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The USMCA benefits the automotive industry in Mexico: opportunities and challenges

by | Dec 21, 2023

The USMCA has opened new doors for the automotive industry in Mexico

The  United States-Mexico-Canada Free Trade Agreement (USMCA) is a trade accord that is in force between the United States, Mexico, and Canada. It became operational on July 1, 2020. The agreement replaces the North American Free Trade Agreement (NAFTA).

The USMCA has the potential to bring significant benefits to the automotive industry in Mexico, which is an important contributor to the nation’s economy. In 2021, the industry represented 18% of Mexico’s manufacturing production and 22% of its exports. The automotive industry in Mexico employs more than 1 million workers.

Benefits of the USMCA for the automotive industry in Mexico

 

Greater access to international markets:

Thanks to eliminating tariff barriers and facilitating trade between member countries, Mexican automobile manufacturers can export their products more efficiently and competitively.

This has allowed Mexico to increase its share in the global market and strengthen its position as one of the main vehicle exporters in the world. Mexico is the world’s third leading automotive exporter. The country has positioned itself as a major manufacturing hub for the industry, thanks to its proximity to the United States and competitive labor costs. In 2022, Mexican automotive producers exported 3.1 million vehicles.

Growth of foreign direct investment:

The USMCA has generated an environment of greater certainty and confidence for foreign investors, which has led to an increase in the arrival of capital and technology to the automotive sector in Mexico.

The development of new production plants, the modernization of existing facilities, and the creation of jobs in the industry have been promoted. Mexico boasts an impressive lineup of leading automotive manufacturers, playing a crucial role in the global car industry. Here are some of the top players:

General Motors (GM): A dominant force, GM operates assembly plants in Toluca, Silao, and Ramos Arizpe, producing popular models like the Chevrolet Equinox, Cruze, and Silverado.

Ford: Another major American automaker, Ford has plants in Chihuahua, Hermosillo, and Cuautitlán Izcalli, churning out vehicles like the Ford Mustang, Bronco Sport, and Escape.

Nissan: A Japanese powerhouse, Nissan has a strong presence in Aguascalientes with three assembly plants, manufacturing the Nissan Sentra, Versa, and Kicks, along with the Mercedes-Benz CLA and GLA, and Infiniti Q30.

Volkswagen Group: This German giant encompasses multiple brands, with Volkswagen plants in Puebla producing the Jetta, Golf, and Tiguan, while Audi manufactures the Q5 and the SEAT Ateca.

Stellantis: Formed by the merger of Fiat Chrysler Automobiles (FCA) and PSA Group, Stellantis operates plants in Toluca and Saltillo, producing several Jeep models, the Chrysler Pacifica minivan, and the Fiat Mobi.

Honda: The Japanese carmaker has a plant in Celaya, Guanajuato, which manufactures the Honda HR-V, CR-V, and the Acura RDX.

Toyota: The renowned Japanese brand operates a Tijuana, Baja California plant, producing the Tacoma pickup truck and the Sienna minivan.

BMW: The German luxury car manufacturer has a plant in San Luis Potosí, producing the BMW 3 Series, 5 Series, and X3.

Kia: The South Korean automaker has a Pesquería, Nuevo León plant producing the Kia Forte and Rio models.

Mazda: Completing the picture, Mazda has a plant in Salamanca, Guanajuato, producing the Mazda2, Mazda3, and CX-3.

Stronger labor and environmental standards in the automotive industry in Mexico:

Aiming to ensure fair working conditions and promote sustainability, the USMCA establishes stricter requirements in terms of labor rights, fair wages, and environmental protection.

The standards contribute to improving workers’ conditions and reducing the environmental impact of the automotive industry, promoting more equitable and sustainable development.

Promotion of innovation and competitiveness:

By promoting the protection of intellectual property and facilitating the transfer of technology, the treaty has stimulated the creation and adoption of new solutions and processes in the sector, allowing Mexican companies to improve their production capacity, raise the quality of their products, and compete more effectively in the global market.

Regional supply chain integration:

The USMCA (United States-Mexico-Canada Agreement) implemented significant changes to the Rules of Origin (ROO) for the automotive industry compared to its predecessor, NAFTA. Here’s a breakdown of the key elements:

Regional Value Content (RVC):

Increased threshold: Vehicles and light trucks need a minimum RVC of 75% to qualify for duty-free trade, compared to 62.5% under NAFTA.

Heavy trucks: A slightly lower threshold of 70% RVC applies to heavy trucks.

Phased implementation: A three-year transition period (until July 1, 2023) allowed gradual adjustment to the higher RVC requirements. Some companies obtained extended transition periods through “Alternative Staging Plans.”

Core Parts:

Specific RVC levels: Key automotive components, like engines, transmissions, and electronics, must have an RVC of 75% or higher using the “net cost method.” This method calculates RVC based on the value of the materials from North America as a proportion of the total cost of the part.

Steel and Aluminum: Domestic sourcing requirement: At least 70% of the steel and aluminum used in a vehicle must originate from North America to qualify for duty-free treatment.

High-Wage Labor Content: Minimum threshold: For a passenger vehicle to be considered originating, 40% of the net cost of its production must be attributable to high-wage labor (wages exceeding $16 per hour). This provision aims to incentivize production in countries with higher wages.

Other significant changes:

Deeming rules eliminated: USMCA removed NAFTA’s “deeming rules” that allowed non-North American content to be counted as originating under certain conditions. This aims to prevent “free riding” and ensure genuine regional production.

New origin procedures: Streamlined procedures were introduced to make compliance with ROO requirements less burdensome for producers.

This has led to increased demand for components and parts manufactured in the US, Canada, and Mexico, generating new business opportunities and strengthening collaboration between the different actors in the regional supply chain.

Challenges and opportunities of the USMCA for the automotive industry in Mexico

While the USMCA has the potential to provide significant benefits to the Mexican automotive industry, there are also some challenges that Mexico will need to address to take full advantage of these benefits. These challenges include:

Increased competition:

With opening markets and eliminating certain trade barriers, Mexican manufacturers face greater competitive pressure from their American and Canadian counterparts. This has required Mexican companies to improve their efficiency, quality, and innovation capacity to stay competitive in the new environment.

Need to adapt to more demanding standards:

Although this represents an opportunity to raise national production and meet the demands of international markets, it also implies a challenge for companies that must adapt and meet these requirements.

The implementation of more sophisticated processes and systems, as well as the training of workers, are fundamental aspects to overcome this challenge.

Changes in the global supply chain:

With the renegotiation of rules of origin and the introduction of stricter requirements, companies have had to reevaluate their sourcing strategies and look for new ways to optimize their operations.

The USMCA has created opportunities to strengthen collaboration with local suppliers and diversify supply sources, but it has also required adjustments to existing business models.

Sustainability challenges:

To meet the environmental standards established by the treaty, companies in the automotive industry in Mexico must implement cleaner manufacturing practices, reduce their carbon footprint, and promote the adoption of more sustainable technologies.

While this involves additional investments and changes in production processes, it also represents an opportunity to lead the transition of the Mexican automotive industry towards a greener manner of production.

Additionally, the USMCA will  lead to increased investment in Mexico’s automotive industry, likely coming from both foreign and domestic sources. Foreign investors are attracted to Mexico’s low labor costs and proximity to the United States.

Also, domestic investors are attracted to the opportunities created by the USMCA, such as higher content requirements for vehicles that qualify for tax-free treatment.

Contact LATAM FDI to discuss your foreign direct investment plans in Latin America.

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