Alert in the Mexican automotive industry: five months of declines and the threat of a trade war

The Gestamp assembly plant in the Mexican city of Puebla.
The Gestamp assembly plant in the Mexican city of Puebla.Francisco Guasco (EFE)

The Mexican automotive industry is not raising its head. Production in November fell for the fifth consecutive month. The data reflects the persistence of problems with the supply of microchips, which the sector expected to have solved by now. It has not been so. Along with this shortage of materials, Mexico’s energy reform proposal and the government’s threat to retaliate against the US if it approves incentives for electric cars are pushing away the possibility of a speedy recovery from the pandemic and darkening the future of a key industry. .

It was the worst November in a decade. Although the reopening of the economy boosted the numbers at first, since July the sector has seen setbacks. Production in November, of 248,960 vehicles, fell 20% compared to the same month last year, the National Institute of Statistics and Geography (Inegi) revealed this Monday. The volume is 25% lower than in February 2020, just before the lockdowns due to the pandemic in North America. Some owners have had to go into technical stoppages due to the lack of materials and suffered overwhelming falls, such as 69% of Mercedes Benz or 42% of BMW.

The data challenges the hopes of the Mexican automaker, which represents about 4% of GDP and 19% of industrial, according to the Ministry of Economy. In August, the industry expected the microchip shortage to be resolved by the end of 2021 and the president of the automotive association AMIA, José Zozaya, was optimistic about the production of vehicles. “We would like to exceed the numbers of 2020 and hopefully reach 2019,” he pointed out to this newspaper. Optimism has been fading. The association now believes that production this year will close below that of 2020 and that pre-pandemic levels will not recover until 2024.

The shortage of microchips, also known as semiconductors, is proving to be a tough bone to resolve. During the pandemic, when demand for vehicles plummeted due to mobility restrictions, microchip manufacturers focused on the computer and electronic device sector, booming for telecommuting. After reopening, the global auto industry was faced with an insufficient supply of semiconductors. A mess to which there is still no immediate exit.

“It does not have a short-term solution,” the general director of AMIA, Fausto Cuevas, assured this Monday at a press conference. “There is already progress, but this is not a matter of a week or a month. It is going to give little by little ”. The economist José Luis de la Cruz sees a structural change. “The semiconductor sector has moved towards those products that are of higher added value. The automaker has been relegated and fixing it is not easy. The investments for the installation of new chip factories will take between one and two years, “he says.

Beyond microchips

It is not the only black cloud. The Government of Joe Biden has announced a tax incentive program in the US for the purchase of electric cars as part of a billionaire outlay in the face of the economic crisis of the coronavirus. Of the $ 12,500 that a US buyer will be able to receive, 4,500 will be paid only if the vehicles are assembled in US factories with collective bargaining agreements and another $ 500 if they use batteries with at least 50% domestic components.

The initiative, pending approval in the Senate, has set off alarms on the other side of the border. So far this year, Mexico has allocated 68% of its automobile production to its neighbor to the north. The incentive would place Mexican exports, the vast majority of which are combustion engines, at a disadvantage compared to US vehicles. In addition, it can scare away investment in electric cars in Mexico, a small but fledgling sector. Ford began manufacturing a model in the Latin American country last year and General Motors plans to open a production line in the state of Coahuila by 2023, according to AMIA.

Swords raised. The Mexican government considers that the proposal violates the T-MEC, the North American free trade agreement, and has threatened to retaliate and bring the conflict before the World Trade Organization (WTO), a process that can take years. The automotive industry has supported the response on Monday, although it has indicated the risks of an escalation. “It seems to us that the government’s position has been adequate,” said Fausto Cuevas. “I could establish tariffs, but I don’t think that is the solution. It would lead us to a trade war that does not benefit the regional integration of the industry, which is what we are looking for ”.

The other policy that darkens the future of the sector is domestic. The constitutional energy reform initiative promoted by President Andrés Manuel López Obrador proposes to cancel the contracts of private power plants, many of them renewable, that supply companies at prices cheaper than those offered by the Federal Electricity Commission (CFE). The automotive industry is one of the great beneficiaries of this scheme and its cancellation would cause, according to AMIA, an increase in rates and a loss of competitiveness.

Beyond the impact on the pocketbook, the reform proposal collides with the commitments of some shipowners to supply themselves with electricity from renewable sources. The president for Mexico of General Motors, Francisco Garza, warned at the end of November that the constitutional proposal hinders the company’s ability to meet the goals. “If the conditions do not exist, Mexico will no longer be a destination for investment, because the conditions will not be stipulated for us to meet our goal of being zero emissions in the long term,” Garza said in a financial forum.

To retain its appeal as an investment destination, economist José Luis de la Cruz says the government must calm the waters, rather than shake them. “The corporate decisions of where the factories are to be installed will be made in Europe, the United States. What Mexico can do is create the best conditions to attract investment, a fiscal and legal environment. The energy issue is strategic, “he concludes.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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