MINISTRY OF ECONOMY Automotive Industry Monograph Department of Heavy and High Technology Industries March 2012 Page 0 of 48
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Contents Summary... 4 Goods produced... 5 Light Automotive Vehicle Industry... 5 Engineering and design centers... 6 Light Vehicle Plant Locations... 10 Engineering and Design Center Locations... 11 Heavy vehicle industry... 12 Auto parts Industry... 13 Regulatory Framework... 17 Official Mexican Standards (NOM as abbreviated in Spanish)... 17 Tariff Policy... 18 Import quotas for new vehicles... 19 FTAs and trade agreements... 19 Rules of origin for automotive products... 20 Automotive SPPs and Eighth Rule... 21 Automotive Decree... 22 Sectoral Indicators... 23 GDP and Employment... 23 Automotive vs. oil exports, 2000-2011... 24 Foreign Direct Investment, 2000-2011... 24 Domestic Market Evolution... 26 Production... 26 Sales... 27 Market share by brand... 30 Exports... 31 Destination of Light Vehicle Exports by Region, 2011... 32 Heavy trucks... 33 Page 2 of 48
Auto parts Industry... 34 Global market evolution... 35 Competitive advantages of the domestic automotive industry... 40 Perspectives... 44 1. - Geographical Distribution... 44 2. - Customers... 44 3. - Technology... 45 4. - Human Resources... 45 5. - Energy Efficiency... 45 Page 3 of 48
Summary Globally, the importance of the automotive industry to domestic economies and its role as an engine for the development of other high aggregate value sectors has moved many countries to prioritize developing and/or strengthening this industry. Mexico is no exception, as the automotive industry in our country has been a strategic sector for our country s development. Its share in exports places it as the most important industry, surpassing even the oil industry. In 2011, the automotive industry exported 22.5% of the total export value. In 2011, the Mexican automotive industry ranked number 8 in the production of motor vehicles, positioning our country among the top producers in the world. As of the first quarter of 2012, Mexico was the 4 th largest exporter of automotive vehicles in the world. Additionally, this industry has been a forerunner to competitiveness in the regions where it has been established. This has resulted, among other things, in a higher-skilled and better paid workforce, along with better use of human resources. On average, Mexican automotive industry salaries are equivalent to 2.3 times those of all other manufacturers 1. Similarly, the industry has generated significant technological capabilities that have an application in other areas, such as in the electrical, electronics and aerospace industries. In turn, this has led to the creation of specialized technical staff. For example, in the aviation industry strong growth has been seen in recent years. Mexico currently ranks first in the world in aerospace manufacturing investments, seeing 33 billion dollars during the years 1990-2009. It had an average annual growth in exports of over 20%. In our country important global supply centers have been developed, many of which are highly integrated to Tier 1 companies. This is evidenced by the fact that over 80% of the production of auto parts is exported. Because of its extensive provider network and the globally competitive advantage that Mexico offers in regards to skilled and competitive labor, geographic position and preferential access to other markets, the Mexican automotive industry still has a high potential for growth and high quality job creation. 1 Monthly survey of the manufacturing industry, National Statistics, Geography and Information Institute (INEGI as abbreviated in Spanish). Page 4 of 48
Mexico can increase its competitiveness as a producer of motor vehicles and auto parts and become an important design and technology innovation center. The development of human capital plays a key role in this process, since a low level of human capital limits the implementation of high value processes. Goods produced Production facilities in Mexico include 18 of the most important vehicle manufacturers, two diesel engine manufacturers and more than 300 first-tier suppliers to the terminal industry. */Freightliner and Mercedes Benz. Light Automotive Vehicle Industry Light vehicle terminal industry companies have a total of 18 production complexes in 11 states in Mexico. These perform activities ranging from assembly and/or protective coating to casting and stamping of vehicles and engines. Currently in Mexico there are more than 48 models of cars and light trucks being produced. Page 5 of 48
Engineering and design centers Furthermore, most manufacturers of light vehicles have moved up to higher aggregate value activities, establishing design and engineering centers in our country. This has allowed these companies to hold some of the top industrial complexes in the world. Nissan Has modeling centers for automotive design prototypes in Toluca and Mexicali. - Equipped with the most advanced modeling technology in America, has computer-aided design stations and a metal and wood shop. - Among this company s equipment is a five-axis CNC machine capable of creating three dimensional models made of foam and clay, along with making small and large parts. - The first job done in the center was a life-size model made of foam which was used for the virtual launch of the Infiniti M luxury sedan in the Concourse D'Elegance, held in California. - Performs modeling of automotive design prototypes. Page 6 of 48
