Mexico Moves to Become Top Latin Car Manufacturer
Mexico enhanced its status this week as a global platform for automobile production--and as the hemisphere’s most adventuresome free trader--by signing a trade accord with Brazil that will give its industry greater access to showrooms in Latin America’s largest economy.
Although the deal initially calls for only 40,000 cars to be shipped each way, Mexican industry and government officials clearly hope it will lead to much higher volumes of vehicles and auto parts once a broader Mexico-Brazil trade pact is signed, perhaps later this year.
The deal is part of the ongoing globalization of auto production, a trend in which Mexico--which has no home-grown auto producers of its own--is playing a central role.
It reflects this country’s aggressive efforts to attract foreign investment and open up a once-closed economy. In addition to the North American Free Trade Agreement it signed with the United States and Canada in 1993, Mexico will soon launch a free trade pact with the European Union. Mexico has bilateral free trade deals with six other Latin countries.
This week’s pact also represents a major rapprochement. Bilateral trade between the two largest South American countries has withered since Brazil let a previous agreement lapse at the end of 1997 as it was entering severe economic difficulties. Trade between the two countries sank to only $400 million last year, down from $1.56 billion in 1996.
“Mexico is trying to diversify beyond its dependence with the United States. Trade has tripled with the United States since NAFTA but it has [vulnerability] if the U.S. economy decelerates,” said Alfredo Coutinho, an economist at CIEMEX-WEFA, a Philadelphia econometrics firm.
Among the biggest potential winners from Monday’s deal are DaimlerChrysler and Volkswagen, which operate major factories in both Mexico and Brazil. They said they plan to boost shipments to Brazil from current negligible levels. DaimlerChrysler will ship its successful new PT Cruiser model, made only in Mexico, while Volkswagen sees a fertile new market for its New Beetle.
The accord lowers tariffs to 8% on auto imports in both countries on a maximum quota of 40,000 vehicles shipped each way the first year, rising to 50,000 the second year. Currently, Mexico charges a 20% tariff on Brazilian cars, while Brazil levies a 35% tariff on those from Mexico. The high Brazilian tariff effectively had shut the door.
Mexico will not serve as Brazil’s back door to the United States market. Its cars won’t meet the requirement that, to receive favorable tariffs, they be substantially made in the U.S.-Mexico-Canada trade zone, said Maria Isabel Studer, international relations professor of the Autonomous Technological Institute of Mexico.
The quotas are expected to be loosened further.
“There is the hope there will be no quotas at all and that tariffs will be even lower than 8%” once the comprehensive trade agreement is finished, said Thomas Karig, spokesman for Volkswagen Mexico in Puebla.
The announcement comes amid a continuing boom in Mexico’s automobile production, fanned mainly by growing U.S. auto companies’ investment here and the booming U.S. economy.
U.S. and other foreign auto companies have invested up to $2.5 billion a year here since NAFTA took effect, lowering tariffs and easing auto makers’ access to cheap Mexican labor. The unusually healthy U.S. market, meanwhile, is the destination for 80% of all cars made here.
So far this year, Mexican car and truck production is running 18% ahead of last year’s robust pace. Total 1999 output of 1.5 million vehicles was twice the total a decade ago.
Production should grow even faster when a new Renault assembly line starts production in November and as the first phase of the Mexican-EU free trade deal kicks in July 1.
Some auto makers have elected to use Mexico as their only production platform for new models. That’s because lower costs can save an average of $1,500 per vehicle compared to U.S. facilities.
Volkswagen’s Puebla plant is the only source for its New Beetle, 80% of which are shipped to the U.S. Total production was 400,000 last year. Similarly, DaimlerChrysler uses its Mexico plant as the sole source for its new PT Cruiser line. Spokesman Leopoldo Silva said the company expects to make 180,000 of the new cars, 90% of which will be sold in the U.S.
Volkswagen’s Karig said that his company hopes the final deal hammered out by Brazil and Mexico will ultimately open doors to all of Mercosur, the trade block dominated by Brazil but which also includes Argentina, Uruguay and Paraguay.
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Revving It Up
Mexican auto production is up 19% this year after a 6% rise for all of 1999, boosted by the increasing investment by the Big Three and other foreign auto makers. Production could accelerate by the end of this year because of the new export agreement with Brazil and as Renault begins rolling out units at refurbished plants it shares with Nissan. Mexico’s auto production, in number of cars for the domestic market, for export (mainly to the United States) and total:
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Year Domestic Export Total 1989 433,763 195,467 629,230 1990 525,133 278,558 803,691 1991 595,529 365,354 960,883 1992 660,129 391,050 1,051,179 1993 562,027 493,194 1,055,221 1994 522,350 575,031 1,097,381 1995 152,500 778,678 931,178 1996 240,423 970,874 1,211,297 1997 354,846 984,430 1,339,276 1998 448,832 978,758 1,427,590 1999 440,837 1,077,217 1,518,054 2000* 107,906 321,489 429,395
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*Figures are through March.
Source: Mexican Automotive Industry Assn.
