Mexico Automotive Review collaborated with EY at an event this morning, February 1, 2017 to discuss the US elections and their implications for the Mexican automotive industry.

EY reunited the top industry leaders at Hacienda de los Morales, Mexico City and led a live digital poll to gage the industry’s optimism following protectionist policies north of our border.

The first vote asked: Given the peso’s depreciation and fiscal uncertainty, do you expect a negative impact on Mexico’s industrial competitiveness. Barely more than half the audience said yes, 57 percent responded affirmatively.

Will Trump’s protectionist policies cause capital to leave Mexico? The industry leaders were much less divided on this question, 70 percent said no. The industry leaders’ faith in Mexican competitiveness got the event off to a good start.

Andrés Lerch, Advisory Partner and Leader of the Operations Transformation Area at Ernst & Young’s Mexico Automotive Center asked rhetorically,What would Mr. Make-America-Great-Again do to Mexico?”

Lerch answered that the newly-elected president does not understand how the supply chain works. The principle risks contemplated by leaders involve the activation of Article 2205. This would lead to the renegotiation of NAFTA and is seen as the most probable outcome of the latest policies, though it will not be instantaneous. If a renegotiation happens exports from Mexico will become more expensive, which would send the economy into recession and cost the US billions of dollars. Lerch said Trump’s presidency will reduce brand competitiveness of Mexico-reliant products and downsize investment in Mexico from foreign sources. “Trump with Twitter is like a baby holding scissors,” said Lerch. His social media declarations affect a key industry in Mexico – of the exports sent to the US excluding oil value, automotive represents 32 percent.

José Ramón Zavala joined the conference via video, making a rousing point regarding the potential NAFTA renegotiation. The presenter of the MVS radio show Autos y Más pointed out “the infrastructure, plants, highways and all other benefits that Mexico has enjoyed thanks to free trade are here to stay.” No foreign policy can take that away from the country, whether the NAFTA holds true or not. Now the industry must reconfirm its competitiveness in services to keep the companies it hosts happy, Raul Gutierrez of AVL commented to Mexico Automotive Review later in the conference.

Mauricio Kuri, Director General of United Way México responded to the topic of whether Mexico should bite back like-for-like in terms of import taxes saying “The country’s development has been catalyzed for 50 years by its automotive industry. It would not be convenient for Mexico to impose tariffs on trade partners and continued open trade from here would be detrimental for the US.” The auto parts sector has been spared attacks, only assembly in Mexico is a direct target of presidential tweets, because applying extortionate tariffs to the auto parts sector would also cause the US automotive industry to lose competitiveness.

Edmundo Torres, Partner at EY spoke of the reason behind the industry’s general concern, saying it is due to the US not having justifya free trade agreement in more than 100 years. Both possible occurrences will be unprecedented but can be dealt with, the US either leaves NAFTA, or renegotiates. The US could leave NAFTA but giving six months forewarning, and this decision would not need any further intervention from US congress. But in 1974 a law was filed that if the US established a free trade agreement, the tariffs applied be altered for a year, unless the President makes a special declaration to return import taxes back to what they were before. This would imply a 3.5 percent tax, not 35 as threatened on Twitter, according to Torres. In either case, he continues “US preference for Mexican-made light vehicles will drop due to perceptions as well as actual higher prices.” This will reduce Mexico’s participation in the northern automotive market.

Kuri believes Trump’s messages were always clear, such as ‘Don’t visit if you won’t pay for the wall’. “He prides himself on being a great negotiator, but his first negotiation [with Peña Nieto] failed before it even started and evidenced poor tactics as Peña Nieto simply rejected invitation to the US because of Trump’s terms,” and the newest president lost the opportunity to even negotiate.

While AMIA’s targets of car sales begin to look overly ambitious, Lerch credits accessibility to credit, associations such as AMDA and ANPACT’s contribution and support of the industry for the enormous growth in 2015. It would be hard sustain similar expectations of growth long-term.

Guillermo Rosales, Director General of AMDA, stated that 12-14 percent interest rates on car loans makes the industry still competitive. In fact, it can sustain growth and the increased base rate is not expected to impact light car sales drastically. The conference stated that at least for the first semester of 2017, the internal market looks solid, reinforced by Asia’s interest in Mexico. Several Asian automakers are going ahead with planned constructions and investments and BAIC specifically, the Chinese OEM entered the market in late 2016 alongside JAC Motors in 2Q17.

Rosales also said that Mexico achieving 1.6 million car sales at the end of 2016 means there is still 400,000 units of potential in the internal market. “Mexico is the most competed market in terms of sheer number of participants.” The presenters said that one of the biggest factors that will affect automotive will be purchasing power, as Trump plans to take a hard line on impounding remittance payments. Currently 83 percent of Mexicans in the US send money illegally back home, which could be knocked on the head, threatening many families’ income. This would represent a hit on 2.3 percent of Mexican GDP.

EY’s Lerch said, “there’s no need to press the panic button!” The first 100 days of a government in office tends to shape how public policy will develop, so have patience, he urged. His colleague Torres reaffirmed that rather than backpedaling or worse, panicking, the Mexican government should respond with fiscal incentives, VAT caps and support for imports. “This is not being announced yet but I have every faith in our Secretary of the Economy to level the playing field.”

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