Tag Archives: U.S.

Assembly Allocation to Mexico will Grow at Canada’s Expense


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The Polk forecasting team is in a position to report good news as the North American assembly and sales volumes continue to improve year over year. This is the direct result of modest economic improvement and the satisfaction of pent-up demand. Polk anticipates North American assembly volumes will increase by 10% (14.4 M) in 2012, following a 10% increase in 2011 (13.1 M) and a 39% increase in 2010 (12M), following a dreadful fall to 8.6 million units in 2009.

To view graph “North America Light Vehicle Assembly”, please click here.

However, there is at least one fly in the ointment, besides the threat of Europe’s problems derailing our recovery, and that is the fact that Canada and the U.S. will continue to lose new vehicle assembly allocation to lower-cost Mexico.  As illustrated in the graph below, Canada will likely produce 16% (2.2 million) of all light vehicles assembled in North America in 2012, down from 17% in 2007 (2.5 million). The U.S. will likely produce 66% (9.5 million) of all vehicles in 2012, down from 70% (12.1 million) in 2002 and 78% (11.6 million) in 1995.

However, if you dig deeper into the data you learn that the U.S. market, while losing ground on a percentage basis, will likely realize an increase of over 2 million units by the year 2022 when compared to anticipated 2012 assembly volumes. This is largely related to an improving industry and capacity expansion by non-domestic automakers.

To view graph “North America Light Vehicle Assembly Allocation by Country”, please click here.

Canada, on the other hand, will continue to lose assembly volumes and many well-paying automotive jobs to Mexico. This is largely related to cost. Many Canadian automotive plants in operation were constructed at a time when exchange rates made Canada a lower cost alternative to the U.S. However, now that the Canadian dollar value is nearly on par with the U.S. dollar, Canadian labor costs are relatively high. In fact, The Windsor Star recently quoted Dan Akerson, General Motors’ CEO as saying, “Canada is the most expensive auto-producing jurisdiction in the world and the Canadian Auto Workers union must close the labor cost gap with their U.S. counterparts in upcoming contract talks.”  In U.S. dollars, the CAW’s total labor cost for hourly wages and benefits is about $60 per hour, compared with $58 for U.S. workers at General Motors, $56 at Ford and about $50 at Chrysler, according to the Center for Automotive Research.

Related to this, GM has confirmed it will follow through on its plans to shutter a portion of its Oshawa plant in mid-2013, which will likely eliminate 2,000 jobs. GM will continue operations at its Ingersoll, Ontario plant.

GM’s announcement is creating a great deal of tension with the Canadian Auto Workers (CAW) as they enter contract negotiations in August (contract expires on September 17). Tensions are also high for Canadians who contributed billions of dollars to preserve automotive jobs. The CAW, which impacts only Chrysler, Ford and GM, will likely refuse to accept wage reductions that automakers are requesting to match current UAW wages in the U.S.

North America Light Vehicle Assembly Forecast by Country: 2012 – 2022
Country      2007             2012                  2017                2022
Canada     2,542,150     2,210,000        2,030,000       2,040,000
Mexico       2,033,658     2,752,000        3,339,800       3,604,400
USA         10,555,043     9,484,400        11,272,870     11,564,100
Total         15,130,851     14,446,400     16,642,670     17,208,500

Polk will monitor the CAW negotiations as well as Mexico’s growing automotive industry. Mexico assembly will likely continue to grow as a result of attractive labor wages, experienced labor force and free trade agreements with countries in South America and the European Union. However, drug-related crime, also known as narcoterrorism, has been on the rise. Mexico’s new president, Enrique Peña Nieto, said he is committed to fighting drug violence and corruption. We will also watch this situation and its potential impact on the auto industry.

Assembly allocation is often dictated by cost – the low cost producer wins. During the 1970s Canada benefited from their lower cost and increased capacity allocation. More recently, Mexico is the benefactor.

