NAFTA reconfigured the automotive industry in Mexico and, with it, the auto parts industry. This agreement, explains Óscar Albín, opened the opportunity for car factories to import vehicles to have a full range in Mexico. “Assembly plants changed their manufacturing scheme, going from a production of several models in small volumes, to one of a single model in high volumes to be exported to the whole world.” The most pertinent example is the New Beetle, which was manufactured in Mexico to be exported to the world market. With the foreign exchange generated, Volkswagen completed its range in the local market through importation.
In accordance with this emerging manufacturing scheme, VW called on global auto parts producers to settle in Mexico and be considered in the New Beetle supplier portfolio. Thus, auto parts factories began to arrive in the country to, in principle, join the production chain of models manufactured in Mexico. After five years, these companies realized that the local manufacturing capacity “was extraordinary and the quality very good.” With this, factories began to migrate from the United States to Mexico to export from here to U.S. plants. “That was the watershed, the starting point.” Today, 85% of the auto parts we manufacture in Mexico end up in a new car factory in the United States or Canada.
Propelled by NAFTA, our country became one of the world’s leading auto parts manufacturer and a leading exporter: Mexico is the fifth largest producer worldwide, after China, the United States, Japan, and Germany. It houses almost 1,200 factories whose current production is almost 30 times greater than 25 years ago. In addition to its increase in volume, its market went from domestic to regional and is now the sector contributing the most foreign currency to the country. Of the US$100 billion in exports that are sold, 85% goes to the United States and Canada. “Our next export client is Brazil. Percentage wise it doesn’t represent a lot, but for each car manufactured, we sell it US$400 when ten years ago it was only US$100.”
Each job at a new car factory generates ten in the auto parts industry that directly employs nearly 900,000 people. “From bumper to bumper, you can make a car with Mexican auto parts. For every component there is one or more national or multinational companies.” Approximately 30% of the factories in Mexico are national capital, medium-sized level 2 companies, for the most part.
From a U.S. perspective, however, the bilateral exchange of the automotive industry, including that of auto parts, originates a good part of its trade deficit with Mexico; a fact that constitutes one of the most relevant reasons behind the renegotiation of NAFTA. “President Trump believes that the success of a trade agreement depends on its trade balance. Given that Mexico is the country with which the United States has the largest deficit after China, the cancellation of NAFTA was used as a campaign flag.”
Albín points out that all production sectors of Mexico worked for 25 years without any update of the agreement. “If we had imposed the task of reviewing it every three to five years, the renegotiation would perhaps not have been so complex.” An agreement that had been established in a totally different context had to be renegotiated. “It was necessary, we hadn’t realized that we were taken out of our comfort zone and that was a good thing.”
For the auto parts industry, the USMCA does not mean a significant difference in comparison to NAFTA. Some sectors saw practically no changes, others were incorporated, such as the energy sector, which was restricted 25 years ago. There were adjustments to previous rules for the automotive industry: “The renegotiation’s starting point was Mexico to lose and they to win. However, this claim was successfully modified for the benefit of North America as a whole. The agreements that were reached follow this context.” A negotiation that moderated positions in order for benefits to spread over the three countries.
Specifically, for the auto parts industry, the United States initially proposed that 50% of the car’s content came from them. “The United States would win. Mexico and Canada would lose.” Stopping the migration auto parts factories to Mexico is a condition that was remodeled, imposing a rule of up to 40% of labor content in exported cars, with a cost above US$16 an hour. “That labor content is divided into three parts: a minimum of 25% in auto parts, a maximum of 10% in research and development (R&D), and a maximum of 5% if there is automobile, engine, transmission or lithium battery manufacturing involved.” This gave a certain privilege to auto parts, components or raw materials manufacturers established in the United States and Canada. “Most of the raw material and many of the components come from that region anyway, so it’s not going to be disruptive for automakers.”
The cost of labor and the percentage of the rule of origin are exclusively for car and truck manufacturers; they don’t apply to the auto parts industry. “Between NAFTA and the USMCA, the only change in auto parts is regional content, which ranges from 60% to 75% in one type of part, or 65% and 70% in others.” For an assembly plant to consider an auto part as following the USMCA, the calculation is very similar to the previous one and much easier to comply with. “This task is easier in comparison to the one automakers must follow.”
The arrival of multinational auto parts companies in Mexico, following the automotive assemblers established in the country, increased in the last years. “That big wave is in the past, with Japanese and Korean companies settling in Mexico during the last five or eight years, such as Mazda, Honda, Toyota, Kia; in addition to the German ones, such as Audi, BMW and Mercedes, and bringing a large number of auto parts to meet 62.5% of NAFTA’s regional content.” With the USMCA, that percentage should increase to 75%, which without ceasing to be an opportunity, it does not longer represent the arrival of a large number of new manufacturers.
Based on USMCA regulations that require more content from North America, the trade flow between Mexico, the United States and Canada should increase, whereas the flow with Europe and Asia should decrease. “That is the ultimate goal.” However, Óscar Albín thinks it will be a gradual process. The reason is that a specific car model is born with a specific composition of parts that are manufactured in a certain city and assembly line. It is preferable for it to remain as it is until the model is replaced by another one. If an attempt is made to change a component, it must be evaluated and approved again. “The safety of a vehicle comes before the rules of origin; it cannot be jeopardized because of a change in manufacturing. Assembly plants will always have the priority of providing vehicle guarantees for its occupants. This means that at the beginning, trade flows will change very slowly because they will only be valid for cars that replace those that are being manufactured.”