- Additionally, Nissan has gas emissions laboratories in Manzanillo, Acapulco and D.F., where it performs analysis for reducing engine emissions by 70%. - On test tracks in Aguascalientes and CIVAC, the company carries out performance tests (acceleration, braking, consumption, noise, A/C and emissions) and durability tests (vehicle and component wear). Ford Engineering Virtual Design Center located in Mexico City s metropolitan area. - Activities related to the design and development of components, systems and automotive subsystems. - Projected investments in Research and Development to create an "individual development plan for the acquisition of technical expertise to meet the demanding knowledge requirements required for the design of products in different disciplines." - The project involves the expansion of the Engineering Center located in Mexico City s metropolitan area within the Ford of Mexico Corporation (Virtual Design, Project Management and Technical Departments). It also involves expansion in the State of Mexico at the assembly plant complex in Cuautitlán, which includes expanding design, development, testing and verification activities for different technical areas. Chrysler Chrysler Engineering and Design Center: located in Mexico City s metropolitan area. - Opened in February 2005 with an investment of 351.5 million pesos, it is located next to the Mexico Toluca highway in Santa Fe, on an 11,400 m2 piece of land, of which 8,800 m2 are used for research and technological development laboratories. - It has training rooms, an auditorium and satellite communication system. - Research and world-class engineering test projects are performed, and research groups dedicated to the use of fuel efficiency fluids are also formed. - In 2006 it introduced new lines of research and technological development, investing in work stations and purchasing equipment for laboratories for a total amount in excess of $960,000 dollars. - This center will conduct research and technological development which is reflected in Page 7 of 48
an increase in product, processes and materials innovations, as well as expansion of the range of products and the optimization of resources and processes. - Technology management has enabled Chrysler to make additional investments, as in the case of the Planning Area for Advanced Manufacturing, which in recent years has created the Toluca Project (design, development and implementation of a new flexible production process), the HEMI Project for a technological upgrade of the V8 5.7 engine and the Medium Size Truck Project in Saltillo. - Other research and technology development projects focused, on one hand, on achieving greater efficiency in the use of raw materials on the paint line, with reduced environmental pollutants. On the other hand, they concentrated on research into a strategy that would reduce electrical power consumption at the truck assembly plant, by means of technological application. Volkswagen Technology development and parts design center located in Puebla. - Interior and exterior car design, development, testing and release auxiliary and special automotive electronic systems. - 800 specialized engineers employed. General Motors General Motors Regional Engineering Center: located in Toluca, State of Mexico. - One of General Motors 13 global centers. - 800 engineers specializing in interiors, heating and air conditioning and validation of product developments. Delphi Delphi Mexico Technical Center: A component engineering center, responsible for the design and development of products, located in Ciudad Juárez, Chihuahua. - This center was built with an initial investment of $150 million dollars and began operating in 1995. It was initiated with 564 employees (currently has 2,500 employees) that came from Delphi plants in Mexico and other Delphi plants in the United States along with recruitment efforts in Mexico and the United States. - The Center has internal customers (Delphi plants) and a wide variety of external Page 8 of 48
customers, among which are the major worldwide auto assemblers. - Its principal activities are the design and development of new products or components using new technologies, production development, advanced engineering, process design and development and worldwide manufacturing cells. - Although 90% of direct material purchases are made from the United States, Delphi currently buys $200,000 annually in materials directly from our country. Page 9 of 48
Light Vehicle Plant Locations Page 10 of 48
Engineering and Design Center Locations Page 11 of 48
Heavy vehicle industry The terminal heavy vehicle industry has also achieved a significant level of development in our country. Currently 11 manufacturers of commercial vehicles and two commercial vehicle engine manufacturers have production facilities in Mexico. Page 12 of 48
Manufacturers of commercial vehicles carry out activities ranging from assembly, stamping and body work, producing a wide range of models to meet domestic and export market demands. Grupo Man Latin America acquired VW Trucks and Buses in 2010, integrating MAN s and VW s operations in Mexico. Source: Based on data from the Mexican Association of Buses and Trucks Assemblers (ANPACT as abbreviated in Spanish) Auto parts Industry Mexico has a competitive auto parts industry, comprised of more than 600 Tier 1, 2 and 3 Page 13 of 48
companies. In 2010, KPMG s manufacturing cost index for auto parts ranked Mexico between 11.2 and 8.6 percent lower than a group of developed countries in America, Europe and Asia that are producers. Source: KPMG Competitive Alternatives (Guide to International Business Location), 2010 Edition The main specialties by region for the production of auto parts in our country are as follows: Northwest (Baja California, Baja California Sur, Sonora, Sinaloa and Durango): Manufacturers of air conditioning and heating systems, interior components, accessories and automotive electrical systems, among others. Northeast (Coahuila, Chihuahua, Nuevo Leon and Tamaulipas): Manufacturing of climate controls, automotive systems, plastic parts, electrical system parts, engine parts and machining. This is the most important automotive cluster in Mexico. Central (Aguascalientes, San Luis Potosi, Queretaro, Guanajuato and Jalisco): Automotive parts plants whose main products are stamped parts, electrical components, brakes and brake parts, rubber products and automotive engine and transmission parts. Southeast (State of Mexico, D.F., Morelos, Veracruz, Tlaxcala, Yucatán, Puebla and Hidalgo): Auto parts plants, most notably in the production of accessories (such as seats, air conditioning and hydraulic bottle type jacks), interior components, engine parts, electrical systems, stamped parts, suspension parts and automobile parts. Because of the production systems that have been implemented by the terminal industry to increase productivity, some of which require the supply of parts at the exact time and place that the part or vehicle component is being assembled, Tier 1 suppliers have a close Page 14 of 48