Source: POLK – GAI

 

 


Assessing an Investment in the Mexican Automotive Industry


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This is a publication that analyzes key factors to be evaluated by investors wishing to enter or expand in the automotive industry in our country.

The industry is the most important in Mexican manufacturing industries and accounts for approximately 3% of GDP, 14% of manufacturing output and 23% of total exports. It also generates 30 billion dollars in revenue, representing 6% of foreign direct investment (FDI) and directly employs almost 500,000 people.

Mexico has many competitive advantages in the global automotive industry, including:

- Low costs combined with high productivity and skilled labor
- Free trade agreements with several countries
- Geographical proximity to the EU car market, which allows lower transport costs and faster time to market

The paper examines the landscape of opportunities this industry, the major investments that will make the world’s leading companies in the sector in coming years, the benefits of these investments and how to evaluate the market to establish an entry strategy.

To download 20-page report, please click here.

Source: KPMG Mexico – GAI

 


Why Mexico’s Economy Could Be One of the Most Attractive Emerging Markets


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Enrique Pena Nieto has just been elected president of Mexico.  It’s not what you’d describe as a dream job.

Mexico’s problems put all our worries into sharp perspective.  The most tragic and visible of these woes is the violent drug war. The war against the cartels (as well as infighting between cartels) has left 55,000 people dead over the last five years. It’s easy to see why most investors give the country a wide berth.

But they’re making a mistake. Behind the gory headlines lies a country with strong economic growth and surprisingly prudent management. Here’s why Mexico’s economy could be one of the most attractive emerging markets in the world.

A Manufacturing Boom in Mexico’s Economy

This may surprise you, but Mexico’s economy has become a formidable export power. Manufacturing accounted for just 2% of GDP in the 1980s. Now it’s 24%.

The boom began when the North American Free Trade Agreement (Nafta) was signed in 1994. Over the last ten years, the weak peso has given the sector a further boost. Healthy demographics – with a large and growing work force – also checks wage inflation and makes Mexican goods more competitive.

The gap between Chinese and Mexican wages has narrowed sharply from 260% in 2006 to just 10% today, notes HSBC’s Sergio Martin. Taking into account travel costs, Mexican factories now beat Chinese ones on cost for many goods. That explains why 12.5% of America’s imports currently come from Mexico. That’s the highest in a decade, and second only to Canada.

Of course, with so many of its exports going to one place, Mexico’s fortunes are tightly tied to America’s. But that’s not necessarily a bad thing, as David Rees at Capital Economics points out: ‘With America growing at around 2%, Mexico’s economy should grow at between 3% to 4%.’

It’s ‘not spectacular’, but it beats plenty of other parts of the world. More importantly, while Mexico is still growing its share of the US market, it’s also increasing sales to its Latin American neighbours.

In the last six years, the share of Mexican exports going to the US has fallen from 90% to 80%. Meanwhile, the overall value of exports, which currently stands at $700bn, is expected to double within the next eight years.

Mexico’s economy is also “moving up the value chain”. ‘More jobs, more energy, [and] more foreign investment are going into more advanced applications’, says Scot Overson, boss of chipmaker Intel’s Mexican division.  These include ‘technology and aerospace’, or ‘advanced manufacturing, not just simple unskilled manufacturing. Those aspects of Mexico economy seem to be accelerating.’

The country has also been wise enough to avoid squandering the proceeds of the boom. Public debt stands at 35% of GDP and falling. Inflation, historically a bugbear, is hovering around 3.8% – below the upper band of 4% targeted by the central bank.

It helps that central bank governor Agustín Carstens is seen as a safe pair of hands. As finance minister, he hedged Mexico’s entire oil output just before the oil price tanked in late 2008. It saved the nation $8bn and – so the joke went – made him ‘the world’s most successful, but worst-paid, oil manager’.

The Three Biggest Challenges Facing Mexico’s Economy

Despite Mexico undergoing one of its best-ever periods of growth and economic stability, its main stock index, the MEXBOL, doesn’t look too expensive. The price/earnings (pe) ratio of 14 is pretty much in line with the index average since its 1978 inception.

