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Will Mexico Be a Player in the Next Stage of Auto Production?

With the implementation of the USMCA planned for the end of the year, Mexico must focus on positioning its automotive industry for the next decade and beyond.

The ambitious goals for the production of electric cars could lead to 30% of light vehicles in Europe and 5% in the United States becoming a reality by 2025, according to a UBS study. With Denmark’s announcement last year, about a dozen countries plan to ban the sale of cars with gasoline and diesel engines by 2030-2040. At some point between 2035 and 2050, depending on who is consulted, all cars and trucks could be electric.

By then, the issue of whether cars will have drivers or even individual owners will be in play. In fact, as millennials and Generation Z avoid ownership of cars in favor of Ubers, electric bicycles and other forms of shared transportation, general car sales are likely to continue to decline.

A recent study by KPMG estimates that the arrival of autonomous vehicles (AV) could reduce private car ownership in urban markets by 50% by 2035. This could mean an additional blow to a declining car market in Mexico. After a historic record of 1.6 million light vehicles sold in 2016, sales have fallen in the last three years to 1.3 million last year.

What does this mean for the Mexican automotive industry? That there will be a handful of winners and a good number of losers when it comes to suppliers.

To begin with, the mechanical complexity of cars will be greatly reduced. The thousands of parts of the powertrain or propulsion system (engine blocks, cylinders, pistons, ignition systems, as well as exhaust systems and transmissions) will be eliminated. Depending on who is consulted, the number of components in a car could be reduced from 30,000 to 1,000. The UBS study compared a Volkswagen Golf with a Chevy Volt and concluded that the Volt had 24 moving parts in its powertrain versus 149 for a Golf.

UBS also noted that 56% of a Volt came from suppliers outside the traditional automotive supply chain, that is, the Korean electronics giant LG.

The forecast is for greater use of plastics, composites and aluminum, and a lower use of iron and steel. There could also be an exponential increase in the use of lithium and cobalt, if current battery technologies are maintained, and a modest increase in the use of copper, assuming that it remains the cable material of choice. Electrical systems are moving to 48 volts in the medium term, and then to 300-plus volts for fully electric cars.

What can Mexico do in this scenario? With greater automation in manufacturing processes, cheap labor becomes a smaller competitive advantage and technological training is increasingly important. Universities have to continue forging agreements with industry to offer relevant curricula and take advantage of the high level of R&D of companies that are manufacturing in Mexico. Such agreements are also great for showcasing job opportunities in the automotive industry and attracting top talent.

Suppliers need to map out a strategy for the next 10-20 years. In many cases, the issue  is whether companies should consolidate themselves in older but still profitable technologies, the “last-standing model,” or consider a transition to new technologies, often at a risk of cannibalizing current business. For example, Mexican suppliers like Nemak are already making aluminum battery housings for next-generation electric vehicles, in addition to traditional lines of engine blocks and cylinders. Similarly, electric harness companies should be preparing for higher voltage systems. And suspension and chassis manufacturers must analyze the new challenges of extra battery weight and distribution.

Innovation and R&D will be paramount. The auto clusters in Guanajuato, San Luis Potosí, Nuevo León, Aguascalientes and Querétaro, where the government and universities work closely with private industry could be a successful model. However, are there any lithium battery gigafactories in the future for Mexico?


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Contacts in Miranda Partners

Damian Fraser
Miranda Partners

Daniel McCosh
Miranda Media