relationship with vehicle manufacturers, having a high degree of responsibility in the process of manufacturing the final product. Autoparts companies (Number of companies) 618 autoparts companies Source: Prepared with data from the Mexican Business Information System (SIEM as abbreviated in Spanish). Notes: It is believed that about a third of auto parts companies are Tier 1 companies Tier 1. Provide original parts to assemblers, primarily subassemblies, and also have design capabilities. Tier 2 and 3. Parts suppliers using designs provided by Tier 1, generally provide relatively basic products and individual parts. Page 15 of 48
According to the Mexican Business Information System (SIEM), within Mexico there are more than 600 auto parts companies, of which approximately 30% are Tier 1. Page 16 of 48
Regulatory Framework Official Mexican Standards (NOM as abbreviated in Spanish) Departments with the authority to administer NOMs in the automotive sector are Environmental - Ministry of Environment and Natural Resources (SEMARNAT as abbreviated in Spanish). Article 32Bis of the Federal Public Administration s Fundamental Law establishes that this Ministry is responsible for promoting ecological order within the country. It is also responsible for the design and promotion of developmental instruments and environmental regulations that protect the environment and for planning and organizing the monitoring and evaluation of progress in abating atmospheric pollutant emissions. Safety Ministry of Communications and Transportation (SCT as abbreviated in Spanish): Article 36 of the Federal Public Administration s Fundamental law and Article 50 of the Highways, Bridges and Federal Transportation law states that this Ministry is responsible for the regulation of federal and international motor carrier services, private transportation, the creation of Official Mexican Standards and the authorization of commercial vehicles that must travel on federal highways. Consumer information Ministry of Economy and the Federal Consumers Agency (SE and PROFECO as abbreviated in Spanish). Article 34 of the Federal Public Administration Fundamental Law states that these entities are responsible for promoting and monitoring the marketing, distribution and consumption of goods and services. It guides the general policies of the industry regarding commerce, supply and prices. The Federal Consumer Protection Law establishes that the Federal Consumers Agency (PROFECO) must ensure compliance with the provisions of the Law and must punish violations. It must also perform verification by means of visits, requests for information or documentation, monitoring, or by any other means that comply with this law. Page 17 of 48
The NOMs currently applicable to motor vehicles are as follows: Subject/Competent Authority SAFETY-SCT EMISSIONS- SEMARNAT CONSUMER INFORMATION-SE (DGN) Light I. New: Minibuses NOM-067 Midibuses NOM-067 I. New NOM-042 Gasoline emissions to 3857 kg NOM-079 Noise NOM-076 Gasoline emissions to 6875 kg II. Used NOM-041 Gasoline emissions NOM-050 LP Gas emissions NOM-080 Noise I. New: NOM-050 Product labeling Heavy NOM-068-Physical- Mechanical Conditions. NOM- 012 Weights and Dimensions I. New: NOM-044 emissions II. II. Used: NOM-45 Diesel emissions (opacity) NOM-050 Product labeling Tariff Policy Vehicles General outline According to the Tariffs in the General Import and Export Taxation Law, published on December 24, 2008, the import tariffs for new motor vehicles were established as follows: Tariff on New Vehicle Imports (%) Page 18 of 48
Import quotas for new vehicles Beginning when Mexico signed GATT in 1986, Mexico's trade policy was geared toward greater openness through trade agreements. Mexico has the largest network of free trade agreements. Under these international treaties and agreements, quotas have been set for the import and export of vehicles, in order to balance access to various international markets. For this reason the following quotas for imports of new vehicles have been in operation: Europe, LAFTA (Argentina, Brazil, Paraguay and Uruguay), Japan, along with vehicle export quotas to countries like Colombia and Chinese Taipei. FTAs and trade agreements Within the framework of the Agreements and/or Free Trade Agreements between Mexico and the rest of the world, tariff reductions for new motor vehicles were negotiated as follows: NAFTA. - In accordance with NAFTA paragraph 19 of Appendix 300-A.2, on January 1, 2004, Mexico eliminated the requirement for prior permissions for the importation of new vehicles and vehicles imported from the United States and Canada, with a 0% tariff in accordance with the tariff reduction schedule. Mexico-EU FTA. - In accordance with Paragraph 4, Article 6 of Decision 2/2000, effective January 1, 2007 tariffs on the importation of new vehicles from the European Community were eliminated. ACE 55 (Agreement between Mexico and Argentina and Brazil). - According to Appendices I and II, regarding trade in the automotive sector between Mexico- Argentina and Mexico-Brazil, respectively, the reciprocal tariff on vehicle imports was set at 0% since 2003. Free trade in vehicles imported from Argentina began on January 1, 2006 and vehicles from Brazil entered into this agreement on January 1, 2007 (only for authorized vehicle manufacturers and distributors). We have had bilateral free trade with Uruguay since 2011. Mexico-Japan Agreement. - Since the entry into force of the Agreement (2005), tariff reductions were applied in 7 equal stages, with a base rate for each reduction of 20% and 30% as of April 1, 2011. Page 19 of 48