The rules of origin will have a different impact on the assembly plants established in the country, depending on their origin. The vast majority of U.S. assemblers practically have manufacturing contents aligned to the provisions of the USMCA, perhaps except for some cars whose engineering comes from a country outside the region, as is the case with small and compact cars. For European, Japanese and Korean companies, they will have to relocate component suppliers and there will be a call for them to relocate their factories in North America, as has already happened in Mexico in the last five years. “It doesn’t have to be necessarily in Mexico, it can be in the United States and Canada. That’s the great benefit of the USMCA, it’s a new opportunity for more auto parts plants to continue arriving and for North America to become increasingly autonomous in its automobile manufacturing.”
Based on the usual classification of companies that make up the automotive industry supply chain, Óscar Albín offers a complete overview of the growth opportunities of auto parts manufacturers established in Mexico. In the case of level 1, which directly supplies car manufacturers, there is a special segment called 0.5, whose members “really go hand in hand with car manufacturers in terms of technology development.” There are no more than five or ten highly technological Mexican factories supporting automakers in Mexico, though it can be considered an acceptable number, because it places us on par with Canada, Spain or Brazil.
Regarding national manufacturers of levels 1 and 2 manufacturing processes, of which Mexico has a good number, Albín considers it difficult for them to continue to grow significantly given the lack of government support. In countries like Canada, Spain or Brazil, as well as Thailand, Malaysia or Morocco “they are providing lots of support to their companies so these have greater influence with automobile manufacturers. I’m talking about tax credits so that companies can be more involved in research and development (R&D) tasks. Unfortunately, we have not had any type of fiscal support for R&D in Mexico for ten years.” Technologies are constantly evolving, cars and mobility itself will see significant changes, so not being more involved in these activities is an epitaph. “I think we need a stronger vision from government institutions.”
In light of the new technological trends in the industry (electromobility, autonomous connectivity and driving), Óscar Albín explains that electric cars boast many advantages for drivers and cities where they move around, including costs. “However, its evolution still does not satisfy the regular customer,” who today uses a gasoline car with 500-kilometer autonomy, that fills the tank in only three minutes. In contrast, a medium sized electric car currently offers 300-kilometer capacity and takes 20 minutes to charge up to 80% at an electroline station with 440 volts, and takes about six hours to fully charge. “Countries like China, Japan, Korea, India and all of Europe are strongly supporting the development of electric cars because they don’t have oil and no longer want to depend on other countries.” Their vehicles becoming electric reinforces their energy autonomy. When that happens, they will need more electric energy than gasoline, which they will produce in a renewable way. “In China and India consumers are subsidized, both for purchasing an electric car and for its cost per kilometer traveled, which in China is one tenth in comparison to a car that runs on gasoline. With this, they are promoting an increase in volume, technology and the lowering of its prices.”
Mexico is closely linked to the consumption model of the United States, a country that will be last in entering the electric world due to its abundant oil reserve and its economy based on that fuel. “The only place they promote electric cars is California, more so for an environmental reason than an economic one.” Technology will improve until people prefer electric cars. “It’ll happen sooner or later, but I think that Mexico and North America will be last in having a significant volume of electric cars.”
The move from internal combustion to electric cars will not fundamentally transform the auto parts industry, including the one established in Mexico. “If you compare both types of cars, 70% of the components are the same. It is not a completely disruptive change.” Modifications are found in the propulsion and electrical system. In electric cars, the cooling system is only needed for air conditioning, so it is lighter. Since they need high voltage, they need more robust cables and more harnesses. “Mexico is the world’s number one producer of harnesses. Some sectors will lose and others will win.”
It is not easy to determine which are the most sophisticated auto parts that are manufactured in Mexico, all the components of automobiles tend to become more complex. According to Óscar Albín, one of the most complete and diverse components is car seats, since all manufacturing processes are in these: a metallic structure, stamping, electric engines, and electronic sensors that detect if someone is on the seat in order to activate the seat belt alarm and air bag. Along with this, the structure of the seat and its proper fitting to the structure of the car, are decisive for passenger safety in the event of a crash. Seats also use a wide variety of plastic resins and synthetic or organic textiles, such as leather. “It is in many processes.” Regarding computing, although hardware semiconductors have no major manufacturing problem, “the software design is what makes it very interesting. Any of these systems can be very complex.”
Regarding Albin’s evaluation of the national content incorporated into auto parts manufactured in Mexico, he believes that we currently comply with NAFTA conditions (60%). “We don’t calculate its Mexican content just because it is required in any particular type of agreement.” If a component is manufactured in Mexico, it must be valid for agreements with the United States, Europe or Japan. “But we must effectively link manufacturers of components and raw materials in Mexico with level 1 manufacturers, which are the ones that most import components to this country.” There is still considerable room to strengthen that link. In the Bajío region, Japanese fastener manufacturers supply Japanese assembly plants “working only one shift, because they were forced to come in order to avoid a situation like the one during the 2011 tsunami.” Those manufacturers could make better use of their established capacity if they supplied parts to German assemblers. “The bolt they make has the same quality, but Germans don’t know them and still import them from Germany. That’s the task we must reinforce.”