Overview of the Automotive Industry: From NAFTA to the USMCA  

Interview with Fausto Cuevas, Managing Director of the Mexican Automotive Industry Association  

By: Karina Almaraz Téllez / Photo: Ignacio Galar  

Overview of the Automotive Industry: From NAFTA to the USMCA  
The approval of the USMCA and its upcoming entry into force triggers new challenges for North America’s—Mexico’s in particular—automotive industry. Fausto Cuevas, Managing Director of the Mexican Automotive Industry Association (AMIA) gives us an overview of this production activity, highlights its performance in the times of NAFTA, and foresees the possible different scenarios after the new rules of origin considered by the USMCA come into effect.  

 

Mexico is now one of the main automobile manufacturers in the world and is also high up in the list of exports. Could you help us understand the size of the automotive industry in the country?

We are currently in sixth place among the main vehicle producing countries in the world, and the fourth largest exporter on the planet. Our participation in the national GDP more than doubled during NAFTA (North American Free Trade Agreement): in 1993 we contributed 1.6% in total, by 2019 it went up to 3.8%. There has also been growth in the sectorial GDP: in 1993 we generated 8.4% of the total and this participation went up to 20.5% by 2019. Our industry contributes the most to the country’s manufacturing production.

 

We created close to 980 thousand jobs, i.e. 22.5% of employment in the country’s manufacturing sector. Nine hundred and eighty thousand families benefitting from the development of the automotive industry. If we consider the average size of families reported by the INEGI (National Institute of Statistics and Geography), we are talking about approximately 3.5 million Mexicans.

 

In terms of trade balance, in 1993 we imported US$2.54 billion and exported US$10.16 billion. This shows a positive balance of US$7.62 billion. By 2019, we had imports amounting to US$58.89 billion, while exports were in the order of US$147.76 billion, resulting in a surplus trade balance of US$88.87 billion. We are the country’s main net foreign currency generator; we even contribute more currencies than those generated jointly by remittances (US$36 billion) and tourism (US$24.56 billion).

 

In terms of volume, our exports exceeded 471 thousand units in 1993 to 3.3 million in 2019, representing a 607% increase for the period. In the last decade, this industry attracted foreign direct investment of more than US$48 billion. Many of these resources have remained in the country since their arrival. We’re not talking about investments that come in search of quick profits to withdraw in times of crisis. That’s how we could summarize the change that Mexico’s automotive industry has experienced from the beginning of NAFTA to the entry into force of the United States, Mexico, Canada Agreement (USMCA).

 

NAFTA is a milestone in the country’s automobile manufacturing history. What do you think is the main contribution of this agreement to Mexico’s automotive industry?

In order to answer that question, we need to go back in time. We need to discuss the various decrees that have been issued in the country since 1962 to promote the development of the automotive industry. The last one was enforced in a closed market where we used offset operations to balance the industry’s trade balance. It was not fully open yet. And that was in 1989.

 

A few years later came the negotiation of NAFTA, a significant measure for the development of the automotive industry that entered into force in 1994. What happened at the end of that year? An event known in colloquial terms as the “December Error” that caused a very important contraction of the domestic market. Faced with a 60% drop in sales, the automotive industry was forced to look for options to stay in business. Fortunately, NAFTA allowed part of Mexico’s production for the local market to be channeled abroad. Thus began a new stage of automobile manufacturing in the country.

 

Sixteen years later, between 2008 and 2009, a global crisis arose that affected Mexico’s industry. And not only here, in the United States as well. Back then, the top three automakers in the United States experienced serious profitability problems, to the point that they needed government support in order to survive. Forced to seek new strategies, they viewed Mexico as an ideal place to complement their operations, strengthen their competitiveness, and successfully return to the market.

 

Ever since, production investments in Mexico by U.S. automakers have grown. Other brands followed suit and began to view Mexico as a strategic location to set up their plants. Five companies have been in the country since 1962 or a little earlier, and there are now 13 international brands that have production facilities in the country. This happened between 2009 and 2019, a 10-year period in which the industry grew and became the most important in the country. I would say that NAFTA’s most significant contribution was to place Mexico in an important position within corporate strategies of most brands that produce light vehicles in the world.

