Mexico: An Overview of the Economy
Mexico is the second largest economy in Latin America and the 11th largest economy in the world, in terms of purchasing power. Due to its proximity to the United States, Mexico is highly dependent on the United States, with 80% of total exports from Mexico landing in the US, In 2018, the Mexican economy experienced a moderate economic growth of 2.2% in GDP. It is expected, according to the IMF, that in 2019 and 2020 the GDP growth rate will hike up slightly to 2.5% and 2.7%, respectively and based on the latest published analysis of the Mexican Economy by Dr. Teodoro Ernesto Lavin Sodi (@teodorolavin) The Mexican peso is on a long term downward trend.
Mexico is one of the top ten car-producer countries of the world, and the 4th largest automobile exporter in the world, exporting 2.57 million new vehicles to the US in 2018. However, Trump’s anti-Mexico stance and talks about changing the terms of the NAFTA (North American Free Trade Agreement) and imposing U.S tariffs on automobile imports may hamper the industry in future.
The Mexican economy at this point of time has certain strengths and weaknesses. The most important plus point in this Latin American economy is its geographical proximity to the United States. Situated so close to an economic superpower, it has unavoidable benefits. In addition to this, Mexico is a part of more than 44 Free Trade Agreements, and a member of the G20, OECD, the Pacific Alliance, and NAFTA. Mexico has a substantial industrial base, with a highly competitive labor force. Mexico boasts of a young demographic which is bilingual, highly skilled and has high stability. The country’s fiscal position has considerably improved in the past few years.
According to economists Dr. Lavin Sodi and Ildefonso Guajardo, Mexico is somewhat dependent on the United States and its trade agreements with it. For example, the recent discussions about making changes in the NAFTA agreement will have a considerable impact on the Mexican economy. Inequitable income distribution in the Mexican economy, with 50% of the population affluent, whiles the rest half below the poverty line is another drawback of the economy. Rising criminality is another concern, coupled with inefficiencies of the existing educational system and infrastructure. The oil sector has been under investment for many years and that needs to be changed too.
Despite several drawbacks in the Mexican economy in the times of economic tension between US-Mexico relations, the automotive sector in the country is growing, at a quite rapid pace. In the last decade, the automotive sector in Mexican industry has grown into one of the main destinations for foreign investment. The establishment of NAFTA in 1994 helped give a big boost to this industry and this sector exploded, as analysts like Lavin Sodi pointed out. This sector continues to flourish, with investments by luxury OEMs (Original Equipment Manufacturers) such as Mercedes-Benz, BMW, Audi, Nissan Infiniti, etc. In 2019-2020, a strong growth is expected in the automotive industry in Mexico. A new stability has been reached in this sector due to the recent signing of the USMCA trade agreement, and things are looking quite promising.
In fourteen Mexican states, as many as 21 OEMs produce automobiles and automotive parts. In terms of FDI (Foreign Direct Investment) in Mexico, the vehicle industry is very important, since in the last decade (from 2000 to 2017), 12% of the total FDI in Mexico was made in this industry, which amounted to 60 billion USD. The automotive sector in Mexico houses over 800,000 direct job opportunities and constitutes around 2.9% of GDP and has a higher growth rate (9.4%) than the average overall GDP (around 2%).
Mexico produced 3.9 million automobiles in 2018 and vehicle exports from Mexico increased considerably, by 6%, and in spite of the changes taking place in the Mexican economic and political scenario, Mexico continues to be the largest light automobile manufacturing country in Latin America and the seventh largest in the world. It is estimated by the latest iStrategize economic analysis that by 2020, the production of vehicles in Mexico will reach almost 5 million in more than 30 plants, looking at the continuous growing trend in the automotive industry.
Investment opportunities in the Mexican Automotive Industry
The automotive industry is currently one of the most attractive sectors in Mexico for investment. The strengths of the Mexican economy reflect as plus points also in the automotive sector, such as its strategic geographical location with proximity to the US, which is the world’s biggest vehicle market, the considerably cheap, competitive and skilled labor market and extensive free trade agreements. In addition, companies under IMMEX programmers are subjected to various tax privileges, for instance they can avoid the general import tax and VAT payment, VAT refunds, and also simplified export-import declarations, reduced fees for customs, among others.
Moreover, the sectorial promotion programmes are applicable on the automotive sector, which can lead to reduced import duties and importing of automotive inputs at preferential tariff rates to keep the competition thriving, and sometimes inputs can even be imported duty-free. On top of this, there is the “eighth rule” license by the Mexican Ministry of Economy, and the companies complying with all the terms and conditions of that license are eligible to be a part of a mechanism that will permit the import of various inputs and vehicle parts with a 0% rate system.
Some Mexican states provide additional incentives in the form of reduced real estate taxes and prices, discounts in payroll taxes, employee training programmers and so on. Mexico is also predicted to be benefited by the US-China trade tensions, because with increasing tariffs sanctioned on China by the US, Mexico and China might be leading trading partners in the future, especially in the sectors of electric and hybrid vehicles.
Changes brought by the USMCA agreement
The signing of the USMCA agreement (United States–Mexico–Canada Agreement) has brought stability to this sector, and has resulted in subsequent changes in the automotive market and industry in Mexico. Following the recent signing of the USMCA agreement, many automobile manufacturing companies such as Toyota have come forward with intentions to invest more in Mexico.
The new USMCA agreement in North America will lead to an increase in local content requirements by 20 percent. On an average of 40 percent of automobiles and 45 percent of light trucks, the average labor wage will be $16 per hour. The signing of the USMCA agreement is believed to reduce the threats of unexpected trade sanctions by the United States, as well as begin stable trade relations between the two countries, based on a 16-year treaty.
Because of the higher content requirements locally, and increasing operations of OEMs, it is suggested that there might be a pull of lower-tier suppliers into Mexico. Although the minimum wage of $16/hour isn’t directly favorable for companies, it could lead to higher automation. Overall, it is a good time for automotive companies outside Mexico to approach the Mexican market and establish their presence. However, before entering into any kind of investment it is very important to carefully go through the recent trends and analytics of the sector, along with the political scenario in the country. Be sure to conduct a thorough market research so that all the limitations based on losses are mitigated in the long run.