Rules of origin for automotive products FTA/Economic Cooperation Agreement Rules of origin for automotive products NAFTA The regional content value (RCV) required must be 62.5% (for vehicles designed for 15 or fewer people) or 60% (for vehicles designed for 16 or more people) using the net cost method European Union To confer original status, the value of all the materials used for the manufacture of the product must not exceed 40% of its manufacture price. EFTA Member States To confer original status, the value of all the materials used for the manufacture of the product must not exceed 40% of its manufacture price. Mercosur (Common Southern Market) Brazil and Argentina: Regional Content Index (RCI) must not be less than 60%. Uruguay: RCI not less than 50%. Mexico: RCI not less than 30%. Colombia* RCV from 35% to 50% Chile Bolivia Costa Rica and Nicaragua RCV of at least 32%, using the transaction value method, or RCV of at least 26% using the net cost method. RCV of at least 40% using the net cost method. RCV of at least 40% using the net cost method. Guatemala, Honduras and El Salvador RCV of at least 50%. Israel 40%, using the transaction value method, or 30% using the net cost method. Peru** RCV of at least 35%. Japan RCV of at least 65%. Under the Decree to support competitiveness in the terminal automotive industry and promote the development of the domestic automobile market (Automotive Decree) which was published in the Official Gazette of the Federation on December 31, 2003 by the Ministry of Economy, a tariff quota with 0% tariff was established (unilateral quota) for companies registered under this decree with the Ministry of Economy. This applies to an amount equivalent to 10% of their annual production, as well as to an additional amount according to their projections for investment in new production facilities, supplier development or human resources. Page 20 of 48
Auto parts General outline In the case of auto parts, the elimination process ceases in 2013, but more than 60% of merchandise classified under this code already has a rate of 0%. Average Tariff* on Auto Parts Imports (%) * A simple average of tariff rates applicable to auto parts. Note: Includes the 155 tariff codes under heading 8708 of the General Import and Export Tariff Taxes. Source: TIGIE Automotive SPPs and Rule Eight Sectorial Promotion Programs (SPP) are instruments aimed toward allowing manufacturers to import their raw materials under preferential tariffs in order to maintain their competitiveness, particularly in globalized sectors such as the automotive industry. Thus, most SPP Automotive raw materials can be imported duty free. Automotive PROSEC tariff structure Number of tariff Number of tariff sections (2007) sections (current) Tariff (%) 1837 602 0 420 136 3 53 21 5 2 2 10 2312 761 However, in cases where the SPP does not solve the needs of companies, they can use Rule Page 21 of 48
Eight with a 0% tariff rate. Companies that are registered with the automotive SPP have access to automotive Rule Eight (tariff code 9802.00.19) when they meet the following authorized criteria: Must diversify supply sources and maintain competitiveness Must meet the needs of new investment projects Must not exist insufficient domestic production or supply Automotive Decree On December 31, 2003 the "Decree for the support of competitiveness in the terminal automotive industry and promotion of automobile market development" was published in the Official Gazette of the Federation 2. This was done in order to promote investment in the manufacture of light vehicles in Mexico through the provision of various benefits. The benefits that registered manufacturing companies receive are as follows: - They can be considered "manufacturing companies" for purposes of the provisions under "automotive tax deposits" and other provisions of the Customs Law. - They may import vehicles that are produced by Mexican production sectors duty free ad-valorem, under the tariff rate quota, for an annual volume equivalent to 10% of the production of the previous year. - They are automatically included among "manufacturing companies" under the Automotive and Auto Parts Industry Sectorial Promotion Program. - The decree provides the following three modes of registration for access to its benefits: Article 3 Article 4 Article 7 Description Light vehicle production companies based in Mexico that have invested at least 100 million dollars in fixed assets and produce at least 50,000 units annually. Companies that perform or will perform manufacturing, assembly and coating processes, increasing vehicle value by 50%. Companies that are in the process of complying with the annual production volume of article 3, but that have complied with the rest of the requirements of that article. 2 Updated April 15, 2010. Page 22 of 48
Sectoral Indicators GDP and Employment Currently, the automotive industry accounts for 17.2% of the manufacturing GDP, with 28.2% of manufacturing exports and 15.9% of employed persons. Source: Created using information from INEGI. Note: Annual average. The automotive industry is also important because of its integration with other industries, creating a significant number of indirect jobs. During 2011, the industry employed more than 504,000 people. The industry also generates a significant number of jobs linked to activities such as marketing and after-sales services for the domestic market. Direct jobs in the automotive sector Source: INEGI Monthly Survey for the Manufacturing Industry and AMDA. Page 23 of 48
Automotive industry exports accounted for 28.2% of the total manufacturing sector and 22.5% of total exports, ranking even above oil. Automotive vs. oil exports, 2000-2011 (Billions of Dollars) Source: INEGI. The automotive industry in both terminal vehicle production and auto parts has been a major recipient of foreign investment, resulting in competitive conditions in Mexico as an investment destination. In 2004, this industry reported the highest FDI level in the last 12 years. Foreign Direct Investment, 2000-2011 (Millions of dollars) Source: SE, Directorate General of Foreign Investment (DGIE) Page 24 of 48
Also, during the current administration significant investment announcements regarding new vehicle assembly production complexes and/or the expansion of production infrastructure have been made. From 2007 to 2011 investments in this sector of 10.349 billion dollars were announced. Between January and April 2012, investments adding up to 5.3 billion dollars were announced 3. Company 2007 2008 2009 2010 2011 Total Daimler Chrysler 871 871 Ford 3,000 3,000 Chrysler 550 620 1,170 Volkswagen 1,053 1,020 2,073 General Motors 435 900 1,335 Nissan 600 600 Mazda 500 500 Honda 800 800 Total 871 3,000 1,053 2,605 2,820 10,349 Besides its contribution to economic activity, its role as a forerunner to competitiveness makes this industry a key factor in the development strategy of our country. Installation of automotive manufacturing plants has contributed significantly to the development of the economies of regions where they are located, which is seen in results such as the following 4 : Improvement and diversification of the local workforce, making it more stable and experienced. Industrial learning, by promoting new organizational practices among local businesses. Building links with higher education institutions in the region. Additional impetus for upgrading urban infrastructure and services. 3 In January Nissan announced an investment of 2.0 billion dollars, and in April, Ford and Audi announced they will invest 1.3 billion dollars and 2.0 billion dollars, respectively. 4 Source: Oscar F. Contreras, La planta Ford en Hermosillo: Antecedentes de su Impacto en el Entorno Local (The Ford plant in Hermosillo: History of its Impact on the local environment), US- Mexico Foundation for Science, El Colegio de Sonora: May 2005. Page 25 of 48
