With the precipitous fall of the peso beginning in December 1994, and the financial turbulence that followed in Mexico, many short-term economic projections and business plans have changed.

In the auto industry, Chrysler, Ford, General Motors, Nissan, Mercedes-Benz and Volkswagen currently produce in Mexico. Since the economic crisis, their plans for expansion have been put on hold. Other auto and parts producers, such as BMW; T&N PLC, a British auto parts manufacturer; Daewoo of South Korea; Honda Motor Co.; and Italy's Fiat Auto S.p.A. which had intended to enter the Mexican market, have applied the brakes.

From 1990 to 1994, U.S. exports of auto parts to Mexico increased 58%. This growth trend, however, will not continue into 1995. Domestic automobile consumption in Mexico has slowed considerably. Consequently, U.S. exports of OEM auto parts to Mexican-based automobile manufacturers will also slow. However, some relief will be provided.

In 1993, approximately 10.9 million vehicles were on the road in Mexico. This represented a growth of 63% from 1983 to 1993. About 3.2 million vehicles or 30% were concentrated in the Mexico City metropolitan area. The average span life of these vehicles has decreased during the past decade to 10 - 12 years. With a reduction in buying power caused by a devalued peso, the purchasing of new automobiles will be put off for a later date, raising the average car life span. Consequently, the need to repair older models will increase the demand for auto parts -- but this will not be enough to offset the overall decline in demand projected this year.

Additionally, in order to receive Nafta status on parts shipped between Mexico and Canada, the rules of origin require 60% North American content (62.5% for autos, light trucks, engines and transmissions, and to 60% for other vehicles). To conform, Japanese and other non-North American auto producers will need to increase their North American content if they wish to receive the benefits provided by Nafta.

Exporting to Mexico

U.S. exporters of auto parts to Mexico have enjoyed much success. In 1993, the United States held almost 70% of Mexico's auto parts import market. The United States was followed by Japan, with 7.5%; Germany with 6.2%; Brazil with 5.9%; Italy with 2.7%; China, 1.5%; and Canada with 1.4%. Under Nafta, U.S. market share will increase even more.

There are two major end-users of auto parts in Mexico: the auto makers, which account for 2/3 of the total market, and the aftermarket, which accounts for 1/3 of the total market. The OEM market for auto parts was estimated at $5.4 billion in 1993. Mexican domestic production supplied 49% of demand. The aftermarket auto parts market was estimated at $2.7 billion in 1993. Domestic production supplied 65% of demand for this market, while imports satisfied 35%. In the aftermarket, dealerships, both large and small, and large independent repair shops continue to be the most important buyers of auto parts.

The automotive industry is very important for Mexico. During 1992, it represented 2.5% of GDP and 9.7% of manufacturing GDP. And according to a Mexican government agency, it employed about 504,000 workers, 15% of the total manufacturing work force. The auto parts industry in Mexico employed around 260,000 persons during 1993.

Prior to the economic crisis, the Mexican auto parts sector comprised more than 500 auto parts manufacturers, 165 maquiladoras, over 1,000 new car dealers, and 10,000 replacement parts distributors. The aftermarket has been very dynamic, having grown at an average annual rates of 10% in the past few years.

Next year, when positive growth is once again anticipated in Mexico, the demand for auto parts will pick up. Items in demand will likely include connecting rods; fuel injection tracks; valves; automatic transmissions; turbochargers; electronic engine management systems; power steering; steering wheels, columns and boxes; radiators; anti-lock braking systems; suspension parts; body parts and stampings; insulated wiring sets; engines; tires and tubes; plastic molded products such as bumpers, panels and gas tanks; and emission, exhaust equipment, and catalytic converters.

Japanese Competition Has Affected U.S. Auto Parts Producers

After having controlled its domestic market unchallenged for several decades, U.S.-owned auto makers have seen their domestic market share decline from 95% to 65% over a period of three decades. Consequently, U.S. suppliers of auto parts to U.S.-owned auto manufacturers have and continue to undergo a restructuring perhaps more painful than that of the auto makers.

According to the Office of Technology Assessment, U.S. imports of Japanese parts have grown rapidly in the past decade. Japanese transplant assembly plants in the United States buy from many U.S. suppliers, but mostly low value-added parts, such as gaskets and hoses as opposed to gears and brakes, while continuing to import high value-added parts from suppliers in Japan. Thus, the Big Three models incorporate a U.S. parts content of about 88%, while Japanese transplant models have only a 48% U.S. content.

As a result of greater Japanese competition, the Big Three have put intense pressure on their U.S. parts suppliers to adopt just-in-time delivery, requirements characterized by low inventories and express delivery, and to reduce costs. In an effort to become more efficient and reduce costs, many U.S. suppliers will likely relegate low value-added and labor-intensive production to Mexican maquiladoras.

Since Nafta was implemented, there has been a proliferation of partnerships between U.S. and Mexican companies, many of which have entered into production sharing agreements. This cooperation will be accelerated as a result of the peso devaluation (see "Devalued Peso Will Increase U.S./Mexican Production Sharing" in the March 1995 issue of the Exporter). A sizable portion of this production sharing is likely to be in the manufacturing of auto parts. Thus, U.S. suppliers of auto part components will benefit.

This article appeared in The Exporter, June 1995.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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