 

In your opinion, which were the main reasons that motivated the renegotiation of NAFTA?

This is not the industry’s position, it is my opinion. I think it was an interpretation of a particular economic situation that was used for political ends. Since his election campaign, the United States’ current president, Donald Trump, has openly focused against the automotive industry, not only Mexico’s, but his own country’s and Canada’s too. He referred to NAFTA as the worst agreement signed by the United States and pointed to the automotive industry as the main cause of the U.S. trade deficit. In fact, the main reason behind this was importing products from China, while trade in the automotive industry only represented 3% of this deficit.

 

But that wasn’t part of the campaign’s speech. It went rather like this: “Mexico took the jobs that were previously generated in the United States,” which is also not true. When the U.S. assemblers decided to transfer part of their production and export operations to Mexico, they did so in response to a problem of loss of competitiveness, since these projects were not profitable under the prevailing conditions in the neighboring country. The change was mainly due to the production automation process; in other words, jobs were not lost to Mexico, but to a technological change in the industry. Something similar is happening now. We are heading towards Industry 4.0 and this will also transform our industry. In 10- or 15-years’ time things will be totally different, but we’re not going to say it was due to countries taking jobs away, because what is changing is the production model.

 

Several of the new USMCA provisions directly allude to the automotive industry. What are your thoughts on the new trade agreement?

It’s very different. It really is a challenge for the automotive industry. With NAFTA we have to meet one requirement, that 62.5% of the value of the vehicle has to correspond to regional content in order to consider it originating. With the USMCA there are four requirements, and the methodology is also different. With NAFTA we have a list of components where the origin must be traced, and once the regional content is reached, the rule has been fulfilled. With the USMCA we will have to go from 62.5% of the regional content value for vehicles to 75%. To achieve that, three other requirements must also be met: the first one has to do with core parts, which must also meet 75% of regional content.

 

These core parts, in turn, require that we comply with the specific source content for the key parts, including engines, transmissions, axles, steering systems, body and frame parts, as well as advanced batteries for electric vehicles. This obviously requires a completely different methodology to calculate the value of the regional content of these parts and of the vehicle as such.

 

Additionally, we have a second requirement, which is that corporate purchases of steel and aluminum made in the region are 70% originating. And a third requirement is the so-called Labor Content Value, which tells us that for passenger vehicles this value should be 40%, and for light commercial vehicles (pickups) it should be 45%. This is obviously much more complex than what we had been following for over 25 years with NAFTA.

 

On the other hand, the USMCA incorporated several parts that did not exist or were not considered when NAFTA was negotiated. We’re talking about e-commerce and provisions to regulate the flow of data, among others. I believe that in these 25 years, in general, the world, the industry and society have gone through very important changes that, at the time, were not in NAFTA.

 

As well as trade regulation changes, the automotive industry is undergoing a major technological transition. Which ones, do you think, are the most important in this respect?

Indeed, there are other changes that don’t specifically have anything to do with the agreement. They are related to Industry 4.0, mobility, and emerging practices of car use. Previously, at least in Mexico, vehicles were considered a family asset. This concept is changing and new modalities allow cars to be used without needing to necessarily own it.

 

We are also in a transitional stage from independent vehicles to units that communicate with each other, through a smart network of technology and data exchange. Self-driving vehicles are on their way. This process of change will somehow have to be reflected in the periodic revisions introduced in the USMCA that were not contemplated in NAFTA, which will allow what is being signed now to be reviewed in six years and updated according to the new scenarios. I believe it’s a relevant change.

 

What do you expect to see in the future evolution of trade flows of the automotive industry in North America?

That’s a very good question. We’re not sure. What we’re obviously looking for is greater integration of the region, which will evidently depend on the strategy of each brand participating in the regional and global market; since clearly a company with U.S. capital addresses this issue in a different way than one of European or Asian origin. They have different corporate strategies, but all of them will have to adapt to the new regional integration dynamic.



