Mexico: Auto Parts & Supplies Industry Page 1 of 5

Mexico: Auto Parts & Supplies Industry

Monica Martinez, Patrick Hess August 07

Summary

Mexico presents a growing diversity of opportunities for U.S. exporters of auto parts and supplies. Due to the large-scale automotive vehicle production in Mexico and the growing aftermarket industry for auto parts, Mexico presents two sizeable and promising sub-sectors within the auto parts and supplies industry. Mexico is the world’s eleventh largest automotive producer and is forecasted to rank fifth by 20111; as such, there is great demand for assembly parts and supplies that are needed in the production process. In Mexico, post market buyers of auto supplies and parts increasingly demand more sophisticated products – similar to what U.S. buyers now commonly seek. Together, these two groups pose great potential and already comprise a tremendous part of the Mexican economy, generating around 7.5% of GDP1. Additionally, market saturation of simple, mass-produced auto products has left little desire to compete with low-cost manufacturer countries, like China. Regardless of the sub-sector in which a firm seeks entry (post market consumers or large-scale automotive vehicle producers), those that intend to export sophisticated and innovative goods to Mexico’s auto parts and supplies industry possess great potential for success. Market Demand

Mexico already presents a rather favorable market for U.S. exporters of auto parts and supplies. The United States benefits from its proximity and free trade environment to quite handedly place itself as the number one exporter to Mexico in this sector (see pie chart below)2. Nonetheless, for this market dominance to simply be

maintained, modernization and continued advancement are needed. Although sizably trailing the United States, Japan, China and Canada increased their auto parts exports to Mexico by 93.75%, 48.98% and 29.80% respectively from 2005 to 2006. Considering China’s low-cost comparative advantage and Canada’s equally beneficial trade relationship with Mexico (i.e. NAFTA), this $12.15 billion import market (which still excludes a number of niche market auto supplies) remains actively competitive2.

Mexican Importation of Auto Parts/Accessories (2006)

74%

6%

11%5%3%1%

United States Japan Germany Canada Brazil China

Mexico provides a large auto

manufacturing market to which foreign auto suppliers can provide inputs for domestic production. Initially, the idea of Mexico as an auto producer may seem peculiar. One does not think of any particular Mexican firm when identifying automobile manufacturers; however, the contrary is true. Many manufacturers have set up large-scale

1 U.S. Commercial Service, “Automotive Manufacturing Industry.” https://www.buyusa.gov/mexico/en/automotive_manufacturing.html. 2 Mexican Secretary of Economy. http://www.economia.gob.mx/. Note: uncited statistics come from this source also.

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Mexico: Auto Parts & Supplies Industry Page 2 of 5

operations in Mexico. In result, nearly two million automobiles were produced in Mexico in 20063. Firms like General Motors, Nissan and Volkswagen have installed vast manufacturing facilities to generate production for this important sector. Impressively, these three foreign companies produced greater than 66% of the 962,472 vehicles produced in Mexico throughout the first half of 20074. In fact, Mexico supplies so many automobiles through its domestic production that over 78% have been exported during 2007 as of July 315. These vehicle exports from Mexico translated to $17.4 billion in export sales from Mexico during 2006, 84% of which went to the U.S. and Canada. Since NAFTA qualifies any finished light vehicle or engine that is composed of at least 62.5% American, Mexican or Canadian products to be duty free, an incredible advantage is granted to U.S. suppliers of inputs to these Mexican made vehicles. Mexican manufacturers want to ensure that the composition of their vehicles is 62.5% NAFTA products. Meeting this qualification allows the manufacturer to access the enormous market of the U.S. and Canada without tariffs. The same logic applies to auto parts manufactured in Mexico. NAFTA qualifies auto parts as duty free so long as at least 60% of the inputs are American, Canadian or Mexican. The type of auto part or supply demanded nearly always depends on the type of automobile in need of such a product. Not only is this important to know when supplying domestic automobile production in Mexico but it can also prove valuable for aftermarket sales of auto parts. The graph to the right indicates the composition of light vehicle sales in Mexico from January to November 20066. The vast majority of these automobiles are most likely still being used; as such, they will become increasingly in need of parts and supplies in order to maintain and enhance their operation. Considering the 18% growth in passenger vehicle import sales during 2006 (to reach an import market size of $9.27 billion) 2, knowing that SUVs have become just as popular as midsize cars is critical when gauging which auto parts will serve a firm’s bottom line best.

