Identifier
Created
Classification
Origin
09MONTERREY206
2009-06-02 15:47:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Monterrey
Cable title:  

MEXICAN AUTO INDUSTRY HIT HARD BY U.S. RECESSION BUT EXPECTS

Tags:  ECON ELTN ETRD EFIN ELAB PGOV MX 
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TO RUEHC/SECSTATE WASHDC PRIORITY 3753
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UNCLAS SECTION 01 OF 03 MONTERREY 000206 

SENSITIVE
SIPDIS

DEPARTMENT PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON ELTN ETRD EFIN ELAB PGOV MX
SUBJECT: MEXICAN AUTO INDUSTRY HIT HARD BY U.S. RECESSION BUT EXPECTS
TO REBOUND

REF: 2008 MONTERREY 504

MONTERREY 00000206 001.2 OF 003


UNCLAS SECTION 01 OF 03 MONTERREY 000206

SENSITIVE
SIPDIS

DEPARTMENT PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON ELTN ETRD EFIN ELAB PGOV MX
SUBJECT: MEXICAN AUTO INDUSTRY HIT HARD BY U.S. RECESSION BUT EXPECTS
TO REBOUND

REF: 2008 MONTERREY 504

MONTERREY 00000206 001.2 OF 003



1. (U) Summary. The deep U.S. recession has
dramatically reduced demand in the Mexican auto industry, a key
source of industrial production and exports. Mexican auto
producers are in an ornery mood, strongly criticizing the
importation of used U.S. cars and their government's lack of
support during the economic crisis. Despite the GM and Chrysler
bankruptcies, Mexican auto and auto parts producers are
cautiously optimistic in the long run that their modern and low
cost manufacturing industry will thrive. End Summary.



Importance of the Mexican Automotive Industry




2. (U) The Mexican automotive assembly and auto parts
industries are critical to Mexican manufacturing. Speaking at
the May 18 Auto Show in Saltillo, Eduardo Solis, President of
the Mexican Automotive Association, stated that the Mexican auto
industry provides 1 million jobs, and constitutes 17% of
Mexico's manufacturing GDP, 13% of Mexico's industrial
employment, and 21% of its manufacturing exports. The Mexican
automotive industry is primarily geared toward exports, as they
export 80% of their car production, including 71% to the United
States. The auto industry is particularly strong in the
Northern states such as Nuevo Leon, Coahuila and San Luis
Potosi. The Mexican auto parts industry is also important,
accounting by itself for $18 billion in sales. Finally, Solis
emphasized how the auto industry has been a key magnet for
attracting foreign direct investment, delivering $20 billion USD
in FDI between 2000 and 2006, including $3.5 billion USD in
research and development.



Deep U.S. Recession Hits Mexican Auto Producers




3. (U) An historic decline in U.S. car sales has led to a
dramatic drop in Mexican production of cars and auto parts. In
recent years Americans purchased 17 million new cars each year,
but auto parts giant Nemak expects car sales to decline to 9.5
million units in 2009, and then recover slowly to 11.5 million

in 2010, 12.5 million in 2011 and 14.5 million units by 2012.
These projections are far below Nemak's forecast last October,
when they expected U.S. car sales to total 13.9 million (see
reftel). As a resulting of falling demand, Solis expects auto
production to drop by 29% in 2009. The Mexican auto parts
industry is also hard hit, because 63% of their sales are the
U.S. Big 3 automakers. Agustin Rios, Executive President of the
Mexican Automotive Parts Manufacturing Association, expects a
20% drop in Mexican auto parts production. The situation in
Nuevo Leon is worse. Manuel Montoya, director of the Nuevo Leon
Automotive Cluster, stated that the Nuevo Leon automotive
industry is only operating at 40% capacity, and that the
industry has shed 15% of its jobs in the last seven months.
Interestingly, the industry lost 6,500 jobs in the last four
months of 2008, but the pace of job losses has slowed, with only
an additional 1,000 jobs lost in the first quarter of 2009.




