MEXICAN AUTO PRODUCTION DECLINES REFLECT DECREASED U.S.

UNCLAS SECTION 01 OF 03 MONTERREY 000504

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EINV ELTN ELAB MX
SUBJECT: MEXICAN AUTO PRODUCTION DECLINES REFLECT DECREASED U.S.
EXPORTS

MONTERREY 00000504 001.2 OF 003



1. (SBU) Summary. Nuevo Leon's key automotive industry has
suffered serious declines in automotive production and exports,
reflecting the weakness of U.S. car demand and the declining
fortunes of the Big Three U.S. automakers. While automakers
might move some car production to Mexico to reduce costs, this
will not be enough to offset the overall decline in sales in the
near term. Although the next year or two will be difficult,
Mexico should be well positioned as a low cost car and truck
producer once the U.S. economy improves. End Summary.



Weakness in the Mexican Automotive Sector




2. (U) The automotive industry is critical to Nuevo Leon.
According to promotional material from the Nuevo Leon Secretary
of Economic Development, Nuevo Leon produces 8.4% of the
Mexico's total automotive GDP, estimated at $1,280 billion USD.
The Nuevo Leon automotive cluster includes 145 Mexican companies
and 50 foreign companies, many of them American. The automotive
industry is also important for the neighboring states of
Coahuila and San Luis Potosi, where U.S. companies such as Ford
and Chrysler have a major presence. The Mexican auto industry
in general is heavily dependent on exports, as 80% of Mexico's
total production of 2 million light vehicles in 2007 was
exported, primarily to the U.S.




3. (SBU) The sharp decline in North American automotive
demand is reflected in declining Mexican production. Jose
Carlos Pons, Strategic Planning Manager for Nemak (a major
player in the worldwide transmission manufacturing market)
reported that North American automotive demand has been over 16
million units per year, but in September the company projected
that demand would fall to 13.9 million units in 2008, and
subsequently we have heard estimates that total demand will drop
further, to 12 million units. Pons thought that North American
automotive demand would not recover for several years. Mexican
auto production has significantly declined as U.S. demand has
faltered. Mexican auto production fell 4.7 percent in August
2008 compared to 2007. The Mexican Association of Automobile
Manufacturers stated that Mexico's exports were also down 14.7
percent from August 2007, and Mexico produced 204,854 vehicles
in August 2008, down from 215,004 in August 2007. The downturn
has also affected supplier sales. Samuel Pena, Foreign
Investment Coordinator for the state of Nuevo Leon, said in
September that Nuevo Leon giant Metalsa, producing chassis and
other auto components, suffered a 35% reduction in sales between
2007 and 2008. Jose De Nigris, Senior Manager with KATCON, a
company which supplies GM of Mexico with Catalytic Converters
and Front Exhaust Systems and exports 95% of its production to
U.S. Markets, noted reductions in sales from the U.S. slowdown
in auto production and recent increases in transport, steel and
oil prices. The pessimism about the sector is accelerating. In
September, Pena claimed that the decline in U.S. economy would
not affect Mexico until early 2009, but recently Pena confided
to econoff that the Mexican automotive industry was now in `very
bad shape'.




4. (U) The slowdown in exports has resulted in job losses,
although the total numbers are hard to quantify. According to
data published by the National Institute of Statistics,
Geography and Informatics of Mexico

(INEGI),the Mexican automotive and auto parts industry
generated 15,640 new jobs in 2007 (an increase of 3.1%),but
could lose approximately 6,000 jobs in 2008. There have been a
number of anecdotal reports of automotive layoffs, including 500
in Metalsa, 800 at Tal-Port in Saltillo, Coahuila, and 1,700 by
autoparts maker Delphi locally and in Chihuahua. Given the
forecast declines in automotive production and sales, many more
layoffs seem likely.