The main drag on the country is the drug-related violence. Any long-term solution can’t be down to just Mexico. Consumer countries (such as the US) need to alter policies too. That won’t happen in the near future.

However, there’s plenty of room for improvement. Mexico’s murder rate has tripled to 22 per 100,000 people – far higher than other Latin American countries with similarly powerful narco gangs. If any progress could be made here, Mexico’s other attractions would become far more apparent to investors.

Pena Nieto has promised to halve deaths by changing tactics. Instead of using the army to take on the cartels, he will use the police to minimise civilian deaths. He has also recruited the Colombian police chief credited with helping to stem that country’s problems. Even Nieto’s critics think he can halt the violence – although admittedly that’s because they think his party, PRI, will do a secret deal with the gangs.

The second big problem is Mexico’s falling oil output. Mexico has plenty of oil, especially offshore. The trouble is that while state-owned Pemex has exclusive rights to the country’s oil, it lacks the capital and expertise to develop new fields. Production has fallen from 3.4 million barrels per day (bpd) in 2006 to 2.5 million today. It’s expected to slip to 2.2 million by 2016.

So Pena Nieto has proposed partial privatisation. This won’t be easy: Pemex’s position is enshrined in the constitution. However, Eduardo Gonzales, a lawyer with Mexican firm Creel, believes it can be done. ‘Private equity funds are already raising the finance to take advantage of it.’ If he can pull it off, Capital Economics reckon it would add almost 1% a year to Mexico’s GDP.

The final challenge is Mexico’s uncompetitive domestic economy. Many markets are dominated by local oligopolies that rip off the people and block new entrants. Inflexible labour laws and a tiny tax base are also a problem: Mexico’s total tax take is about 22% of GDP, far less than the 36% raised in Brazil.

The oligopolies look safe for now. Many supported PRI, and Pena Nieto is unlikely to attack them in his first term. Instead, he will probably focus on freeing up the labour market and reforming tax, says Rees. ‘Strong exports will keep the economy ticking over but if the domestic economy could be reformed then we would see exceptional growth.’

Invest in the Mexican Economy?

Be warned. Mexico’s economy is definitely a ‘risk-on trade’: when investors get nervous they will jump ship indiscriminately. However, in the long run, it has great potential. Put it this way – if you’ve been thinking of allocating capital to the BRIC countries, I’d suggest looking at Mexico as an alternative.

Source: Money Morning Australia – GAI

 


Nearshoring Fuels Mexican Manufacturing Growth


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Security concerns don’t yet appear to be putting a major dent in Mexico’s appeal to manufacturers. Here’s why.

Closer, cheaper, friendlier. That might have been the formula underlying moving to or opening manufacturing operations in Mexico. The United States’ southern neighbor offers transportation distances a fraction of those from Asia, a labor force a good deal cheaper than domestic workers, and a country causing fewer headaches about intellectual property and other trade concerns. But in recent years, drug-related violence along the border has caused some manufacturers to be more cautious about making the move to Mexico.

Even with those concerns, Mexico continues to benefit from U.S. companies and other foreign investors who see it as an attractive manufacturing destination. In fact, 63% of those surveyed by AlixPartners, a business advisory firm, named Mexico the most attractive country for siting manufacturing operations closer to the United States. Only 19% of the companies reported supply-chain disruptions in Mexico as a result of security issues. And 50% reported they expect things to improve over the next five years.

Mexico’s proximity to the United States solves the most pressing issue facing manufacturers, which is speed to market, according to Rich Bergmann, global lead for manufacturing for Accenture. “The stability of the time schedule of supply has become paramount in manufacturing. Whether we like it or not, a 12-month forecast, steady-state demand is no longer a reality. Everyone is running lean supply chains and inventories. Being close to customers is key to reducing lead time. Add to that the overall total landed cost and that explains why reshoring is occurring in Mexico,” he says.