The automotive industry in Mexico has undergone major transformation phases to adjust to prevailing economic conditions both domestically and internationally. This transformation has been accompanied by various policies implemented since the sixties by the Federal Government to promote the manufacture of vehicles and parts in our country, as shown below (See more details in the Standards section): Domestic Market Evolution Production The increasing globalization of the industry meant that since 2000 the vehicle manufacturing industry has experienced a production plant reconfiguration process, moving from economy car assembly to the assembly of models focused on a global market that demands vehicles with more sophisticated technology and aggregate value. The entry into force of the North American Free Trade Agreement (NAFTA) has been accompanied by a modernization process in Mexico s automotive industry. In 1995 light vehicle production resumed its growth at a steady pace up until 2000. Starting in 2001 there was a reduction in the production of vehicles that was the result of the slowdown in the US economy and the production line conversion process. Therefore, after having reached a manufacturing volume of just over 1.9 million units, nationwide vehicle production fell to Page 26 of 48
just under 1.6 million units in 2004. However, since 2005 there has been a rebound in vehicle production, with an increase of 7.3% during that year, reaching a total of 1,694,420 units. This dynamism accelerated in 2006 when production increased by 22.3% compared to 2005, reaching a record level of just over two million units produced. Production peaked in 2008, with a volume of 2.1 million units, representing an increase of 91.3% compared to production in 1994. Light vehicle production in Mexico Note: information for heavy trucks for the year 2011 covers the period from January to September with ANPACT and from October to December with information provided by the companies. Source: prepared with information from ANPACT and AMIA. This favorable trend was interrupted by the global economic crisis of 2009. During this year vehicle production fell by 28.1%, mainly due to the contraction of the US auto market. Now that the worst of the crisis is over, recovery has been significant. In 2010 there was an increase in light vehicle production of 50% over 2009 and 7.5% compared to the year before the crisis (2008). In 2011, the positive trend continued, with an all-time record being set for the second year in a row at 2.6 million light vehicles. The volume of vehicles exported during 2011 (2,143,883 units) was also the second consecutive record year for the Mexican automotive industry. Sales Sales of new vehicles in the US and Mexico show the same long-term behavior, an upward trend from 1996 to 2006. Page 27 of 48
New light vehicle sales, Mexico vs. US (Thousands of units) Source: AMIA and WARD'S AUTO This behavior was reversed with the global economic crisis of 2009, when global new vehicle sales dropped by 4%, with the North American region being the most affected as demand for new light vehicles fell by 20.4%. In Mexico, the drop in sales was 24.7%. Despite the severity of the crisis and the fact that previous levels have still not been recovered, it should be noted that the recovery of the light vehicle market was faster than that observed during the 1995 crisis. New light vehicle sales (Units) *Monthly data from Jan-94 to Dec-96 and from Jan-08 to Dec-10 Page 28 of 48
New light vehicle sales (% annual variation) *Monthly data from Jan-94 to Dec-96 and from Jan-08 to Dec-10 By the end of 2011, retail sales of new light vehicles in Mexico had risen by 10.4% from the previous year, from 820,406 units in 2010 to 905,886 units in 2011. It is notable that sales of automobiles produced in Mexico exceeded those observed before the crisis by 4.4%, going from 414,258 in 2008 to 432,572 in 2011. Retail sales of automotive vehicles (thousands of units) Year Light vehicles Heavy trucks Total 2003 978 33 1,011 2004 1,096 35 1,131 2005 1,132 41 1,173 2006 1,140 48 1,188 2007 1,100 53 1,153 2008 1,025 49 1,074 2009 755 24 779 2010 820 28 848 2011 906 33 939 Source: Created with information from AMIA and ANPACT There is a more balanced mix between imported and domestically produced vehicles. The contribution of cars sold and manufactured domestically went from 47% in 2008 to 40% by the end of 2011. Page 29 of 48
Market share by brand Source: Created with information from AMIA As far as brands are concerned, the largest share at the end of 2011 was held by Nissan with a sales volume of 224,500 vehicles, representing a 25% market share. General Motors sold 19% of all light vehicles during the year. Per segment, there was an increase in the share of multipurpose vehicles (SUV, Minivan and Crossover) and a reduction in subcompacts and compacts. Passenger vehicle sales by segment (% share) Source: Created with information from AMIA Subcompact: wheelbase up to 2,475 mm, with 4-cylinder engine up to 1800 cm3 displacement and power up to 110 HP. Compact: wheelbase of 2,476 to 2,700 mm, with 4 or 6 cylinder engine with 2500-3100 cm3 displacement and power from 110-135 HP. Page 30 of 48
Luxury: wheelbase of 2,601 to 3,000 mm, with 4, 6, 8 or 12 cylinder engine with 3200 to 6000 cm3 displacement and power from 136-394 HP. Sport: wheelbase of 2,601 to 3,000 mm, with 4, 6 or 8 cylinder engines with 2000-4600 cm3 displacement and power from 160-295 HP. These units also feature special devices in their engines such as: turbo chargers or a greater number of valves in each cylinder. Multi-purpose or utility (UV): Motor vehicle designed to transport people and/or products, with or without chassis or with special equipment for occasional off road use (SUV, Crossover, Minivan and Van). Light commercial vehicle sales by segment (% share) Class 1: Truck with GVW under 2,721 kg Class 2: Truck with GVW between 2,722 kg and 4,536 kg. Class 3: Truck with GVW between 4,537 kg and 6,350 kg. Exports Foreign sales are still the main destination for vehicles produced in Mexico. 83.8% of all vehicles produced in Mexico during 2011 were destined for export, the US being the main destination of our exports (63.5%). Page 31 of 48
