MEXICO AS AN AUTOMOTIVE MANUFACTURING PLATFORM FOR EXPORTING Emilio Cadena PRESIDENT & CEO

MEXICO AS AN AUTOMOTIVE MANUFACTURING PLATFORM FOR EXPORTING Emilio Cadena PRESIDENT & CEO

OPERATING AGENDA STRUCUTRES 4. DOMESTIC SALE OBJECTIVE: 1. What is the reality of Manufacturing in Mexico today in the automotive industry? 2. What to expect in the future? 3. What to do next?

MEXICO IS GROWING Key Indicators for Mexico (2013) 8 World s largest vehicle producer in the world Worldwide producer of heavy vehicles 7 (3.07 million units) 5 (136,669 units) 8 8 Worldwide producer of light vehicles (2.93 millions of units) 4 4 Exporter of heavy vehicles 8 (97,501 vehicles) 4 Exporter of light vehicles 9 (2.42 millions of units) More than 300 Tier 1 suppliers established in Mexico. 19 of the top leading automakers are located in 15 states of Mexico Occupied workers: 70,887 7. The automotive industry in Mexico accounts for: 2% of the National GDP 7 :2012 States with automotive production 15% of the manufacturing GDP 7 2012 9% of the Foreign Direct Investment 6 (FDI): 30% of Mexican total exports 9 4 Source AMIA 5 Souce: OICA 6 Source: Ministry of Economics 7 Source: INEGI 8 ANPACT 9 ProMexico with information from Global Trade Atlas

MEXICO IS GROWING Light vehicle production in Mexico Mexico reached an historic level of production with 2.9 million units in 2013. According to forecasts, by 2016 production will reach 3.7 million units. 2.0 2.0 Mexico: Light vehicle production, 2005-2016 (millions of units) 2.1 2.3 2.5 2.9 2.9 3.1 3.5 3.7 Mexico: Light vehicle production by company, 2011-2013 (thousands of units) 2011 2012 2013 646 571 544 462 455 452 452 439 607 684 680 510 605 516 1.6 1.5 339 45 63 63 50 56 64 2005 2006 2007 2008 2009 2010 2011 2012 2013 /f: forecast for the year Source: AMIA (2005-2013), Global Insight (2014-2016). 2014 /f 2015 /f 2016 /f Source: AMIA.

MEXICO IS GROWING Automotive Industry Exports from Mexico In 2013, the assemblers in Mexico contributed to reach the highest export volume for the country. During the same year, Mexico was ranked as the 4th largest light vehicle exporter in the world. Mexico: light vehicle exports, 2005-2016 (millions of units) Mexico: light vehicle exports by company, 2010-2012 (thousands of units) 1.5 1.6 1.7 1.9 2.1 2.3 2.4 2.5 2.8 3.0 2011 2012 2013 520 526 465 425 450 443 402 385 323 467 450 412 430 518 424 1.2 1.2 36 40 38 50 56 64 2005 2006 2007 2008 2009 2010 /f forecast for the year Source: Source: AMIA (2005-2013), Global Insight (2014-2016). 2011 2012 2013 2014 /f 2015 /f 2016 /f Source: AMIA.

MEXICO IS GROWING Heavy vehicle production in Mexico Mexico: Heavy vehicle production, 2005-2016 (thousands of units) 135.1 138.0 147.7 158.0 169.1 180.9 84.4 92.3 86.3 78.9 91.8 56.6 2005 2006 2007 2008 2009 2010 2011 2012 2013/f 2014/f 2015/f 2016/f /f :forecast for the year Source: ANPACT and forecasts of the growth rate from Business Monitor International

MEXICO IS GROWING Production Increase (2012-2017) Source: ProMexico with information of Near-Sourcing: Hecho en México

IS MEXICO STILL A LCC Source: INEGI / CONAPO

IS MEXICO STILL A LCC Close to US Market Time Zone Many Location Options Many Foreign Companies

IS MEXICO STILL A LCC Close to US Market Many People Available Time Zone Many Location Options The Cost Advantage is Here to Stay Many Foreign Companies Manufacturing is the Employment Of Choice

IS MEXICO STILL A LCC LABOR AVAILABILITY IS THE COMPETITIVE ADVANTAGE OF MEXICO In Mexico availability of labor is more related to the amount of people coming in to the economy every year rather than the unemployment rate! 82.4 M 83.6 M 84.1 M Source: INEGI / CONAPO

IS MEXICO STILL A LCC SKILLS LABOR IS ALSO THE CHALLENGE THIS IS WHAT WE HAVE Source: INEGI / CONAPO

IS MEXICO STILL A LCC SKILLS LABOR IS ALSO THE CHALLENGE THIS IS WHAT YOU WANT THIS IS WHAT WE HAVE Source: INEGI / CONAPO

IS MEXICO STILL A LCC McKinsey Global Institute March 2014 A tale of two Mexicos: Growth and prosperity in a two-speed economy There is a modern Mexico, a high-speed, sophisticated economy with cutting-edge auto and aerospace factories, multinationals that compete in global markets, and universities that graduate more engineers than Germany. And there is traditional Mexico, a land of sub-scale, low-speed, technologically backward, unproductive enterprises, many of which operate outside the formal economy.

