Country’s association of auto parts manufacturers aims to increase suppliers at tier-2 level to localise operations as the country’s light-vehicle production is set to pass Brazil

With light-vehicle production up 7.2 percent on the year-to-date and further investments by automakers and component suppliers, Mexico is currently booming as an automotive production base. Mazda, Toyota, Honda, Nissan, and the Infiniti-Daimler partnership have either announced or begun production since late 2013. Audi's plant construction has begun and is due online in 2016, while Kia announced a USD1-billion investment in August and last week Toyota admitted they are looking at locations for a new facility.

As a result, suppliers also continue to expand their facilities in the country as they seek to optimise their production footprint and support their OEM customers. There has been a marked increase in plant openings or investments by tier-1 automotive suppliers in the last year. The last month alone has seen the following announcements:

Other tier-1 suppliers making investments this year include Continental, Denso, Robert Bosch, Hella, Faurecia Johnson Controls, JTEKT, Asahi Glass, Bridgestone and Hitachi Automotive. Shinano Kenshi, Magna, SRG Global and PPG.And it’s not just the tier-1 suppliers, Kobe Steel last week partnered with Shinsho Corporation, Metal One Corporation; Osaka Seiko Ltd; Mexico's Grupo Simec, S.A.B. de C.V. and O&K American Corporation to form a joint-venture in Mexico to process steel wire rod into CH steel wire for automotive suppliers in the country.

IHS Automotive forecasts that production in Mexico will see production of 3.24 million units in 2014 on its way towards 4.2 million units in 2017. As such, Mexico will eclipse Brazilian output in 2014. The two are forecast to run a tight race until 2017, when Mexico takes a firm lead. In 2014, production should increase in the third quarter, though output may be sequentially lower in the fourth 2014. We also see output surpassing 4.80 million light vehicle units in 2019 as capacity and component supply networks are widened and improved.

Mexico's strategy has created an export production base, taking advantage of the internal resources of the country as well as some transportation advantages. However, though the production and supply base is embedded in the country at this stage, there are still some structural issues for suppliers. Tier-1 suppliers still rely on imports as the local tier-2 and raw material supply base is still underdeveloped; an issue that Mexico’s trade associations know only too well.

The Industria Nacional de Autopartes (INA), the Mexican association of auto parts manufacturers, is pushing for a stronger tier-2 supplier base in the country. According to INA, Mexico produced USD76.8 billion worth of automotive parts in 2013. Imports during the year reached USD38.8 billion, up 7% y/y over 2012; imports mainly comprised items such as copper, aluminium, alloy cable and wire, tiers, seat and seat parts, harnesses, steering column parts, and disc brake mechanisms.

The issue may be a chronic one however. Mexico’s local suppliers have been hampered by a shortfall in the quality needed for international manufacturers, as well as the intense competition that has emerged with the arrival of major tier-1s over the last few years. The arrival of major global suppliers setting up production bases in the Mexico has seen them dominate at the expense of the local supplier industry, which has very few local Mexican tier-1 suppliers.

There is also growing pressure on component manufacturers in the US to match the prices offered by their counterparts based in China. This is leading many small or medium-sized suppliers that are unwilling or unable to shift production to China to move output to Mexico. For foreign tier-1s and other major suppliers though, there is now a real opportunity to locate new facilities in the region.

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