Mexico automotive industry well-positioned for growth

01 June 2016

As emerging markets in Asia drive demand, the Mexico automotive industry is on a path to becoming a regional manufacturing hub, a Roland Berger study finds. Driven by dramatic industry expansion into new markets, Mexican vehicle production is predicted to double between 2010 and 2020. OEMs are attracted to the country’s stable, business-friendly economy, global access points, and its cost-competitive workforce.

Mexico boasts a business-friendly regulatory environment, holding the highest number of active free trade agreements in the world. The country also has a number of complementary economic agreements which span most of Latin America, as well as investment protection agreements with non-FTA countries like China and India. In addition, Mexico has adequate infrastructure for OEMs, a stable economy, and relatively low workforce costs, forming an attractive environment for auto manufacturers. Proximity to both North and South America as well as ports on both the Atlantic and Pacific coasts also give Mexico a competitive logistical edge in the auto-manufacturing industry.

Globally, the rise in the demand for light vehicles will continue to grow at an annual rate of 2.1%. In unit terms, we will see the global market reach 100 million sales of new light vehicles by the year 2020. This projected growth is driven by a growing global middle class, tech developments, and a desire for environmentally friendly vehicles. Technological advancements in digital support services and autonomous features - including self-driving technology - will play a role in this expected growth, according to The Boston Consulting Group

Light vehicle production in Mexico and sales destination

According to a new report by Ronald Berger, the rise in global demand for light vehicles and the shift to low-cost manufacturing markets make Mexico an attractive investment option. The report, which is titled ‘Being prepared for the next Mexican automotive boom’, examines both the strategic positioning of the Mexican automotive industry and the potential hurdles of the future. 

The Mexican hub

In an attempt to retain cost-competitiveness, many manufactures have relocated to countries with lower labor costs. Mexico has been at the forefront of this market shift, and as a result its automotive manufacturing industry has boomed in recent years. The country has attracted international companies like Audi, Jeep, Mercedes, Nissan, and General Motors. From 2010-2015, production increased from 2.3 million units to 3.4 million. The CAGR over the past five years was an average 8.4%. 

Light vehicle production in Mexico and sales destination

Mexico exports the majority of its automotive products to NAFTA countries, which increased its share from 63% to 67% over the same time frame. Although sales in the 'rest of the world' decreased slightly last year, Asia’s purchases of Mexican-produced light vehicle grew 250% during the five years. In comparison, exports to Latin America grew by only 20% in the same period. Within the country, demand for local products has remained relatively stable, sitting at 19% of the market share in 2015.

Supply chain barriers

Whilst vehicle production rises, the gap between vehicle production and part production will also increase. While the industry is set to grow at 9% annually, there are resounding issues in supply chain logistics relating to parts. Automotive part production in Mexico is set to rise 1% annually, leaving a significant demand gap. As Mexico’s capacity to produce light vehicles continues to increase, there are a number of key areas which are not met by local producers. Local production is centered around plastics, which creates a significant lack of metal-based vehicle body parts, powertrains, and chassis.

Local production vs imports of parts by system in 2013

Mexican suppliers also lack manufacturing expertise in advanced parts production processes, creating an import gap of $20-25 billion. The shortage of technological knowledge to aid the production processes such as stamping, forging, and laser-cutting directly affect the supply chain. A reliance on importing parts will be necessary to fill this gap, increasing both production costs and inventory handling costs. Another side effect is the risk to the supply chain, the report indicated. Importing a wide range of parts creates the danger of a logistical bottleneck that may hamper the time frame for production.

Indexed growth of light vehicles vs auto-parts production

The various structural issues which will arise from the increased reliance on imports, may also be affected by the devaluation of the Mexican peso. To meet these challenges, it is important for Mexico to further boost manufacturing to reduce currency volatility. The report suggests that digital manufacturing and technology in the light vehicle industry - and filling the import gap through local production - can add to regional stability and create a significant opportunity for investors.