4. (SBU) Mexican auto producers must cut production even
below the abysmal car sale figures to reduce the overhang of
inventory. Automobile analysts confirm that companies such as
GM and Chrysler have 100 days of inventory of new cars waiting
on the car lots. Due to the bankruptcy of Chrysler, auto
production and auto parts suppliers have shut down production
for 2-3 months. The same is true for many other brands, as many
companies throughout the supply chain have slowed or stopped
production. For instance, Nemak, a Tier 1 worldwide supplier of
cylinder heads and engine block, coped with a 40% decline in
sales and ballooning inventory by reducing production by 54% in
the first quarter of 2009. Nemak also fired 3,500 employees, or
22% of their work force, and they have reduced their capital
investment by 50%. Nemak is a division of the large Alfa
company, which has other successful divisions such as the Sigma
group (processed food) to rely upon. The situation is much more
dire for many other smaller producers in the supply chain,
particularly those focusing exclusively on auto parts.




MONTERREY 00000206 002.2 OF 003


Fallings Sales in Mexican National Market




5. (U) The Mexican auto industry is not going to be
bailed out by domestic car demand, because Mexican car sales
have also fallen substantially. According to the industry
magazine Mexico Now, Mexican auto sales will fall from 1.02
million in 2008 to 779,000 in 2009 (a 24% reduction),and the
Mexican market will not recover to 1 million new car sales until

2015. Subsequently, the April data shows that Mexican sales of
new cars fell by 38%, so the Mexico Now forecast may turn out to
be optimistic. Curiously, Mexico's auto industry only supplies
38% of local sales, while the remaining new cars are imported
(albeit many with Mexican auto parts).




6. (SBU) Industry leaders blame the depressed market on
two factors besides the recession: lack of credit and imported
used cars. Financing has become increasingly important for new
car sales, as the percentage of buyers who receive financing has
risen from 30% in 2000 to 70% in 2008. In the Coahuila auto
show, Luis Gomez of Chrysler agreed that declining credit had
had a dramatic impact in reducing sales of new cars, a point
also made by several other contacts. According to an analysis
by the leading newspaper El Norte, new car credits fell by an
average of 25% in the first quarter of 2009, including
reductions by GMAC (-42%) , Ford Credit (-39%) and Chrysler
Services (-71.5%). Car loans from local banks fell at a much
lower rate. Katia Calderon, the head of GMAC, disagreed by
noting that GMAC financing was available and GMAC had taken over
financing for Chrysler cars. Calderon did not think that lack
of financing was an impediment to new car sales, although she
acknowledged that a deterioration of the borrowers' credit
worthiness (due to the deep recession) had led to higher credit
standards.




7. (U) The real bugaboo for Mexican car producers is the
importation of U.S. used cars, which they claim has
substantially reduced Mexican new car sales. According to
industry association head Solis, if not for used car imports,
Mexicans would have bought 1.7 million new cars in 2008, instead
of the 1.02 million which were purchased. In the Coahuila auto
show, speaker after speaker thundered against used car imports,
claiming that they were old junkers which did not meet U.S.
safety or emission standards, and demanded that the GOM enact
new rules to greatly reduce used car imports. The GOM decreed
in December 2008 that all imported used cars must prove that
62.5% of the car or truck's content was made in the NAFTA
region, or the car is subject to a 10% tax. In addition, there
is an additional tax imposed on cars imported into the border
area. These standards are extremely difficult to meet for an
older car, especially if it has had several owners. Mexican car
producers fully support the decree, and want even more
protection based on safety and emissions tests. If pressed, the
car producers claim that these rules are NAFTA compliant, but
the issue was rarely addressed in front of Mexican auto trade
audiences.