IS MEXICO STILL A LCC McKinsey Global Institute March 2014 A tale of two Mexicos: Growth and prosperity in a two-speed economy Productivity has grown 5.8% a year in large modern firms. But has fallen 6.5% a year in traditional firms

IS MEXICO STILL A LCC YEAR STABLISHMENTS EMPLOYMENT EXPORTS EXPORT / STAB EXPORT / PAX 2007 2008 2009 2010 2011 2012 5,140 1,977,741 $158,422,000,000.00 $30,821,400.78 $80,102.50 5,254 1,745,176 $175,044,369,043.06 $33,316,400.66 $100,301.84 5,214 1,641,465 $126,506,715,001.51 $24,262,891.25 $77,069.40 5,108 1,806,055 $159,162,895,099.04 $31,159,533.10 $88,127.38 5,079 1,880,254 $178,229,073,339.01 $35,091,371.01 $94,789.89 5,049 1,989,862 $195,982,802,633.26 $38,816,162.14 $98,490.65 2013 5,049 2,110,939 $196,132,253,336.27 $38,845,762.20 $92,912.33 26% more exports per company. 16% more exports per employee. There has been a real inflation of wages of 2.4% per year, 16.8% in the same period. There are still substantial labor savings in Mexico. Most other cost and expenses are equal or more to the US.

WHAT SHOULD YOU EXPECT Source: INEGI / CONAPO

WHAT SHOULD YOU EXPECT FACTS. There are still substantial labor savings in Mexico. Most other cost and expenses are equal or more to the US. Automotive OEM s will continue to grow in Mexico. The next (only short term) big cost savings opportunity is the Supply Chain.

WHAT SHOULD YOU EXPECT FACTS. There are still substantial labor savings in Mexico. Most other cost and expenses are equal or more to the US. Automotive OEM s will continue to grow in Mexico. The next (only short term) big cost savings opportunity is the Supply Chain. YOU HAVE TO THINK ABOUT MEXICO

WHAT SHOULD YOU EXPECT FACTS. There are still substantial labor savings in Mexico. Most other cost and expenses are equal or more to the US. Automotive OEM s will continue to grow in Mexico. The next (only short term) big cost savings opportunity is the Supply Chain. YOU HAVE TO THINK ABOUT MEXICO It s not all bad, it is an opportunity to grow the business. It s not that difficult. Many others have done it before.

WHAT SHOULD YOU EXPECT Mexican auto parts imports Imports recovered their dynamism in 2012. The annual variation was 11%, compared to 2011. Mexican imports of automotive parts, 2002-2012 (millions of dollars) 17,937 16,182 15,021 23,019 29,188 29,192 28,910 Source: ProMexico with Global Trade Atlas 21,556 27,964 32,497 36,233 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 The United States is the leading country of origin of automotive parts imports to Mexico. Mexico: Automotive Parts Imports by Country of Origin, 2012 (millions of dollars) Partner country Imports (md) % United States 20,335 56% China 3,805 11% Japan 2,387 7% Germany 1,856 5% Canada 1,654 5% South Korea 1,426 4% Brazil 697 2% Taiwan 538 1% Italy 348 1% India 337 1% Rest of the world 2,850 8% Total 36,233 100% Source: ProMexico with Global Trade Atlas

WHAT SHOULD YOU EXPECT Investment opportunities ProMexico has estimated market opportunities in processes with lack of presence in Mexico. 71% of the total demand are imported processes, therefore there exists investment opportunities for foreign companies. Some of the processes with the highest demand are: stamping, foundry, forging and machining. Billion dollars 16.0 12.0 8.0 4.0 0.0 14.8 9.7 5.2 Stamping Total market value and business opportunity in the supply chain for the Mexican automotive industry (billion dollars) 12.9 9.7 3.2 Foundry 11.4 9.1 2.3 Forging *Value of demand not produced in Mexico Source: ProMexico with Global Trade Atlas 11.0 7.7 3.3 Machining 9.3 8.0 8.0 1.2 0.0 Automotive Interiors 8.0 Semiconductors 6.8 4.4 2.4 Injection Molding (Plastics) 5.8 5.5 0.3 Design and Engineering *Market Opportunity Domestic Production 3.3 2.9 2.6 2.2 0.7 0.7 Die Casting Cable and/or wires

WHAT SHOULD YOU DO Source: INEGI / CONAPO

WHAT SHOULD YOU DO BECOME EMPLOYER OF CHOICE EC= LEADERSHIP + CULTURE

THE RIGHT LEADER MEXICAN NATIONAL MEXICAN NATIONAL VS EXPAT? Technical skills VS People and Leadership skills? Choose a Mexican National for the region you are locating in. Dotted lines don t work very well in Mexico. Mexicans like to be power holders, find someone with a team approach. Recommendations are the best way for recruiting this level of people. EXPAT Hire an expat s spouse first! Make sure they believe and respect the Mexican people and culture. How much baggage they have back home? For how long? Helps on communication and transferring the new business culture. Work on the replacement option(s) from day one. Work on the relocation plan.