In fact, Mexico helps multinational firms cope with a variety of factors stemming from intense global competition, says Arnold Matlz, an associate professor at the W.P. Carey School of Business, Arizona State University. They include the pressure to reduce and control operating costs, the need for operational flexibility, the need for different service outcomes for different customers, and shorter product/service development cycles.

To date, manufacturers operating in Mexico have been largely shielded from the drug-related violence. “As reports have indicated, Mexico’s violence is characteristically cartel versus cartel. It is something that has not had a very large amount of leakage into civil society, nor has it affected, in a noticeable way, the companies that are already doing business there. As a matter of fact, in spite of what is in the news, Mexico’s manufacturing economy is humming along,” says Steve Colantuoni, director of corporate marketing for the Offshore Group. “Companies that are already in Mexico are increasing their numbers and their production.”

Foreign direct investment in Mexico rose 9.7% in 2011 compared to 2010 to reach $19.44 billion, indicating that violence is not chasing away dollars. This faith in Mexico is helping to fuel strong economic growth there. After a 5.5% growth rate in 2011, the Mexican economy is expected to grow 4.5% in 2012. Manufacturing has been a significant driver of the economy, growing 8% over the past year and creating 1.8 million jobs.

A High-Flying Aerospace Cluster

One industry flocking to Mexico for its lower cost structure and ample workforce is aerospace manufacturing. Between 2010 and 2011, total sales in Mexico’s aerospace cluster increased by 25% to $4.5 billion, according to the Aerospace Industries Association, far outstripping the industry’s overall annual growth rate of 15%, according to data from the World Bank.

To read entire article, please click here.

Source: IndustryWeek – GAI

 


Mexico’s Automotive Production and Exports Posting New Records in 2011


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In 2011, Mexico produced a record number of passenger vehicles and light trucks with over 2.5 million units. Mexico is now the world’s 8th largest manufacturer of passenger vehicles.

To download 8-page review, please click here.

Source: Mexico Trade and Investment – GAI

 


Mexico Continues to Lead as Lowest-Cost Country for U.S. Outsourcing; U.S. Closing Cost Gap with China


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U.S. manufacturers are regaining some of their global competitiveness, primarily driven by a weak dollar and wage inflation in countries long-considered to be more cost-efficient locales, according to a new study released today by AlixPartners LLP, the global business-advisory firm.  The analysis shows that Mexico remains the leading low-cost country (LCC) for manufacturing outsourcing from the U.S., but that a number of developing countries – with the exception of China – are gaining ground on Mexico as attractive options.

The gap between the United States and each of the other 12 countries analyzed in the AlixPartners U.S. Manufacturing-Outsourcing Cost Index has narrowed – the first time this has happened since 2007.

“It’s clear that the economic advantage of the so-called low-cost countries over U.S. manufacturers is shrinking,” said Stephen Maurer, managing director at AlixPartners and head of the firm’s Manufacturing Practice in North America.  “Our analysis shows that, in certain cases, outsourcing continues to make sense.  However, in nations experiencing rapid economic development, like China, challenges associated with a maturing economy are creeping in.”

In the comparable AlixPartners study released a year ago, the Index showed that U.S. manufacturers lost ground relative to the 12 analyzed LCCs, largely due to a stronger dollar and a rapid decline in logistics costs.

But the most recent data show that China took a step back because of its rapid wage inflation and a stronger yuan vis-à-vis the U.S. dollar.  This year’s Index also revealed that Vietnam, Russia and India have closed the cost gap considerably and have surpassed China in terms of their cost-effectiveness.

According to AlixPartners, this trend is likely to continue and could gain steam as China becomes a more economically developed nation and confronts challenges that go hand-in-hand with economic maturity.  Specifically, the study predicts that China will face wage inflation, a growing unionization movement and a modicum of labor unrest as workers push for wages and benefits on par with those earned in the U.S. and other developed economies.

Still, China production will continue to play a dominant role in the U.S. economy for the foreseeable future, the study finds.  Furthermore, several other countries evaluated will also start to experience some of the pressures China is now facing, as their economies develop and their workforces become more assertive, the study contends.