Vehicles Sold in Mexico (Jan 06 - Nov 06)

35%

7%

4%

18%35%

1%

Midsize cars Compact cars Luxury cars Trucks SUVs Sports cars

Best Prospects

A growing economy and continuing integration with the American market have caused a shift in the most preferred types of auto parts and supplies. The greatest potential for an automotive parts and supplies producer in the United States lies within these shifting preferences. Mexico displayed an impressive 6.5% GDP growth rate from 2002 to 2006 all while maintaining manageable inflation7. As well, 40.5% of the population is under 20 years old

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3 Asociación Mexicana de Distribuidores de Automores, A.C. “Reporte Estadística (Anexo), Diciembre 2006.” http://www.amdaautomotor.org/SACSV2/XStatic/amda/docs/espanol/reporteestene07.pdf. 4 Asociación Mexicana de Distribuidores de Automores, A.C. “Reporte Estadística, Junio 2007.” http://www.amdaautomotor.org/SACSV2/XStatic/amda/docs/espanol/reporte_estadisticojun007.pdf. 5 Asociación Mexicana de la Industria Automotriz, A.C. “Julio presenta un major panorama en los indicadores de la industria automotriz.” http://www.amia.com.mx/estadisticas.html. 6 Asociación Mexicana de Distribuidores de Automores, A.C. “Mercado Automotor: análisis y reportes estadísticos febrero, 2007.” http://www.amdaautomotor.org/SACSV2/XStatic/amda/docs/espanol/mercado_automotor_feb_07.pdf. 7 World Bank. “2006 World Development Indicators.” http://devdata.worldbank.org/wdi2006/contents/home.htm.

Mexico: Auto Parts & Supplies Industry Page 3 of 5

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and nearly 60% is under the age of thirty. These socioeconomic factors combine to create a growing consumer base with increasing financial capacity to afford a greater variety of auto parts and supplies. The replacement market for standard auto parts will remain in place so long as vehicles continue to be sold; therefore, many of such products remain best prospects for exporters to Mexico. Yet overall, the more technologically advanced and value-enhancing products will prevail as the Mexican economy continues to strengthen in its current fashion. Due to these changing consumer preferences and the position in which a high cost, capital intensive producer, like the U.S., is placed, the best prospects for U.S. exporters of auto parts to the Mexican market are as follows (listed alphabetically):

• Air conditioning parts and accessories: In the first quarter of 2007, Mexico imported 87.2% more

automotive air conditioning parts and accessories compared to the same quarter in 2006. And the U.S. posted a 117.8% increase in export sales to Mexico in the same time period. A similar pattern has been seen in each of the last three years. Due to this unprecedented growth, air conditioning parts and accessories appears to be an $85 million a year industry for 2007.

• Brake systems: This is an $867.5 million import market. In 2006, nearly 22% of these imports came in the form of disk brake systems, an example of a more sophisticated product within this genre. The United States provides 69.2% of Mexico’s imported disc brakes, of which Mexico imported 15% more last year.

• Engine replacement parts (rings, pistons, carburetor parts, fuel injection, etc.): This ever-needed and reliable sector creates demand for its parts that corresponds with the demand of vehicles. So long as consumers continue to buy cars, these products will remain integral to the auto parts & supplies industry. Last year, the driving force behind these replacement parts – larger piston engines – created export sales to Mexico from foreign countries worth over $1.34 billion, 74% of which came from U.S. exporters (an 87.4% annual increase). This indicates a tremendous, growing market that continually needs maintenance. In addition to engine parts, both replacement and original input products for electrical systems and transmissions pose good opportunity for U.S. exporters.

• GPS systems and accessories: With a similar logic to that of providing hybrid vehicle accessories, GPS navigational equipment is an automotive item that will become commonplace in Mexico in the near future. Fortunately for vendors, such systems and their accessories can be sold both pre and post market. All that impedes growth is the lack of fuller navigational information technology. Once this information technology becomes adequately gathered, one should expect to see these products in higher end car almost immediately.

• Hybrid vehicle accessories/inputs: Mexico is following the same trend that the United States has set. According to JD Power and Associates, hybrid vehicles will comprise 5% to 10% of the automobile market in the U.S. by 20158. Who is to say that Mexico would not follow suit? There is already a long waiting list to buy the Toyota Prius in Mexico and both Honda and Ford have recently introduced hybrid alternatives to the Mexican market9. Additionally, the Mexican government is offering incentives to definitive (versus temporary) importers – and, in turn, to consumers – of hybrids. As of the fiscal year 2007, the tax applied to imported vehicles with combustion engines, which is normally 2.6% of the automobile’s value, has been lowered to a mere 0.16% for hybrids9.

• Polishing waxes & paintjob restoration: With a growing concern for cosmetic design of their automobiles, Mexicans are more and more eager to purchase products and services that aesthetically improve their cars, trucks and SUVs. Something as simple as maintaining a paintjob through the use of car wax has seen remarkable returns. The U.S. only continues to increases its 94% share in the $56.8 million a year import market of polishing wax products. The product that enhances these cosmetics (i.e. paint, wax, etc.) and the manner in which it maintains, restores or improves the look of a vehicle (i.e. the service) are both emergent markets that warrant attention from exporters.

• Rims and tires: Tireless wheels (more commonly known as rims) posted $109.4 million in export sales to Mexico in 2006, 65.75% of which came from the United States. Mexico imported nearly 20% more rims in

8 Alianza automotriz (July 2007), “Motores híbridos: Al rescate de la ecología” pp. 22-25.

Mexico: Auto Parts & Supplies Industry Page 4 of 5

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2006 than in 2005. In 2006, Mexico imported $548.4 million worth of new motorcar tires. During 2006, the near 25% export sales growth of tires from the U.S. coincided nicely with the entire Mexican import market’s 23% growth. As with rims, American manufacturers benefit from the majority of these import sales transactions in Mexico.