Stephan Keese, a Senior Partner with Roland Berger and expert in the Americas' automotive markets, said, "Setting up a full local supply chain will take years and will require strong actions from all players along the value chain, but companies that act now have a true chance of benefiting the most from these interesting growth opportunities.”


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Latin America faces many hurdles for electric vehicle market

31 October 2018

The slow uptake of electric vehicles across Latin America is due to a number of roadblocks which look unlikely to change in the near future. Whilst the road to success may be arduous, there are a number of factors that may be tweaked to ease the process.

In Latin America, there are many obstacles preventing the widespread adoption of electric vehicles. In comparison to Europe, Asia and North America, Latin America’s level of infrastructure and economic diversity are holding the region back, with Latin America being one of the most unequal regions on the planet. The disparities between city and urban population, elite and other also limits the location of the customer base for extensive uptake. 

“Latin America suffers from the chicken-and-egg problem at a very early stage – not many electric vehicles are available since the public charging infrastructure is very limited and, in turn, the public charging infrastructure is scarce because there are too few EVs,” states a recent Author D. Little report titled ‘Electric mobility roll-out in Latin America – The arduous road to success.’

Public charging availability in Latin America

The consulting firm recounts its experiences with original equipment manufactures attempting market penetration in the region, the barriers and the keys to success. Latin America is unique in many ways and to successfully enter a product with so many variables such as full battery electric vehicles (BEVs), companies must have a comprehensive understanding of the market.

“Most Latin American markets have only had scarce experiences with electric vehicles so far. Many have not even seen plug-in hybrid vehicles yet, so importers and dealers are unable to build upon previous knowledge obtained in past rollouts. Subsequently, everything from standards implementation, dealer training and legal requirements through to aftersales challenges is new, and needs to be thoroughly analyzed and defined before the market introduction of a BEV,” the report says.

However, as is usually the case in Latin America, governments are not moving quick enough. Market penetration will presumably happen sporadically, scattered throughout society and confined to the affluent in a few major cities. The Authur D. Little report makes the assumption that EVs will predominantly be adopted as a status symbol.

Roll-out challenges in Latin America

Customer demand for BEVs is currently mainly driven by premium brand image, with the customers being affluent – less price-sensitive – concentrated in 2-3 cities per country, who drive an average of 30 km per day and who have access to private parking for vehicle charging. The report also states that it is likely that target customers will also have access to a second non-BEV for long journeys as charging outside these cities will be complicated at best, impossible otherwise.

The availability of charging stations and the power currents – which effect charging time – are also large factors of slow EV adoption across the region. The highly fragmented availability of public charging stations also becomes more complicated as BEVs from Europe, North America and Asia all have different plugs. Without defined government intervention to adequately regulate BEVs, it will be impossible to create continuity across the board. 

The region also faces a lack of stable power supply which can effect the charging times of BEVs. “Depending on the voltage and amperage available, this can mean power output from as low as 3.6 kW up to 22 kW for a privately installed EV charger.” The difference between these currents means that a 90 kW battery can take anywhere between 5 and 24 hours to charge. 

Success factors of BEV roll-out in Latin America

Other issues include, low levels of translations for premium solutions developed for western markets, a small number of local importers or dealers with experience to drive uptake (especially in smaller markets), and a lack of local partners willing to engage with companies including (often state-controlled) electric utility companies, gas station operators, and local transport and traffic authorities. All the variable factors combined add a significant barrier to market entry and widespread adoption. 

Despite these issues, the management consulting firm suggests that companies turn toward agility and adjust to regional pressures rather than put the pedal to the metal and proceed at full speed. “The local market conditions in Latin American countries limit the reasonable scenarios for the overall product portfolio: the offering structure needs to be carefully adapted to the local context – which often means reducing the line-up of products and services to affordable and technically simple and reliable solutions,” states the report.