In the specific case of U.S. assemblers established in Mexico, what are they doing in preparation to face the new USMCA provisions?

We have here a legal limitation. Everything related to commercial strategies, projections, forecast of future competition are considerations that under the provisions of the Federal Economic Competition Law cannot be shared within AMIA. Nothing having to do with prices or future strategies of corporations. We learn about this only when the information is made public. We cannot anticipate it, although we would like to. Even though we don’t have official information on how changes will be addressed, manufacturers have clearly worked differently and down the line, they will have to continue working differently according to their specific conditions. They will of course need to adapt to meet the agreement’s new requirements.

 

How do you expect the investment in the industry you represent to evolve? Where do you identify the greatest business opportunities for its members?

Today, we have 13 automotive companies with production investments in Mexico, and high possibilities of them staying. The increase in the number of factories in the country was, first, due to the entry into force of NAFTA, and in the last decade it gained more momentum. Some investments are very recent; cases like BMW, Toyota, Audi, KIA and Compass, the joint venture between Mercedes Benz and Nissan, are in initial stages of their operations, and it is clear for us they will want to stay. Also, other potential manufacturers that are not in Mexico yet might seek to establish themselves here.

 

In response to the rules of origin provided in the USMCA, Cummins announced late last year that it will move part of its operations in China, India and Brazil to Mexico. Can you expect more movement after this? What should the country do to promote it?

New investments in the country are expected, mainly in the production of parts and components. Cummins manufactures diesel-powered engines. We would expect the greatest growth opportunities in manufacturers of what we call levels two and three of the supply chain. We’re talking about small and medium-sized companies, because level one companies have practically all established in Mexico.

 

Do you think favorable conditions to increase the national supply exist? What measures should be taken in the country to increase the number of national suppliers?

Ultimately, the USMCA promotes regional integration and what we’re seeking is for this greater integration to also translate into an increase in national content and not only imported from Canada and the United States. The intention is for the entire country to have this benefit.

 

Now, how is this promoted? Well, it’s not only a task for the industry, public policies that really promote all those investments, that favor the production chain as a whole to locate new projects in our country are also needed. I would say that we should not only focus on the manufacturing part; the industry is increasingly having to do with information technologies and software.

 

Much of the traditional automotive activity’s competition comes from other segments of the production apparatus. There is Google, Amazon, and Tesla. Brands that were not involved in this industry and are now direct competitors. We’ll have to see how we evolve to projects not only in manufacturing, but also where we can leverage these new opportunities in sectors that until now we have served somewhat marginally.

 

In light of new technological trends (e-mobility, autonomous connectivity and driving), how do you expect Mexico’s participation in the global automotive industry to evolve?

The opportunity is also in the new concept of mobility, because that’s where changes are taking place, and the automotive industry will have to adapt to these new ways of participating and competing. Other points to consider include end user perception change regarding the shared use of vehicles and how we will face new dynamics of intermodal mobility where cars are only one of the parts.

 

Would you like to add something else, something we should consider?

We are in a very complex situation. We have come from more than 31 months of domestic market downturn, about eight months in which production and exports have stagnated. This new crisis is even more complex now with the covid-19 pandemic. Companies are waiting for additional support from the federal government to overcome this crisis, and once these emergency measures are called off, to recover both the internal market and production levels.

 

I believe this situation is similar to the one we went through in 2008-2009, but it is much more complex. For now [the interview took place on March 19], we see that at least six of the companies established in Mexico are already scheduling technical work stoppages, some lasting several days, others weeks; that obviously has an impact on production volumes and if we consider that emergency measures force us to stay at home, people are clearly not going to look for a new car. Indicators such as sales to the domestic market, production and exports, will be seriously affected. To what extent? We don’t know, it’s too early to tell, but I am certain we are going to see an effect on the industry and the country's economy. Yes, we’ll have to try to shorten this period as much as possible and see how to reactivate production and the internal market as soon as possible.