Destination of Light Vehicle Exports by Region, 2011 Share (%) Source: prepared with information from AMIA. During the first quarter of 2012, Mexico ranked as the fourth largest exporter of automobiles in the world. Leading Vehicle Exporters, 2012 (Units) Ranking Country Jan-Mar 1 Germany 1,267,654 2 Japan 1,264,332 3 South Korea 855,354 4 Mexico 589,581 5 Canada 520,749 6 Spain 459,220 7 United States 448,809 8 France 398,629 9 United Kingdom 322,653 10 Czech Republic 294,480 Source: AMIA and Global Trade Atlas (GTA) Page 32 of 48
Automotive vehicle exports (Millions of units for light vehicles, thousands of units for heavy trucks) Left axis: light vehicles; Right axis: heavy trucks Source: prepared with information from ANPACT and AMIA. For heavy trucks, information starting October 2011 is provided by the companies. Light vehicle production by destination market (%) Heavy trucks In 2011, heavy vehicle production reached 132,737 units, an increase of 53% over the previous year. Of these, 79% went to the export market. During the first quarter of 2012, production increased by 31.5%, rising from 27,430 to 36,081 units. During the same period, 81% of production was for export. Page 33 of 48
Production, exports, imports and sales of heavy trucks (Thousands of units) Year Production Exports Imports Wholesale 2003 56.9 25.0 1.5 32.2 2004 69.0 37.9 2.2 35.1 2005 84.4 43.2 3.1 42.4 2006 92.3 50.4 5.2 48.4 2007 86.3 39.9 7.6 51.9 2008 78.9 36.7 6.5 50.3 2009 56.6 42.7 5.0 21.5 2010 86.7 62.7 6.4 29.7 2011 132.7 105.4 5.8 32.6 Jan-Mar 2011 27.4 21.4 1.5 7.4 Jan-Mar 2012 36.1 29.3 1.7 7.7 Source: Created with data from ANPACT Wholesale sales during 2011 came to 32,592 vehicles. This represented an annual increase of 10%. During the first quarter of 2012, sales increased by 3.4% (7,653 units), compared to the same period of 2011. Auto parts Industry Mexico is a major automotive manufacturing center. This activity has been supported by the establishment of a domestic and foreign supplier base with global scope (mostly Tier 1). Many of the major auto parts companies from North America, Europe and, to a lesser extent Asia, have established themselves in Mexico. This represents an opportunity for investment promotion. The auto parts industry saw a boom in the nineties, with rapid growth that led to a production value of over 20 billion dollars during 2000. In 2007 it reached a peak of 24.7 billion dollars and, similar to the terminal industry, was severely affected by the 2009 crisis. It began its recovery in 2010 and recorded its all-time record in 2011, totaling 32.6 billion dollars. Value of autoparts production (Billions of dollars) Page 34 of 48
* Estimate Source: For years 1994 to 2004, compiled with information from INA. For years 2005 to 2011, information from INEGI. Extended Monthly Industrial Survey. As in the case of terminal industry, auto parts manufacturing is mainly for export, the US being the largest market. Of all automotive exports to the US (vehicles, engines and parts), Mexico holds the largest share, with 26.0%, followed by Canada (23.2%) and Japan (19.2%) 5. Mexican automotive exports share in US total Source: US Department of Commerce Global market evolution Since the 90s, the automotive industry has undergone a process of reconfiguration that has deepened its characterization as a global industry, characterized by several strategic alliances among major automakers in the world. The goal of these partnerships has been to form large scale economic forces for the design, manufacture and marketing of new models, while seeking at the same time seeking to achieve more effective penetration into new markets through brand diversification. To illustrate this phenomenon, four of the top five vehicle assembly firms in the world (General Motors, Toyota, Ford and Volkswagen) have thirty-two divisions or subsidiaries around the world. 5 Source: US Department of Commerce; Bureau of Economic Analysis, 1 2011. Page 35 of 48
MAIN VEHICLE PRODUCERS, 2011 (Millions of units) Ranking Country Production 1 China 18.4 2 US 8.4 3 Japan 8.4 4 Germany 5.9 5 South Korea 4.7 6 India 3.9 7 Brazil 3.1 8 Mexico 2.6 9 Spain 2.4 10 France 2.0 Source: Created with information from OICA. In recent years, the automotive industry has experienced an intense process of structural change. This process has been accelerated in the wake of the financial crisis that began in 2008 and had its most serious consequences in 2009. Among the key features of the new environment is the relocation of production processes to low-cost countries. From 2000 to 2011, the vehicle production in major developed countries fell by 24%. Vehicle manufacturing in developing countries grew by 202.9% during this same period. Vehicle production Developed countries vs. developing countries, 2000-2011 (Millions of units) Developed countries include: USA, Germany, Canada, France, UK, Japan, Italy, Belgium and Spain. Developing countries: Brazil, India, China, Russia, Mexico, Korea and Thailand. The countries with the largest decrease in their level of production during this 11-year period were the US and Japan. Mexico has remained among the top 10 vehicle producers in the world. At the end of 2011, Page 36 of 48
Mexico was placed at number eight. Global vehicle production in the leading countries, 2000 Total: 58.4 million units Global vehicle production in the leading countries, 2011 Total: 77.8 million units */Data for 2010 Source: Ward s Auto and OICA (International Organization of Motor Vehicle Manufacturers) On the demand side, the US market (largest consumer of vehicles produced in Mexico) is showing an increasing penetration of Asian brands (Japanese and Korean), at the expense of the big three US firms which have faced various difficulties in maintaining their shares in their own market. Page 37 of 48
