Mexico may be comparatively small compared with its northern neighbour, the United States of America, but it is the fifth largest country on the American continent and the 13th largest independent nation in the world. Its official name is the United Mexican States and the country consists of a federation of 31 states, while the capital Mexico City is a federal district. The population, according to the CIA is estimated at around 121,736,000. It is largely urban, some 80% live in towns and cities, with an on-going urbanisation trend of people moving from rural areas to the cities. The capital, Mexico City has the largest population at some 21 million.

Natural resources, free trade agreements

The country has a range of natural resources including crude oil and natural gas, as well as silver, copper, gold, lead, zinc and timber. Motor manufacturing has been one of the growth industries in the country with the country’s 46 free trade agreements proving attractive to motor manufacturers.

There’s a long list of manufacturers who build vehicles in Mexico, including Fiat Chrysler, Ford, General Motors and Nissan, which have all been established for some time in the country. In addition, Honda and Mazda began building vehicles in Mexico in 2014. Audi, BMW, Kia, Renault-Nissan with Daimler and Toyota are either building new plants or have plans to do so. Ford will expand its engine and transmission plants adding 3,800 jobs in the northern and central parts of the country. Altogether, the industry represented around 20% of the country’s manufacturing output in 2013. Motor manufacturing contributes 3% of Mexico’s GDP.

Part of Mexico’s attraction to the motor industry is the low wage economy – it is cheaper to build cars here than in the US or Canada and then the free trade agreements give easy access to markets around the world. Low wages are not the only story. The large presence of motor manufacturers in the region has established a robust supply chain for manufacturers and also provided an experienced workforce. The proximity to the US is also an attractive factor.

Low wages are also the reason that the market for new cars in Mexico is comparatively small, given the size of the country and its population. Annual consumption of new vehicles in Mexico runs at some 10 vehicles per 1,000 inhabitants. Growing prosperity for the nation would bring further opportunities for growth in the light vehicle market.

NAFTA

Mexico is a member of the North American Free Trade Agreement (NAFTA) with the United States and Canada. Not surprisingly, the US is the largest market for Mexico’s motor vehicle industry, second only in its exports there to Canada. Vehicle sales in the country have continued to rise steadily over the past few years and overall, the market has almost tripled since the 1990s. Data from the Mexican Automotive Industry Association (AMIA) shows that for the January to October year-to-date (YtD) period, total new light vehicle sales reached 1,064,774, an increase of 19.6% on the same period in 2014. For October, sales reached 119,867, up 18.8% on October 2014.

The majority of sales are of passenger cars, but the figure also includes light trucks, with roughly one third of sales going to trucks.

Leading the market by a large margin YtD is Nissan with 278,790 sales, a 22% increase on 2014. General Motors takes second place with 199,669 sales, up 15.8% on 2014. Volkswagen is the third best-seller with 144,266 registrations YtD, an 11.4% increase over 2015. Despite the recent Volkswagen emissions testing debacle, which came to light in September, Volkswagen sales rose 9.6% in October compared with October 2014 to 15,889. Given that the country faces air quality issues from older imported vehicles, as we discuss below, it might be that emissions are not the big issue that they are in other parts of North America, Europe or Japan.

Used car imports

Just as Mexico exports 80% of the new cars produced in the country, mostly going to the US, it is also a large importer of used vehicles from the US. Some 640,000 used cars were imported in 2013, more than half the number of new cars registered, giving rise to concerns about emissions compliance and safety standards. In 2014, the country produced 3,365,306 motor vehicles, a 10.2% increase over 2013, making it the seventh largest manufacturer of motor vehicles in the world. Mexico is also a large producer of automotive parts and again most of these are exported to the US.

Although the improvements in the economies of the NAFTA countries has boosted production and sales of motor vehicles in the region, analysts are expressing concerns about the effects that another free trade agreement, the Trans-Pacific Partnership Agreement (TPP) could have on the automotive manufacturing sector across North America. The deal is currently being negotiated between Australia, Brunei Darussalam, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Mexico was not originally included in the deal but lobbied successfully for inclusion. While the deal would open up trade to the NAFTA countries with South America and the emerging Asian markets, it would change the rules on local content that currently exist under the NAFTA agreement.

Trans-Pacific Partnership Agreement

Carlos Gomes of Scotiabank explains, “Under the TPP, the local content requirement for vehicles will drop from the current 62.5% North American content to 45% from anywhere within the TPP region. In addition, for auto parts the local content required will fall from the current 60% North American constraint to roughly 40% from anywhere within the TPP region. Furthermore, some products such as metal stampings and engines are required to have only 35% TPP content. These reductions in local content requirements have raised concerns of significant job losses at both vehicle assembly facilities and auto parts plants across North America, if there is a shift in production to low-cost jurisdictions.”

Mexico would be less exposed under the deal than either the US or Canada as wage rates are far lower and the country can produce parts and vehicles for less than its NAFTA partners. Gomes points to both increasing exports from the NAFTA region and lower import rates from Asian auto parts exporters to NAFTA as counter arguments, since the take up of Asian auto parts is far higher in Europe than in the NAFTA region.

Mexico might be key here. If Mexican manufactured parts are cheaper than those sourced from the US, the cost of transporting competing parts from Asia may not be economically viable compared with the overall cost of Mexican parts in the US and Canada. TTP could just focus attention on other markets for the Asian producers if competition with Mexico for the NAFTA market isn’t worth it.

Vehicle leasing

Wheels Inc. is ALD Automotive’s partner in North America. The company has formed a joint venture with Mexican company Ixe Automotriz, known as Ixe Fleet, to handle fleet business in Mexico. Wheels issued a White Paper, “Managing a Fleet in Mexico” this year, giving an overview of the fleet sector in the country.

The report highlights historical barriers to leasing such as the lack of economic stability, heightened by an economic crisis in the 1990s. The Mexican peso is much more stable today and the current bank rate is 3%. Wheels says that most leases are written on fixed rate contracts to guard against future rate increases.

The White Paper also highlights a highly controlled fuel market. State controlled oil company Pemex owned and managed all the fuel stations in Mexico, creating a market with no competition for fuel prices. Pemex has begun a process of franchising, according to the White Paper and fuel stations have begun to accept payment by credit and debit card. This was prompted by change in tax law, which means that fuel purchases will only be tax-deductible for businesses if paid for with a card, a measure designed to reduce fraud. This has also generated a market for fuel cards in the country.

Mexico City is the third largest city in the world with around 21 million inhabitants and almost inevitably, the city faces air quality problems. The White Paper indicates that there is a system of emissions verification to help reduce vehicle emissions. Vehicles that fail the verification test cannot be driven on specific days of the week.

Wheels says that vehicle theft is a problem in Mexico but rates of theft have fallen as vehicles with new security devices have reached the market. To counter theft in Mexico City, all new vehicles purchased since 2008 must be fitted with a tracking device.

The White Paper says that typically, residual values are set low in Mexico because while the lessor takes on the risk of a debit value at disposal, the client takes any improvement in the value.