2022 Will Be a Year of Growth for the Mexican Auto Industry
Vehicle production across the world fell in 2021 compared to 2020, when global production was brought to a halt for two months. The same phenomenon happened in Mexico, where vehicle production decreased by 2 percent in 2021 compared to the previous year, to a total of 2,979,276 units. However, the auto parts industry grew 21 percent in 2021, almost reaching pre-pandemic levels. Something interesting is happening in the Mexican automotive industry. Despite the fact that fewer cars are being produced, in Mexico, we are making more for each car produced in our country.
The drop in vehicle production in Mexico and the world is a result of supply shortages, especially semiconductors and some raw materials. This has been a consequence of the COVID-19 pandemic that has impacted supply chains, making it difficult to fill inventories. By halting vehicle production at the start of the pandemic, semiconductor manufacturers diverted the part of their production destined for the automotive industry to other growing industries, such as computers and entertainment accessories. The auto industry “got up from its chair” and temporarily lost its place among the semiconductor manufacturers and we continue to see the ravages of this lag.
In addition, only 12 percent of the world’s production of these chips are intended for use within vehicles, and they are normally less complex, without as much added value as those intended for computers. On the other hand, it is also a fact that the global manufacturing of microchips is not enough to meet demand, which is why the installation of new factories is currently in process. Yet, because these plants come with a high cost and complexity, the rate of ramping up a new facility is not as fast as required by the growing demand. We estimate that by 2023, these new plants will be operational and will be covering the global demand for semiconductors.
The pandemic has also highlighted how fragile supply chains are, especially when they depend on materials and components manufactured on the other side of the world. The chain could break at the weakest link but the worst is when it breaks far from where a part or vehicle is assembled. When this happens, it becomes a complicated problem that is expensive to solve. This is causing manufacturers of goods to regionalize production, with the goal of having their suppliers closer to their manufacturing plants. As a result, we are experiencing nearshoring in the North American region. Many manufacturers are bringing back what they took to China a few years ago. When they return, they are choosing Mexico in many cases as a destination for their production and supplies. This partly explains why the production of auto parts is growing, despite the fall in the production of vehicles. The other reason is that more parts for the production of cars in the US are being manufactured in Mexico.
The biggest opportunity for Mexico is linked with USMCA’s new rules of origin. The new requirements of this treaty demand that light vehicles have 75 percent of their content produced in North America by 2023, a 12.5 percent increase compared to the old treaty. Until 2020, this percentage could be imported from Asia or the EU. Tier 1 auto parts manufacturers have also been required to meet these rules. This is forcing Tier 1s to integrate more Tier 2 suppliers to comply with the rules of origin so that the resulting vehicle is considered North American. This is where we see USMCA truly triggering regional economic growth, generating business for SME producers in the regions where the automotive industry operates in Mexico.
Tier 1 auto parts manufacturers are looking for suppliers in Mexico that can help them produce plastic injection parts, machining, stamping, steel or aluminum castings, hot or cold forgings and electronic components, among others. Tier 2 manufacturers, prepared with the necessary certifications, are receiving purchase orders to replace imports made from Asia and Europe, which is generating a positive movement of national integration.
Those components that cannot be replaced so easily or quickly are pushing Asian and EU suppliers to establish their operations in Mexico, attracting those very specific investments that will complete and strengthen our automotive value chains.
Thus, 2022 will be a year of growth for the Mexican automotive industry. We expect vehicle production to accelerate toward the second half of the year, in addition to this growth trend in auto parts production and the integration of national content. Now, the challenge will be for Mexican SMEs. These companies must be able to grow at the rate that the opportunity is giving them. We hope that new players enter the automotive industry and that the sources of financing adjust to the needs of the sector, also taking advantage of the opportunity to invest in a solid industry with a great future in our country.