New light vehicle sales in the US (Millions of units) Source: Created with data from WARDS. Among the changes in US consumer preferences, an increase in the acceptance of smaller vehicles has been notable (subcompact and compact). For decades these vehicles were under little demand. Some global firms with production facilities in Mexico have seized the opportunities presented by this trend 6. In addition to the loss of US market share, the three major US firms have faced significant burdens in terms of production costs due to the high cost of pension payments. The increase in its cost structure has resulted in a consequential loss of competitiveness against its competitors. In this context, in 2009 Chrysler and General Motors took advantage of Chapter 11 Bankruptcy Law, and the US government financially "rescued" these two automotive companies which are emblematic of American industry. The advancement of Asian firms has been demonstrated by an increase in its market share. In 2011, sales by the three major Japanese companies were 30% of total new light vehicle sales in the US, 10% more than in 2000. New light vehicle sales in the US by brand Market share (%) Brand/Year 2000 2011 GM 27 20 Ford 24 17 Chrysler 15 11 Toyota 9 13 Honda 7 9 Nissan 4 8 Volkswagen 2 3 Other 12 19 6 In this regard, it is noteworthy that the US has made commitments to increase vehicle performance and reduce motor vehicle greenhouse gas emission levels. This includes the requirement that new vehicles increase efficiency by approximately 25% between 2008 and 2016. Page 38 of 48
Source: Created with data from Ward s Auto. Moreover, China has become the most prominent emerging country, with a production level of 18.3 million vehicles in 2010, placing it as the leading producer in the world, a position formerly occupied by the US The growth of the Chinese automotive industry reflects the sustained growth of its economy in recent years, and although it has not reached the quality standards necessary to successfully compete outside of China, it has been driven by an enormous domestic market with rising purchasing power. Vehicle production and sales in China Source: Ward s Auto In Latin America, Brazil has experienced significant growth in vehicle production in recent years. With 3.6 million units produced in 2010, the Brazilian automaker industry saw growth of over 88.2% during 2000. This growth has moved it into the list of major vehicle producing countries, rising from 12 th place in 2000 to 7 th in 2011. New vehicle sales in Brazil (Thousands of units) Source: Ward s Auto Page 39 of 48
However, it is important to note that Brazil specializes in producing subcompact cars (low aggregate value), mostly to supply its domestic market (a feature it shares with the Indian and Chinese industries). In 2011, only 15% of vehicles manufactured in Brazil were destined for export markets. With reference to the needs of Brazil's vehicle fleet and comparing it with Mexico, it should be noted that in 2008 the population of the country was almost 1.8 times that of Mexico. During that same year, Brazil s vehicle fleet (27.4 million) was similar to that of Mexico s (26.6 million). Competitive advantages of the domestic automotive industry Mexico offers significant global competitive advantages. Notable among these are its geographical location, the availability of skilled and competitive labor and preferential access to major world markets. Large supply network. Access to high quality supplies helps reduce assembly costs, such as costs for inventory, risks, transportation and others. Throughout the country there are important automotive clusters. The largest automotive cluster is located in the northwestern region of the country and has 198 manufacturing plants. These include the manufacturing of climate controls, automotive systems, plastic parts, electrical system parts, engine parts and machining. Skilled and competitive labor. Mexico has a skilled and low cost automotive industry workforce. In the most efficient plants in Mexico these costs are a quarter of the cost of labor in the United States. The development of the automotive industry in our country has created skills and abilities in the national workforce that enabled the emergence of the aviation industry. Similarly, it is expected that the development of both industries will create positive outputs for the telecommunication and railway industries, along with others. The number of engineers in Mexico represents an advantage for attracting investment when compared to other destinations. In our country, 100,000 engineering and technical students graduate (more than in Germany, Canada and Brazil) per year and there are 900 postgraduate programs related to engineering and technology in Mexican universities. This creates a major attraction for investment. Page 40 of 48
Graduated engineering students per thousand inhabitants For the United States, only citizens and permanent residents are included. Source: UNESCO, Institute for Statistics Geographical location. Mexico shares a 3,000 km border with the world's largest market and has preferential access. In addition to this, it also has easy access to the Atlantic and Pacific oceans. Eleven thousand kilometers of coastline on the Pacific and Atlantic oceans. The leading Asian countries (China, Japan and Malaysia) take an average of 15 to 23 days longer to supply the North American market in comparison to our companies. Furthermore, these countries take between 12 and 24 days longer to reach the South American market compared to products shipped from our country. Distance in sea days to main consumer centers Germany Brazil China Colombia Korea US India Mexico Poland Turkey New York 11 15 32 6 21-25 5 12 16 LA 25 23 18 10 17-31 4 26 28 Rotterdam - 17 32 15 33 11 20 16 1 10 Yokohama 35 35 4 24 3 15 17 19 36 27 Source: Boston Consulting Group Processes that require close collaboration between engineers and administration performed between the US and Mexico are highly benefited by sharing time zones. The cultural similarities between Mexico and the United States allow high corporate compatibility. The stability of macroeconomic variables provides greater certainty compared to other locations in the region. Currency conversion is easier in Mexico than in any other Latin American country, Page 41 of 48