Complaints that the GOM has Failed to Support the Auto Industry




8. (U) Almost every industry contact complained to
econoff that the GOM has done little to support the Mexican auto
industry during this difficult time. The GOM has a
pro-employment program to support industries with temporary
plant shutdowns. However, El Norte reported that by late May
the GOM program to preserve employment in the automotive and
electronic industries had only spent 25% of its 2 billion peso
budget ($154 million USD). Moreover, the program had only
supported 230,000 workers, less than half of its goal of 500,000
workers. Of the supported workers, 73% were in the automotive
or automotive parts industries, and 27% were in electronics or
machinery. Auto industry leaders have repeatedly complained
that the GOM program had too many requirements and red tape to
be effective. For example, Tier 1 producer Metalsa kept paying
its workers even though they were not working, but kept track of
their hours, and Metalsa plans to recoup these hours from its
workers when production ramps up. However, since the workers
were being paid, we understand that Metalsa was not eligible for

MONTERREY 00000206 003.2 OF 003


the GOM program. The GOM agreed on May 28 to create more
flexible regulations so that more companies would subscribe.
Industry association head Solis demanded even more support, such
as lines of credit and loan guarantees for new car purchases,
the GOM should renovate its car fleet by buying new cars; the
GOM should maintain the December 2008 decree on used cars; and
the GOM should initiate common safety and emissions regulations
for U.S. and Mexican cars. Solis and others also compared the
GOM unfavorably to Germany, which they claim provides a 2,500
Euro credit for new car sales, a Brazilian program to provide
consumer credit, and the U.S. programs to help the U.S.
automakers.



Impact of GM and Chrysler Bankruptcies




9. (U) Industry leaders are cautiously optimistic that
the bankruptcies of GM and Chrysler will not substantially
disrupt Mexico's industry because Mexican plants are modern and
cost efficient. This issue is critical for Mexico, not just for
final assembly, but the Mexican auto parts industry supplies 63%
of its production to GM, Ford and Chrysler. However, the
economic fundamentals point to Mexico overcoming the crisis.
Several observers concurred that Mexico's plants are newer and
more efficient than those in the U.S., and combined with
Mexico's substantially lower labor costs, meant that a purely
business decision would be to send auto production to Mexico.
For example, Garcia of Chrysler assured the Coahuila audience
that Chrysler planned to continue operating all of its Mexican
car production plants. The Mexicans' primary concern is that
GM and Chrysler will face political restrictions on their
ability to out-source production. El Norte reported on May 30
that GM agreed with the United Auto Workers union (UAW) to
produce a subcompact car in the U.S., instead of sending the
production to Mexico or China. Michele Compton, an American
lawyer from Detroit, said that the new Ford agreement with the
UAW requires Ford to notify the UAW if it plans to ship
production to Mexico, but the UAW does not have veto power over
Ford's plans. Compton explained that any restrictions on auto
production are likely to affect final auto assembly and Tier 1
suppliers, so there may be more opportunities for Tier 2
suppliers and others lower in the supply chain.




10. (U) Mexico should also benefit from the approximately 30%
depreciation of the peso, which has made its auto industry more
competitive. Garcia commented that labor constitutes 9% of
Chrysler's total costs, so Mexican production has become even
more competitive. Tier 1 supplier Nemak also considers the peso
depreciation a great benefit, because like all tier one
suppliers their sales are denominated in dollars and euros,
while labor and some other costs are in pesos. Mexico would
also greatly benefit if it develops more second and third tier
automotive suppliers. Trade magazine Mexico Now estimates that
Mexico could reap an additional $5 billion USD through producing
additional products for the supply chain.




11. (U) Comment. Mexico still has a significant cost
advantage, which has only grown with the shrinking peso, and it
could grow further if Mexican industry continues to develop more
auto components. Therefore, in the long run, the future still
looks bright for the Mexican auto industry. However, unless
U.S. auto demand quickly ramps up after the recession, the short
term will be difficult, especially for smaller auto parts
suppliers with little financial capacity to weather the storm.
End Comment.
WILLIAMSON