Amid the global shuffle, Mexico maintained its position as the world’s most cost-competitive locale, a leadership slot it had wrested from China and India in 2009. AlixPartners’ 2011 Index also shows that while the U.S. gained on each of the countries studied, it closed the gap the most against China.  In fact, the competitive dynamics have changed the landscape dramatically:

- In 2005, the pecking order in terms of their manufacturing cost competitiveness had China leading the pack, followed by India, Vietnam, Russia and Mexico.

- By 2010, the deck had been shuffled, with Mexico atop the rankings as the lowest-cost locale, followed by Vietnam, India, Russia and China.

All Eyes on Exchange Rates and Freight Costs

Moving forward, AlixPartners believes that global exchange rates and freight costs will dictate both the pace and flow (i.e., site selection) of U.S. manufacturing-sourcing decisions.

Companies doing business in China, for example, could see their costs of goods sold jump if the value of the yuan continues to rise against the dollar and other Western currencies.  Year to date, the yuan has appreciated some 4% against the dollar. AlixPartners estimates that the yuan needs to appreciate another 25% or more to reach natural equilibrium with the dollar, which would dramatically increase the cost of Chinese goods sold in the U.S.

Offshore manufacturing grew in late 2008 and through 2009, spurred by sharp declines in ocean-freight shipping costs, making it more cost-effective to manufacture goods in far-flung nations for eventual sale in the United States.  Freight costs flattened in 2010, as both market demand and oil prices, a major driver of freight costs, stabilized.  However, according to AlixPartners’ study, spikes in oil prices this year are likely to drive up near-term maritime freight costs.

“In today’s environment, looking at all cost variables is critical.  Our study is a powerful tool for companies to use to fully understand the global cost environment and help guide both their manufacturing and supply-chain strategic evaluations,” said Maurer.  “It’s increasingly important that companies keep a close eye on the many factors that can dramatically affect their production costs.  In simpler times, you often could look at just one or two key factors to guide your manufacturing decisions, but our study shows the myriad variables now in play.”

About the Study The 2011 AlixPartners U.S. Manufacturing-Outsourcing Index analyzed a variety of manufactured products and the total costs to make these items in 13 countries, including the United States.  The analysis covers well-established LCCs, such as Mexico, China and India, as well as emerging countries such as Russia, Romania and Vietnam.  It tracks changes in seven key cost-drivers (exchange rates, labor costs, transportation costs, raw-materials costs, inventory costs, capital-equipment costs and duties, and overhead costs and duties) and their combined impact on the total cost for a range of fabricated parts and products by country.

To download 3-page report, please click here.

Source: AlixPartners – GAI

 


Mexico suspends retaliatory tariffs on U.S. exports


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The Government of Mexico announced October 21, 2011, the suspension of retaliatory tariffs on U.S. products exported to Mexico, five business days after the U.S. Federal Motor Carrier Safety Administration (FMCSA) issued operating authority, to the first Mexican carrier to engage in cross-border trucking services under the long haul cross-border trucking pilot program established by a July 2011 memorandum of understanding between the U.S. Department of Transportation and the Mexican Secretariat of Communications and Transportation.

Under the Lifting of Retaliatory Measures agreement signed by the Office of the United States Trade Representative and the Government of Mexico’s Secretariat of Economy, provisions placed into effect included the following:

- The suspension of 50% of tariff applied to all products subject to the retaliatory measures, within 10 days of the date on which the MOU is signed

- The suspension of tariffs applied to all products subject to the remaining retaliatory measures within five business days of the date on which the first Mexican carrier is granted operating authority (provisional or full) under the cross-border long-haul trucking pilot program.

Source: KPMG – GAI

 


Panama Canal Completes Another Expansion Phase


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The Panama Canal Authority announced the completion of phase three of the dry excavation project in the construction of the Pacific Access Channel (PAC). The Pacific Access Channel will connect the third set of locks with the Culebra Cut and Gatun Lake.