making it a standard currency for international trade in the region. Preferential access to other markets. Mexico also has a number of free trade agreements that include rules of origin. Under these rules, preferential tariffs are granted for products whose Regional Value Index (percent of total value that was generated in the country) exceeds certain levels. This creates incentives for the development of higher aggregate value activities. Mexico has 12 free trade agreements with 43 countries and a legal framework that is compatible with its major trading partners. Page 42 of 48
Mexico's advantages as an investment destination place the country in a highly competitive position. According to WEF, in an analysis prepared in 142 countries, during 2011-2012 Mexico rose by eight places in competitiveness, going from 66th place in 2010-2011 to 58th in 2011-2012. The Global Competitiveness Index 2011-2012 rankings 2011-2012 2010-2011 Country Ranking Score Ranking Change Sweden 1 5.74 1 0 Singapore 2 5.63 3 1 Switzerland 3 5.61 2-1 Finland 4 5.47 7 3 United States 5 5.43 4-1 Mexico 58 4.29 66 8 Source: World Economic Forum Page 43 of 48
Perspectives Globally, major trends in the automotive industry are as follows: 1. Geographical Distribution Change in manufacturing facilities. Moving towards regional models of low-cost manufacturing. The move to low-cost regions will be driven by two main factors: cost and demand. Acquisitions and agreements have contributed to the consolidation of OEMs. 77% of global production is done by the top 10 manufacturers and these are opening new markets. Regional supply networks, encouraging existing suppliers and OEMs to find mechanisms to integrate with local companies in order to combine technology development with low-cost manufacturing. Diversification in the production platform, developing greater diversity of models produced from each platform. 2. Customers Changing purchasing priorities, value and safety being the most important features. Trend towards smaller but safe models. Growth of the middle class in emerging countries, opening new markets for luxury brands, as well as for first time purchasers (greater purchasing power). Innovations focused on safety will be crucial in making final decisions for the purchase of vehicles in coming years. Consumers are willing to pay more for these attributes. Innovations related to connectivity. The rapid development of communications will require greater involvement of the automotive industry with the electronics industry. Page 44 of 48
Automotive dealerships are still the main vehicle sales channel. Consumer trends indicate that this will not change in the short term. However, manufacturers continue to show strong interest in developing the internet as a sales channel. Innovations regarding specific needs related to the age of consumers will be crucial in the coming years. 3. Technology Engine technology and the transition to electric power. Despite the preference for more efficient internal combustion engines over electric motors. The shift from mechanical to electronic. Further integration of OEMs with the electronics industry (components). Low technology mobility. This trend is evident in markets where first time purchases of vehicles will be made, most of whom seek low-cost and basic vehicles. It is expected that by 2020, hybrid vehicles will still have a greater share than electric vehicles, but trends indicate a totally electric world in the long term. 4. Human Resources Both providers and OEMs should plan for a future that will require increasingly skilled workers from the design to the production stages. Workers with better and deeper skills at all levels and in all areas of the company and which include aspects such as technological development and innovation (Labor flexibility). Link between manufacturers and suppliers for employee development. Change in recruitment programs focused on getting younger employees who seek long-term professional development. 5. Energy Efficiency Worldwide environmental problems have led to the adoption of increasingly stringent standards in energy efficiency and pollutant emissions. This poses challenges to the industry, which actually translate into opportunities for structural Page 45 of 48
transformation and development towards new technologies that will improve the energy efficiency of vehicles. Thus, migration towards greater energy efficiency and more intensive use of renewable energy sources in order to reduce carbon emissions can be exploited as a mechanism to gain new international markets and generate development of the industry. To trigger this new market, incentives to innovate and develop the most efficient technologies will be created. This includes economic incentives. Given the urgent need for environmentally friendly products, Mexico can reaffirm its position among the best on the global automotive stage. Innovation will without a doubt be a key to reaching this goal and is an aspect which will require joint efforts from the public and the private sectors. To this effect, commitment stems from a basic idea. Innovation is an indispensable tool for increasing competitiveness, meeting environmental and human health requirements and gaining trust among the population. Therefore, innovation is a necessary tool for developing intelligent solutions and generating new business strategies. Innovation is a key factor to develop and implement environmental technologies and intelligent solutions to comply with regulations and maintain a good business strategy. The training of human capital in this new setting is essential to strengthening the sustainability of companies, keeping the country competitive, job creation and improving individual incomes. Technological retraining and updating according to the demands of the market is already a characteristic of this sector. Therefore, the challenge will be to maintain this rhythm of advancement and rise in production. Environmental sustainability is having a positive impact on high quality job creation and profitability. Preliminary estimates indicate that the vehicle market in the US, with more efficient automobiles, could generate a net gain of about 190,000 new jobs. This presents opportunities for Mexico to increase high value activities, such as innovation and design, in an effort to strengthen its presence in global markets. The automotive industry may benefit from existing experience, knowledge and Page 46 of 48