By Ralph Biedermann, Managing Director of Mexico Consulting Associates
Looking back at the fifty-year history of the industry which started with many names and eventually settled on “maquiladora,” it has had a similar track to a “product life cycle”. The beginnings were somewhat rugged with concentration on the border. Then heavy growth took place in the 1980s and 90s. For many years in that period, growth was “double digit” – in terms of number of plants, numbers of employees, and production output. Following the 2001-2003 recession, growth was in the single digits. With substantial growth recently, let’s look at the industry’s current conditions and what factors might affect it going forward.
Light Automotive
- Although Ford has just adjusted its investment picture, it still may double its Mexican vehicle output to just under 1 million vehicles by 2018, when all of its light vehicles will be made in Mexico with zero job losses in the U.S.
- Fiat-Chrysler said they would focus U.S. production on trucks and SUVs and move more light vehicle production to Mexico
- More investments from OEMs abroad show continued optimism towards Mexico: Toyota ($1 billion in Celaya); Kia ($1 billion in Monterrey); BMW ($1 billion in San Luis Potosi); Nissan/Daimler ($1.4 billion in Aguascalientes); Audi ($1.3 billion in Puebla); Honda ($1.3 billion in Celaya); Mazda ($0.8 billion in Salamanca).
- IHS Automotive reports that light vehicle production in Mexico will rise to just under 5 million vehicles by 2022 (although this may not include Ford’s new investment)
- Automotive jobs in Mexico reached 675,000 in 2015 – a 40% increase over 2008
Aerospace
- 12 percent average annual growth expected from 2016-2020
- 330 industrial facilities in 2015 – 79 percent manufacturing, 11 percent MRO, 10 percent D&I
- 50,000 employed in 18 of the 32 states
- Exports of $6.7 billion in 2015 – and expected to grow to $12 billion in 2020
- Mexico is ranked 6th – both as the largest aerospace exporter globally and largest supplier to the U.S.
- Of the $33 billion in FDI (Foreign Direct Investment) 75 percent comes from North America
- From 2011-2015, Mexico received the 4th largest amount of FDI of all countries with 51 projects from 44 international companies
Medical Devices
- 9th largest exporter of medical devices worldwide
- Largest exporter in Latin America and the largest supplier to the U.S.
- 2nd largest exporter worldwide of tubular needles
- 5th largest exporter worldwide of medical, surgical, dental and veterinary instruments and devices
- 5th largest exporter worldwide of syringes and catheters
- 87 percent of FDI comes from the U.S. and over 90 percent of exports go to the U.S.
- In the first three months of 2016, exports rose by 8.1 percent year-over-year to $2.1 billion
- Forecasted export growth of 13.4 percent compound annual growth rate (CAGR) from 2013-2018 in dollar terms
In sum, these are very presentable figures – and that only covers three of Mexico’s important industries. Although we don’t include graphs, the trade balance with the U.S. in all three industries shows a positive balance for Mexico for the recent past. The reason is that, for all of the products made, a good percentage of the materials and components comes from the U.S. and many of the finished products are exported to the U.S. In fact, according to the Mexican government, about 40 percent of the value of light vehicles made in Mexico and exported to the U.S. is made up of U.S. components. In addition, much of the investment also comes from the U.S. except in light automotive where many foreign companies play a significant role. As noted above, light automotive industry employment in Mexico reached 675,000 in 2015 – and that number is projected to increase in the next three to four years as additional investment comes on line.
The Progress of the IMMEX/Maquiladora Industry
According to the latest figures from INEGI (Instituto de Engenharia Mecânica e Gestão Industrial), there were 2,475,935 workers employed in 5,004 plants as of September 2016 compared to 2,343,679 employed in 5,017 plants in September 2015. So, an increase in workers but a slight decrease in net plants.
Looking back further to July of 2007 (just before the last recession began), employment was at 1,912,745 in 5,062 plants. Again, a very good increase was noted in employment through late 2016. The lowest headcount in the period occurred in July of 2009 with 1,576,995 employees. The highest was this past September. In terms of plant employment figures, the lowest was 5002 which occurred in January of 2016 while the highest was 5,289 in May of 2010. Generalizing somewhat, since this last recession, employment per existing plant has increased while the number of wholly-new plants (not expansions) has not seen the double-digit growth, which existed in the industry prior to the 2001 recession – the automotive industry notwithstanding.
It is important to see how some factors affect the outlook for IMMEX/Maquila manufacturing going forward. One is a more recent decline of the peso against the dollar as shown in the attached chart. Of course, a lowering peso would bring lower operating costs in dollar terms, a factor which has trended for much of the history of the maquiladora industry.
One area where the lower peso is helping is in Mexico’s foreign trade balance as shown by the attached chart. The balance in November 2016 (as reported by INEGI) was $200.4 million. In addition, the export picture is brightening as manufacturing exports increased by 10 percent last November to the highest level since October 2015. It should be noted that Mexico’s manufacturing exports are made up largely by the IMMEX/Maquila industry. Shipments to the U.S. of non-oil exports accounted for 83 percent of the total last November with vehicle exports increasing eight percent from a year earlier. And, other non-oil exports to the U.S. are increasing by 9.6 percent (source: Bloomberg).
Although it is too early to tell whether one month may start a trend, a lower peso affects the operating budgets of foreign-owned Maquila/IMMEX operations, especially those whose corporate parents are based in the U.S. and who budget for their Mexican operations in dollars. Depending on the market outlook for products made in Mexico and exported, an increased production forecast for 2017 for Mexican operations of foreign-owned IMMEX/Maquila companies will bring with it benefits of lower operating costs in dollars especially labor. It may also spur companies to continue to find or develop suppliers in Mexico to replace foreign- sourced components if the purchase of those components can be made in pesos. Of course, with the stronger dollar, Mexican suppliers would prefer to price in dollars.
Looking at the FDI picture, again it is too early to predict what 2017 and beyond may bring. Since 1960, FDI averaged about $23 billion per year. As the attached chart indicates, investment increased by $4.3 billion in the third quarter of 2016. Under normal circumstances with exchange rates changing in favor of dollar investors greater investment can be expected. UNCTAD (United Nations Conference on Trade and Development) reports that Mexico ranked 13th in inbound investments in 2014 and 15th in 2015, only following Brazil in Latin economies among the top 20 host countries in the world.
Back to the U.S. side. The Republican led House this past summer put forward a plan to overhaul corporate taxes. The tax plan includes a major cut on corporate taxes – from 35 percent to 15 percent. The uplift in the post-tax bottom line due to the lower rates should put corporations in a better position for future business investment given a brighter economic picture.
The trade community can play an important role right now. We understand the importance of trade to our jobs, our companies, and the economy in general. We have a lot at stake here.
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