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AD&P; > October 2014 > TALK > Insights from IHS > Michael.Robinet@ihs.com 8 INSIGHTS FROM IHS Michael Robinet, Managing Director, IHS Automotive Consulting Why Mexico? Why Now? Michael Robinet has been a managing director of IHS Automo- tive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade fow/sourcing strategies, and OEM footprint/logistics trends. The location of the next assembly plant or major powertrain facility in the current environment is more focused on ensur- ing less than seeking more. That's as in less currency and po- litical risk, lower comparative labor costs, shorter component shipping distances, and fewer trade barriers. These are the new factors considered when locating new facilities. Though less is the operative word, the endless search for more locational incentives, skilled labor pools and an ample supply of capable suppliers will always be critical. Given this philosophy shift, Mid-Mexico has witnessed an incredible number of investment wins since the 2009 auto recession. We witnessed the same dance in the late 1990s with a furry of investments in Brazil to capture that growing light-vehicle market. That was followed by a focus on Russia during the last decade to seek share in their restricted market. Then there is China, where there was an investment surge during the last decade and which seems to have endless energy with a number of investments by West- ern OEMs continuing. Justifcation for the majority of the "Emerging Market" investments has been predicated on skirting trade tarifs and capturing fast- growing internal markets. Reliance on one market is fraught with risks though— many which have unfortunately emerged recently. Slumping Brazilian and Russian markets highlight this, with OEMs and suppliers alike viewing these single-source demand locations with much trepidation. Enter the "export-focused" surge in locations such as Thai- land/Indonesia, India, Eastern Europe, and the industry's new darling, Mid-Mexico. While internal markets are growing, the focus on lower cost locations such as Thailand, Eastern Europe and Mid-Mexico is predicated on reduced-risk access to larger regional markets. Mid-Mexico (the geographic strip extend- ing from Eastern to Western sea ports which intersects Mexico City) has witnessed a tremendous surge of late. Virtually every major European and Japanese OEM has announced major investments or growth plans for this growing cluster. Mexico ofers tarif-free access to over 40 countries, a build- up of capable Tier II/III suppliers, manufacturing support, and an expanding logistics infrastructure to channel the volume in either direction. By the end of the decade, over 75% of Mexico's estimated production volume of over 4.7-million units will emanate from Mid-Mexico with over 80% of the volume exported. Why Mexico, why now? Global OEMs importing into the U.S. have faced unstable exchange rates, home country cost escala- tions, logistics challenges, and a need to slim inventory/react more quickly to demand shifts in regional markets. During the automotive recession of 2009, it took almost three months for the Japanese OEMs to stabilize the inventory stream of product destined for the U.S. due to the long chain. Time and inventory are money. The Mexican Peso is closely tied to the U.S. dollar, hence currency stability is inherent. Other reasons include a govern- ment which is supporting workforce skills enhancement. It is working to ensure infation is under control and it is ad- dressing security issues (more emphasis is required). State governments are willing to incentivize new facilities or expan- sions. Additionally, OEMs are speeding this growth through the usage of existing global platforms already proven else- where with known export markets. By the end of the decade, Mexico will be the seventh largest country from a production volume perspective and the third largest exporter. Volume will have breadth of content and scope. With mass market oferings at the core, luxury volume from Audi, BMW, and Daimler/Infniti is a major part of the future. Mexico's day in the sun is now. While it is not slated to last forever, there is no doubt that decisions made decades ago to open their market to the competitive marketplace instead of shielding it were forward-thinking in retrospect. The cross- roads of trade for the Western Hemisphere has others playing catch-up (U.S. and Canada seeking new trade agreements) and wishing their planets would align, as well. IHS Vehicle Production Forecast: Mexico CY 2014: 3,242,398 CY 2015: 3,360,884 CY 2016: 3,562,545 CY 2017: 4,225,453 CY 2018: 4,492,197 CY 2019: 4,802,667 CY 2020: 4,930,505