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Why Mexico Is Speeding Past Brazil in Cars

Why Mexico Is Speeding Past Brazil in Cars

Remember in the 1990s when some Cassandras feared the North American Free Trade Agreement (NAFTA) would someday help Mexico eclipse car production of its higher-cost rivals north of the border? Two decades later, Mexico is making its move, but against another competitor: Brazil.

The country is poised to overtake South America's largest nation as the top Latin American automotive industry producer for the first time in more than a decade. Mexico's ascent is fueled in part by auto sales running at the fastest pace in almost eight years in the U.S., its largest market. The boom coincides with a slump in Brazilian production through June as its domestic demand cools

People talk about the energy and telecom industries in Mexico, but the auto industry is going to continue as the icon of this country, says Luis Lozano, lead automotive partner at Price Water House Coopers in Mexico City.

Passing Brazil, where output has fallen 17 percent this year, would vault Mexico to No. 7 among the world's auto producers. China is No. 1, followed by the U.S.
The diverging fortunes of Mexican and Brazilian auto production reflect the state of their biggest markets. Because of high labor costs and taxes, Brazil-made cars and trucks are too expensive to send abroad and go mostly to local buyers. Mexican factories export 8 out of every 10 cars they produce, with more than half bound for the U.S.

Auto output in Mexico rose 7.4 percent during the first six months of 2014, to 1.6 million vehicles, bolstered by new plants owned by Nissan Motor (NSANY), Honda Motor (HMC), and Mazda Motor (7261:JP), according to the Mexican Automobile Industry Association, known as AMIA. Brazil's production through June was 1.47 million, reports Anfavea, Brazil's automaker association.

Mexico's proximity to the U.S. also gives it an advantage, as do labor costs for carmakers that are about 20 percent of U.S. levels, according to PricewaterhouseCoopers. So the broader reason for the big surge

Is the appeal of Mexico as the production source for North America," says Bill Rinna, senior manager of North American forecasts at LMC Automotive.

LMC forecasts Mexico will pass Brazil in 2016; other researchers put it sooner.


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