mar16-kpmg-mario-hernandezThis is an exclusive preview of the 2017 edition of Mexico Automotive Review. If you want to get  other relevant insights regarding the Mexican automotive industry, get your copy of Mexico Automotive Review 2016.

Article based on an exclusive interview with Mario Hernández, Leading Partner of the IMMEX Segment at KPMG Mexico.

Q: How will Mexico’s economy face the recent protectionist ideas presented by other international markets?

A: Mexico evolved in a globalized environment that fostered international trading through fiscal incentives. The big leap for the country was NAFTA in the early 90s, followed by trade agreements with Europe and other countries in Latin America. The TPP was set to consolidate this idea of an open economy, decreasing Mexico’s dependence on the US dollar and the North American market. The country still has a strong economic link with the US in terms of oil and manufacturing, and with Canada in the mining sector. Several governments have tried to diversify our commercial relationships and even though there have been success stories, Mexico is far from the position it should have.

Given the recent changes in the global economic landscape, Mexico along with other Latin American economies will feel an impact on their development strategies. There is uncertainty as to what will happen in the years to come and right now the only thing the world has is campaign promises. Mexico’s strategy to diversify is on the right path but our efforts have to be faster, boosting strategies like the Energy Reform. We have natural resources, tourism, a strong manufacturing base and an excellent location between North and Central America to expand our international presence.

Q: How will the still-to-be-ratified TPP agreement and the NAFTA evolve with the newly elected US president Donald Trump?

A: There were worries in the US regarding employment generation, independent of whoever was elected president for 2017. The country has considerable commercial deficit and debt and as in many other markets, companies had to move abroad to remain competitive against China, Korea and Japan. But it would be unrealistic to talk about a fully protectionist idea where all manufacturing activities were carried out in the US. Production and living costs make this economically unviable.

Unfortunately, many blame NAFTA for the sense of unrest. But the reality is that with or without this agreement, companies needed a way to be efficient. The trade and customs barriers that were implemented in prior years to protect the US market and manufacturers were insufficient. The decision to become an open economy is still valid nowadays. If we add the TPP alliance to the equation, we need to consider the debt deficit the US has against China. The country will need to consider its commercial relationship with its Asian counterpart and the impact that products coming from this region have on the existing commercial deficit.

The final decision will take some time, at least until the President-elect establishes his new administration. That being said, NAFTA’s main bases remain strong. Countries can regulate the economy but companies set the rules. It is not a political but an economic decision and as long as this remains the same, there should not be no major effects.

Q: How can Mexico move past incentives and into an added value for companies looking to invest?

A: We consider that Mexico could be losing competitiveness against other countries with similar business models related with manufacturing operations and currently many companies already located in Mexico are wondering if Mexico has the necessary infrastructure to support its projected growth. We also hit a fiscal bump two years ago which needs to be resolved in the coming years. The country continues to operate under the same manufacturing scheme it created almost 50 years ago. Mexico has not incorporated the local supply chain into the process and still needs to make the leap toward higher added-value activities.

Even though we produce engineers, we do not target areas that could boost the industry. We focus on industries that already exist without creating any new products. The relationship between the automotive and aerospace industries is a clear example. It took decades for the automotive sector to develop adequate human talent to establishing a few research and engineering centers in the country. Now that the aerospace industry is growing, companies are looking to the automotive sector for engineers but they still need training.

Q: How can the industry evolve to enter an advanced manufacturing scenario?

A: We need to stop viewing foreign investment as a separate business to the domestic economy. A national company can file for an IMMEX permit just as easily as any international player. Furthermore, most foreign players direct 90 percent of their production to the export market, so local companies only compete for their 10 percent oriented to the domestic market. It is a cultural problem of considering foreign investment as a negative issue.

The government also has an important role to play in the process. There needs to be more collaboration between the private and public sectors, together with academia to find the main areas of opportunity for the industry. Most companies do not struggle to locate their local suppliers but they need certainty about companies’ quality and efficiency. Therefore, instead of having a thousand small suppliers competing for a spot in the industry, a possible solution would be to form a conglomerate with all these players.

After signing NAFTA, the country gave local companies 10 years to develop local capabilities and substitute imports. This program freed corporations from paying taxes for imports that would be eventually exported as finished products. But after that decade the industry failed to create its own supply chain. The private sector might make efforts to develop smaller players but it is not their priority. Imports are a billion-dollar market and developing enough to attract 20 percent of it would make an incredible difference to Mexican industry.

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