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? These are the results of a survey conducted interviewing 100 top executives from Foreign manufacturing companies: Question: What do you look for in a top Manager? Nationality of Sample: 51 USA. 21 Japan. 10 Germany. 7 Canada. 5 China. 4 Korea. 2 Brazil.

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? RESULTS: 1)Honesty. 2)Integrity. 3)Communication Skills. 4)Drive. 5)Experience (process/product) 6)Leadership. 7)Team Building Skills. 8)World Class Manufacturing Systems. 9)Empathy. 10) Thirst for growth and knowledge.

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? RESULTS: 1)Honesty. 2)Integrity. 3)Communication Skills. 4)Drive. 5)Experience (process/product) 6)Leadership. 7)Team Building Skills. 8)World Class Manufacturing Systems. 9)Empathy. 10) Thirst for growth and knowledge. Present in 80% of the responses. One of the concerns with our Culture. Trust is developed over time: trust is good but control is better

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? RESULTS: 1)Honesty. 2)Integrity. 3)Communication Skills. 4)Drive. 5)Experience (process/product) 6)Leadership. 7)Team Building Skills. 8)World Class Manufacturing Systems. 9)Empathy. 10) Thirst for growth and knowledge. Individuals with values. Individuals that speak their mind.

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? RESULTS: 1)Honesty. 2)Integrity. 3)Communication Skills. 4)Drive. 5)Experience (process/product) 6)Leadership. 7)Team Building Skills. 8)World Class Manufacturing Systems. 9)Empathy. 10) Thirst for growth and knowledge. Communicate through the language barriers. Usually valued over technical skills.

THE RIGHT LEADER WHAT TO LOOK FOR IN A LEADER? RESULTS: 1)Honesty. 2)Integrity. 3)Communication Skills. 4)Drive. 5)Experience (process/product) 6)Leadership. 7)Team Building Skills. 8)World Class Manufacturing Systems. 9)Empathy. 10) Thirst for growth and knowledge. Execution oriented. Get the job done. Move (push) through corporate bureaucracy. The challenge is to get things done and also make the team feel proud and motivated.

THE RIGHT CULTURE For us CULTURE means the set of priorities, values and key behaviors that people in the organization embrace and live by every single day allowing the organization to fulfill its mission on a productive way and at the same time give everyone a sense of belonging and pride. + + STRATEGY KNOW-HOW PRACTICES

THE RIGHT CULTURE STRATEGY STRATEGY MISSION VISION VALUES STRATEGY is what gives the organization a reason to exist, a sense of direction and the core values to live by every day. The key is to design a specific strategy for the plant, not for all the organization. This allows everyone to understand why the Mexico plant exist.

THE RIGHT CULTURE KNOW-HOW PRODUCT PROCESS METRICS QUALITY KNOW HOW is the process of transferring to the organization what we are going to make and how. It also means establishing CLEAR ground rules for performance evaluation and what a good products looks like for the organization and the customer.

THE RIGHT CULTURE PRACTICES SUPERVISION COMMUNICATION RECOGNITION INTERACTION PRACTICES are the set of internal process and procedures that will rule the conduct and interaction of everyone in the plant. They are the ones that allow the culture to be implemented and perceived by everyone.

THE RIGHT CULTURE SUPERVISION: 1. Leadership Style. 2. Execution. 3. Individual Development Matrix. COMMUNICATION: 1. Reporting System. 2. Plant Communication Sessions. RECOGNITION: KEY PRACTICES 1. Performance Evaluation System. 2. Continuous Recognition Plan. 3. Variable Compensation Plan. INTERACTION: 1. Meetings Good Practices. 2. Team Building. 3. Cultural Training. 4. Living the Values Plan.

SUCCESFULL START-UP THE KEY TO SUCCESS 1.Ask those who have done it before. 2.Choose the right processes and products for Mexico. 3.Spend time on developing the business case and implementation strategy (Culture Plan). 4.Make a good site selection process.don t fall in love until the end! 5.You have to become EXCELLENT at training. 6.Government incentives should be the tiebreaker, not the driver. 7.Choose the right leader for the plant. 8.Don t mirror image what you already have. 9.Aim high! This should be the most productive plant of the corporation. 10.Design a good supply chain strategy.

MEXICO CHALLENGES

MEXICO CHALLENGES COMPETITIVE MANUFACTURING COMPANY LEGAL FRAMEWORK INFRASTRUCT URE & SECURITY TALENT DEVELOPMENT SUPPLY CHAIN DEVELOPMENT INVESTMENT INCENTIVES BUSINESS ENVIRONMENT PROMOTING INVESTMENT PUBLIC IMAGE OF THE MANUFACTURING SECTOR

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