The third phase of the PAC—costing $36.6 million including design, contractors and management—consisted of excavating 8.2 million cubic meters of materials, cleaning 190 hectares of munitions and explosives of consideration (MECs) and leveling Paraíso Hill from 46 meters to 27.5 meters above sea level.

This dry excavation project was completed within budget, on time and in compliance with strict environmental, safety, hygiene and quality standards.

“As we reach another milestone, we at the Panama Canal are proud to acknowledge that this new third lane will be a game changer in world maritime commerce,” said Panama Canal Authority Administrator/ CEO Alberto Alemán Zubieta. Mr. Alemán Zubieta recently visited ports in the East and Gulf Coasts to showcase the Canal´s progress on expansion and future plans.

To date, three of the four dry excavation projects, which will result in a 6.1-kilometer channel, have been completed for Postpanamax vessels to transit once the Canal Expansion is completed.

The Canal’s expansion is on schedule, following the recent commencement of the permanent concrete work for the new locks. The $5.25 billion project includes the construction of a new set of locks that will double Canal capacity and allow the transit of longer and wider ships.

Source: Material Handling & Logistics – GAI

 


Extension of the IETU Benefits Applicable to Maquiladora Companies


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On October 11, 2011, the President of Mexico, Felipe Calderon Hinojosa, signed the decree by which the special single rate tax (IETU for its acronym in Spanish) benefits applicable to maquiladoras are extended from January 1st, 2012 through December 31, 2013. Such benefit was originally granted by President Calderon under the IETU Decree that was published in November 5, 2007 and was scheduled to expire on December 31, 2011.

This benefit is intended to minimize the negative implications of the IETU for maquiladora companies by allowing a special credit that result in a combined income tax/IETU liability of not more than 17.5% of the maquiladora income tax base. Because of the manner in which most maquiladoras operate, imposition of the IETU using the normal IETU base would generally result in a very large increase in its Mexican tax liability, to a level that the President has once again determined would not be appropriate.

It is important to mention that this announcement is a result of the lobbying efforts of the National Maquiladora Council (Consejo Nacional de la Industria Maquiladora y Manufacturera de Exportacion, A.C. or “CNIMME” for its acronym in Spanish)

During this important announcement at Los Pinos, President Calderon signed the decree by which these benefits will be extended for maquiladora companies and which also includes an extension of the tax benefits applicable to non-profit and philanthropic organizations.

The official publication of this decree in the Official Gazette will be made in the following days.

Source: Baker & McKenzie – GAI

For more information or to contact Baker & McKenzie, please click here.


Auto production hits record level in Mexico


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Mexico’s total automotive output hit a record level in the January-September period, when 1.9 million vehicles were produced, authorities said Monday.

The automotive industry has been ‘one of the most dynamic (sectors) in the national economy, both because of its high production levels and its rate of exports’ in 2011, the economy secretariat said.

Total production in the January-September 2011 period was up 14.7 percent, compared to the same period last year, with output reaching 1.905 million units, a ‘maximum historical figure for the first nine months of a year’, the secretariat said.

Exports totaled 1.58 million units during the first nine months of this year, a figure that was up 14.8 percent from the same period in 2010.

‘In the ninth month of this year alone, vehicle production reached 225,287 units, marking annual growth of 14.1 percent,’ the secretariat said, citing Mexican Automotive Industry Association, or AMIA, figures.

Domestic auto sales, meanwhile, ‘continued on a positive trend’, rising 12.2 percent in September, the secretariat said.

A total of 631,336 new vehicles have been sold in Mexico this year, representing an increase of 11.6 percent compared to the same period last year.

The automotive industry is the most important manufacturing sector in Mexico, which is home to the world’s leading automakers and serves as an export platform.

General Motors is the No. 1 automaker in Mexico, followed by Volkswagen, Ford, Chrysler and Toyota.

Source: Yahoo Finance – GAI