• Sophisticated alarm systems (e.g. vehicle tracking systems): Considering the 13% upsurge in vehicle thefts in Mexico during the first quarter of 2007 (compared to the same period in 2006)9, consumers are increasingly seeking out alarm systems that work more effectively than what is currently available. Last year, 54% of the $9 million in vehicle alarm systems that Mexico imported arrived from the U.S. In this same time frame, this import market grew 34.2% and U.S. exports to Mexico increased 47.8%.

• Sound equipment: Radio receivers for vehicles (most often with CD or mp3 capabilities) alone generated $361.6 million worth of exports from foreign producers to Mexico. The U.S. sold $227.7 million of these exports. Other increasingly popular car audio equipment, such as woofers, amps and speakers, are not included in this figure and they all pose great growth potential for firms supplying such products.

• Suspension systems: The U.S. maintains seven times the export sales to Mexico than its closest competition in this category (Japan). The $36 million in suspension systems that Mexicans imported during 2006 is 91.4% greater than the value imported throughout 2004. As suspension systems’ technical capabilities improve, so do prospects of selling such products to the Mexican market.

Market Entry

The best way for American firms to enter the Mexican market is to first identify which type of clients they are pursuing. This client may be an all-encompassing automotive vehicles producer that requires many inputs. Conversely, the client may be an aftermarket supplier of pre-assembled auto parts and supplies. In either scenario, a distributor, partner or buyer within Mexico must be located. As well, to supply throughout the country, more than one local distributor may be needed. Also, manufacturers in Mexico will expect product warrantees and technical support especially in the early phases of the business relationship. NAFTA provides free trade for nearly all products and services between the U.S. and Mexico, and exporting any of the products and services mentioned in this report are no exception. To receive this preferential treatment, qualifying products must obtain a NAFTA Certificate of Origin, which can be issued by authorized government agencies, producers, exporters and commercial chambers/associations of commerce. For more detailed information, visit the U.S. Trade Information Center’s homepage at http://tradeinfo.doc.gov. The U.S. Commercial Service can assist to initiate this relationship. Our knowledgeable, experienced staff has the connections and market know-how to aid in this often-difficult process of entering a foreign country’s import market. Our offices in Mexico are located in Mexico City, Monterrey, Guadalajara and Tijuana. We provide numerous services to support our U.S. clients, such as investigating potential partners and the current market environment, overcoming governmental impediments through advocacy, and scheduling meetings between the U.S. exporter and possible Mexican purchasers and distributors of the service/product at hand. For more information on opportunities in the auto parts and supplies industry please contact Commercial Specialist Monica Martinez by email at Monica.Martinez@mail.doc.gov or phone at (52-55) 5140-2628. Trade Events

PAACE Automechanika Centro Banamex, Mexico City July 9 - 11, 2008 http://www.paaceautomechanika.com

9 Alianza automotriz (July 2007), “Los vehículos más robados” pp. 19.

Mexico: Auto Parts & Supplies Industry Page 5 of 5

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Resources & Contacts

Mexican Association of Automobile Distributors (AMDA) http://www.amdaautomotor.org/SACSV2/XStatic/amda/template/index.aspx Mexican Automotive Industry Association (AMIA) http://www.amia.com.mx/index.html National Auto Parts Industry (INA) www.ina.com.mx National Bank of Foreign Trade (Bancomext) http://www.bancomext.com/Bancomext/index.jsp National Association of Auto Parts Wholesalers (ANAMAPA) http://www.portalautomotriz.com/directorio/?mode=ver_empresa&id_empresa=1519&id_tipo_negocio=30&vehiculo=1&id_especialidad=354 American Chamber of Commerce of Mexico (AMCHAM) http://www.amcham.com.mx/ U.S. Department of Commerce’s Trade Information Center (TIC) http://www.export.gov/exportbasics/ticredirect.asp For More Information

The U.S. Commercial Service in Mexico City can be contacted via e-mail at: Monica.Martinez@mail.doc.gov; Phone: (52-55) 5140-2628; Fax: (52-55) 5140-1115; or visit our website: www.buyusa.gov/mexico. The U.S. Commercial Service — Your Global Business Partner

With its network of offices across the United States and in more than 80 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://www.export.gov/eac. Comments and Suggestions: We welcome your comments and suggestions regarding this market research. You can e-mail us your comments/suggestions to: Customer.Care@mail.doc.gov. Please include the name of the applicable market research in your e-mail. We greatly appreciate your feedback. Disclaimer: The information provided in this report is intended to be of assistance to U.S. exporters. While we make every effort to ensure its accuracy, neither the United States government nor any of its employees make any representation as to the accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, U.S. Department of Commerce, 2007. All rights reserved outside of the United States.