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AD&P; > June 2013 > TALK > Insights from IHS > Michael.Robinet@ihs.com Making It in Mid-Mexico Michael Robinet, Managing Director, IHS Automotive Consulting The post-recession automotive rebound in North America has provided some much needed breathing room for both the OEMs and suppliers. Production volumes by the end of this year are slated to rise 86% from the fnal tally of 8.6 million units in 2009. Issues have now shifted from the corporate survival mode of 2009 to maintaining/bolstering staf, seeking low-cost capacity increases, and grappling with heavy launch activity. Most would rather work through the second set of issues than the former. From a fnancial perspective, the expansion of vehicle production capacity to Mexico, specifcally mid-Mexico, is both an opportunity and a problem for the industry. Over the past 20 years, scores of suppliers added Tier 1 and 2 component production capacity to both service output in Mexico and the more than 14-million vehicle units produced in the U.S. and Canada. Mexico was the low-cost source to feed facilities in the north while still maintaining some semblance of control and access. Security issues in the Maquiladora zone of Northern Mexico have altered the strategy of those already resident in the area and the possibility of new tenants. The focus within Mexico has shifted since 2010 as several foreign OEMs expanded production capacity in mid-Mexico to take advantage of several trade agreements, access to U.S. and Canada as well as relative currency stability. Over the past couple of years, Japanese OEMs had to deal with the tsunami, Thailand foods, and subsequent escalation of the Yen compared to several currencies. This upended Japanese exports. Alternative sourcing scenarios were required—quickly. The myriad of bilateral trade agreements between Mexico and several high-volume vehicle markets, anxious states willing to draw new investments, as well as a growing outbound shipping infrastructure has led to a massive expansion in mid-Mexico production capacity. By the end of the decade, the radius of 4 hours driving distance from Mexico City (also known as District Federal [D.F.]) may be the home to over 3-million units of production capacity as well as rising engine and transmission build. This explosive growth of mid-Mexico is now causing several players heartburn—OEMs and suppliers alike. OEMs such as Honda, Nissan, Audi and Mazda are seeking increased value add in mid-Mexico to cut logistics costs, lower inventory and, in turn, reduce risk. In the past, suppliers would be happy to expand though the massive downturn in recent past is giving many pause. Stretched thin from a 8 heavy dose of launch activity, more caution driven by the prospect to maintain strong gross margins and banks which are not the rubber stamp for funding found before the automotive recession—expansion by suppliers of all stripes in mid-Mexico is wrapped in an "abundance of caution." Under the waves of this massive production expansion are two important trends not apparent to most. Firstly, content and capability of suppliers in mid-Mexico will be more than many expect. Audi, Nissan/Infniti/Daimler and the prospects for both BMW and Land Rover to plant seeds in mid-Mexico changes the content/technology dynamic. Sending your lowest technology/cost components to this region is not the ideal solution. Increased exports to non-NAFTA locations, exposure to luxury segments and the rise of global platform integration in mid-Mexico requires careful integration into a strategy. In addition to employee turnover, the availability of skilled workers to maintain world class quality, security concerns, and stretching the global footprint to yet another region are two major considerations: upstream supply base capability and logistics concerns. In an era where OEMs and Tier 1 suppliers are seeking closer supply, the 11-hour truck travel time from Monterrey to Mexico City is not an optimal solution for anyone. Railway networks are also strained from the pressure and inefciency of more north-south trafc and border security. In the end, capacity expansion in mid-Mexico is the only solution for many—or be shut out of an important region with substantial interconnections to the rest of the world's production footprint. The decisions versus 2009 are diferent though still critical to the future of the enterprise. Michael Robinet has been a managing director of IHS Automotive 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. INSIGHTS FROM IHS