Sector Study: Mexico's Automotive Industry is Ready for the Digital Age
Mexico's automotive industry represents the second-most important economic sector in the country, accounting for roughly 3.8 percent of Mexico’s GDP in 2019. Worldwide, Mexico is the sixth-leading car manufacturer and fourth-largest vehicle producer, with close to 4 million vehicles in 2019 and exporting over 85 percent. The production value of light vehicles, auto parts, heavy vehicles, bodyworks and trailers together accounted for US$143.3 billion last year. Over 40 auto brands are produced by the world’s leading OEMs, with Nissan, General Motors (GM) and Volkswagen the largest players in the country.
A skilled labor force at low costs, Mexico’s proximity to the US, the tight relations between the two countries – and Canada – under the North American Free Trade Agreement (NAFTA), and its strategic geographical location are only some of the reasons for the industry’s success. Industry dynamics and the political climate in North America have situated Mexico in the center of the global automotive industry, offering a cost-competitive production environment for carmakers from Asia, Europe and North America. Recently ratified trade agreements, in particular the EU-Mexico Treaty, the Trans-Pacific Partnership (CPTTP) and the USMCA FTA enhance Mexico’s attractiveness, especially due to Regional Value Content (RVC) requirements. The US-China trade war also increases the attractiveness of manufacturing in Mexico.
Mexico’s automotive industry is at a crossroad, where it can choose to invest more in R&D and shift from being a value-for-money manufacturing or maquiladora destination to an important player in the advanced manufacturing industry. The opportunity is to start building and positioning Mexico as an innovation hub. Expertise, knowledge and innovative solutions are required to achieve a smooth adaptation. Local technology suppliers are in demand. Investments toward expansion, innovation and automation in production centers of OEMs and Tier 1 suppliers are expected shortly, with several investments confirmed in R&D facilities based in Mexico. Fortunately, the country is home to a solid pool of educated talent to cash in on the opportunities.
There is a clear gap in the Mexican automotive supply chain from Tier 2 and down, on both the production supply side and in investments. Local suppliers do not always meet the standards and volumes of top-tier suppliers and OEMs, leaving room for foreign companies. Automation levels with Tier 2 suppliers and lower require further digitalization and automatization of their processes. Production machinery and equipment, materials, pre-assembled components, molds and tooling, cutting tools, automation process equipment, raw materials, engineering and design, finished parts and accessories are all in strong demand. As the industry advances in technology, solutions in Big Data, wireless technologies, innovation for high production volumes, smart packaging and track and trace systems in logistics are needed. Simultaneously, the automotive industry in Mexico is becoming increasingly committed to sustainable manufacturing, both in terms of the manufacturing process and their products. Light weighting is a promising trend throughout the supply chain, particularly mixed-material body structures of steel and aluminum with polymers and plastics.
Based on a profile of the Dutch automotive industry, the following specific opportunities for Dutch companies interested in entering the Mexican automotive industry are identified:
- Innovation and solutions to support the transition to becoming an advanced manufacturing hub, R&D
- Supply to Tier 2 suppliers and lower tiers, both traditional and advanced manufacturing solutions
- Customization of vehicles
- Light weighting and sustainability
- Market share for European truck brands and heavy vehicle supply chain
Regional opportunities include the state of Guanajuato, specifically for suppliers to Tier 1 suppliers and lower. Queretaro holds opportunities in the heavy vehicle segment, Tier 1, 2 and 3 suppliers, and R&D activities. In San Luis Potosi, there are possibilities for services targeted at the numerous OEMs, while the area around Jalisco has set out to become Mexico’s EV hub.
Opportunities for partnerships in the fields of research, development, and innovation exist. Puebla is favored particularly by German automakers and emphasizes sustainability. Some OEMs and Tier 1 suppliers execute R&D in Mexico City and the State of Mexico. Traditionally, the northern states have been the preferred destination for the industry, due to their proximity to the US border. Chihuahua and Nuevo Leon have numerous research and engineering centers. Opportunities exist in the areas of local tooling production and quality forged components, strong meta sintering capacities and local production of molds for plastic technologies.
Mexico is not an innovation leader but experts agree that the country has the potential to become the leader in Industry 4.0 in Latin America. The electrification trend, although at a premature stage, will shape the automotive industry in the coming years as OEMs are announcing plans for electric vehicle production in Mexico. CASE vehicles are the future, creating demand not only on the production and innovation side, but also in related fields such as specific R&D and a nationwide EV charging system infrastructure and associated technologies.
Ready to cash in on the opportunities? Establishing a solid network is the key to success. Holland House Mexico, the bilateral Chamber of Commerce, can help you set up shop and introduce you to companies in the Mexican automotive industry. We advise you to look for partnerships with established companies in Mexico and to incorporate Mexican employees in your teams, which will help you to adapt smoothly and quickly to the new market. Identify what drives your customer and adapt your offer to local demands.
This article is based on a recent sector study executed by Holland House Mexico, commissioned by NLinBusiness and RAI Automotive NL. The full report can be downloaded here.