The impact of government intervention on Mexico's US automakers.

• Author: Scheinman, Marc N.

1. INTRODUCTION

   Since the North American Free Trade Agreement (NAFTA) began on January 1, 1994 Mexico's automotive industry has become increasingly integrated with the production and sales networks of the three US-owned automakers--General Motors (GM), Ford and Chrysler. As a result, Mexican output, the primary measure of industry health (growth versus decline), has become dependent on US demand in general and on the preferences of American consumers for GM, Ford and Chrysler branded vehicles in particular. Approximately 60% of Mexican vehicle output (domestic + exports) is shipped to and sold in the United States. Table 1 indicates the very high correlation among NAFTA's three auto-producing countries.

   This paper examines the performance of Mexico's industry since 2004 from the vantage points of production, exports and domestic sales and focuses on how US manufacturers and government policymakers have responded to the current crisis. Although Mexican output, exports and sales have declined by 37.7%, 35.5% and 30.5%, respectively in unit terms during the first nine months of 2009, this poor performance is not as dismal as in 19951. Then, domestic sales plunged by 63% to 189,000 vehicles and exports reached 783,000 for total sales (domestic + exports) of barely more than 1mn units. By sharp contrast, this year's domestic sales are likely to reach 770,000-780,000 and exports 1.07-1.10mn. Viewed from another perspective, total sales will be more than double what they were in 1995. Still, these figures are hardly reasons to cheer, because total sales will only be slightly better than 1999's 1.78mn.

   In spite of grim headlines, Mexico is profoundly different from its pre-NAFTA self. It offers US and other foreign automakers like Volkswagen, Toyota, Hyundai and Nissan significant growth opportunities for new and smaller vehicles capable of meeting more stringent US fuel efficiency standards--35.5 mpg by model year 2016. Before analyzing current developments it is useful to review the structure of Mexico's automotive industry and its crucial relationship with the United States.

2. STRUCTURE AND SIGNIFICANCE OF MEXICO'S AUTOMOTIVE INDUSTRY

   Mexico ranks as the 3rd leading supplier of US vehicle imports, accounting for a 19.2% share, and is the top provider of US auto parts imports with a $28% share. According to the US International Trade Commission, 2008 US imports in both categories amounted to $47bn. In 2008, automotive manufacturing accounted for 3%-3.4% of Mexico's one trillion dollar gross domestic product (GDP), based on the National Institute of Statistics and Geography (INEGI), depending on whether it is measured in nominal (current) or constant 2003 monetary units. The constant metric is the higher and also more useful one because it reflects the industry's structural importance by adjusting GDP for inflation.

   Table 2 reveals just how crucial US-Mexican vehicle trade is to both countries, as measured in value (billions of dollars) and volume (thousands of units). Between 2004 and 2009 Mexico consistently has ranked as the second most important destination for US-manufactured passenger car and truck exports, increasing from $4.142bn in 2004 to $4.854bn in 2008, or at an average yearly rate of 4.3%. However, the deepening economic crisis in Mexico triggered a steep 63.6% decline in US exports to $1.11bn, during the first eight months of the year. By contrast, export volume dropped slightly, from 313,800 units in 2004 to 296,500 in 2008. Then it plummeted 56.2% in the first eight months of 2009 to 82,800 vehicles, compared with same period 2008 figures.

   In the 2004-2008 timeframe, the dollar value of US imports from Mexico grew 3.9% annually, reaching $22.1bn (about $1.3bn less than in 2006), but during the first eight months of 2009 imports dropped sharply, by 32.7% to $9.73bn, compared with same period 2008 figures. By contrast, US import volume from Mexico grew at the rate of 6.9% per year before falling by 38% between January and August 2009. These recent developments probably are likely to result in $10bn in industry trading losses in 2009--$7bn in US vehicle imports from Mexico and $3bn in US auto exports to Mexico. Such serious declines in trade will force Mexican policymakers to reevaluate strategies that have relied so heavily on the US market.

   Although the United States accounts for almost 72% of Mexico's exports, Europe, and particularly German, has become very important because of the growing presence of Volkswagen and Mercedes Benz trucks in the last few years. While this geographical market diversification has reduced somewhat the reliance on the US market and economy, it also has resulted in the neglect by policymakers of Mexico's domestic market. Table 3 covers the January-October 2008 and 2009 periods and...