Possible Offsetting Factors Could Assist the Mexican Auto
Industry


MONTERREY 00000504 002.2 OF 003





5. (U) Mexico could still benefit as the low cost North
American producer since automakers will face pressure to reduce
costs by locating in Mexico. According to Pena, a Mexican
automotive technician earns $9,000 USD per year, much less than
a Korean ($20,000) or American ($25-30,000),but still much more
than a Chinese technician ($2,000). Pena maintained that the
Big Three American automakers and other foreign car companies
would continue to locate in Mexico to reduce costs, and their
suppliers would follow. According to the trade magazine Mexico
Now, in 2007 GM and Nissan produced almost 500,000 light
vehicles in Mexico, Volkswagen made 400,000, Ford and Daimler
Chrysler produced 300,000 units and Toyota perhaps 30,000 units.
In the production of new automotive parts, assembly plants in
Mexico are now requiring that their suppliers are as close as
possible to them in order to reduce inventory volumes. This
shift in production locations has forced many U.S. first- and
second-tier suppliers to move to new facilities so they can
lower costs and reduce freight and handling expenses in the U.S.
An upcoming U.S. Commercial Service Market Research report has
found large investments in 2007 and 2008 by premier companies
such as General Motors, Nissan and Toyota. Moreover, Pena
contends that the trend towards smaller cars will benefit
Mexico, since Mexico focuses mainly on the production of small
and medium-sized cars. Note. Mexico also produces trucks and
SUVs, such as the production of the RAM truck in Coahuila, which
could be negatively affected by this trend. End Note. We also
heard from a manager of industrial parks that several automotive
suppliers are looking to move to Nuevo Leon, although these
moves are dependent on the industrial park locating financing
for the companies.




6. (U) Mexico could potentially benefit from expanding its
domestic market for new cars. The Mexican Association of
Automobile Manufacturers (AMIA) reports that Mexican production
for the domestic market has remained steady at approximately
400,000 units from 2004 to 2007. AMIA is trying to fend off
cheaper imported used cars to support the domestic market for
new cars, which carry significantly higher prices than
comparable new models in the U.S. AMIA reported that over 3.1
million used cars have been imported into Mexico from the United
States since a 2005 Mexican presidential decree allowed imports
of cars of between 10 and 15 years of age from the U.S.,
dragging down domestic sales of new cars. A modified decree,
introduced this year in response to local auto industry
complaints, now only permits imports of cars that are exactly 10
years old, resulting in a 48% drop in used-car imports. However,
as of January 1, 2009, a provision of the North American Free
Trade Agreement (NAFTA) takes effect that will allow imports
into Mexico of cars of 10 years of age and upwards. Mexico's
local auto industry is currently trying to reach an agreement
with the government on potential legislation to curb the looming
influx of used cars without modifying NAFTA.



Long Term Boom For Mexican Automotive Manufacturers?




7. (U) Sergio Ornelas, editor of Mexico Now trade
magazine, predicted that after the current slump, the Mexican
automotive industry will roar back in 2011 as the low cost North
American producer. Monterrey TEC business school dean Salvador
Trevino agreed that Mexico could do well in the future, provided
that the Detroit Big Three Automakers survive. According to
Mexico Now, the Big Three account for over 50% of the automotive
production in Mexico.




8. (SBU) Comment. There is little doubt that the Mexican
automotive industry will suffer a significant decline for the
next several years, which will impact employment going forward
as production, sales and exports decline. It seems likely that
automakers may try to reduce costs by moving more production to
Mexico (and increasing the pain in Detroit),but this trend will
be overwhelmed by general declines in production for the next
two years. Given the probable weakness of the Mexican economy,
and the availability of cheaper imported used cars, it seems

MONTERREY 00000504 003.2 OF 003


unlikely that the domestic market for new cars will grow.
However, given Mexican cost competitiveness in the region, it is
quite plausible that the Mexican automotive industry will emerge
stronger than ever once North America resumes its economic
growth. End Comment.
WILLIAMSON