Mexico's auto industry slump continues, but Trump avoids blame

MEXICO CITY—For the better part of a decade, Mexico broadcast its status as the new darling of the global auto industry with plant announcements at the presidential residence of Los Pinos, groundbreaking ceremonies attended by top auto executives, and media-packed factory inaugurations full of congratulatory speeches by federal, state and local officials.

Former Mexican President Vicente Fox was on hand for Chrysler's pledge to spend $1 billion at its Toluca plant in 2006; ex-President Felipe Calderon feted Audi executives in 2012 during their announcement of a $1.6 billion facility in the state of Puebla; and successor Enrique Peña Nieto headlined similar events for Kia, Toyota and BMW in 2014 and 2015.

But the arrival of Donald Trump to the U.S. presidency helped by his campaign against the North American Free Trade Agreement and illegal immigration to the U.S.—mostly ended the public celebrations of Mexico's record-breaking auto industry. And now, nearly three years after Trump took office, Mexican auto production, exports and new-vehicle sales are all falling, and the sector has abandoned its goal of producing 5 million cars and light trucks annually by the end of 2020.

While Trump's ascendancy coincided with the downturn in Mexican auto manufacturing, analysts warn against a false correlation, given that the North American auto sector had begun to decline before Trump took office.

"In Mexico, the current wave of automotive investments really stopped in mid-2015," said Bernard Swiecki, assistant director of research at the Center for Automotive Research in Ann Arbor, Mich. "Which, by the way, was before Mexico became such a big player in the U.S. presidential election and before we knew who the candidates were going to be."

And it wasn't just Mexico. North America was coming off record highs.

"Way back in 2015, our own forecast as well as other forecasts that the auto makers were seeing were calling for a softening of the market because it's a cyclical industry," Swiecki said. "There comes a point where the cycle tops off, the industry has added all the capacity it needs, so you stop adding."

The nation's auto exports, estimated to account for 88 percent of production in 2019, fell last year after setting a record high in 2018. Light-vehicle output dropped for the second-straight year to an estimated 3.75 million in 2019, from 3.91 million a year earlier and a record 3.93 million in 2017. And new-vehicle sales declined for 30 straight months to about 1.3 million, from a record 1.6 million in 2016.

Credit to Trump

Some Mexican industry officials even credit Trump with saving the North American trade alliance through the new U.S.-Mexico-Canada Agreement, which has broad political support and is considered an update to its 26-year-old predecessor.

"Trump stopped having this vision of Mexico as the enemy and that NAFTA was the worst trade agreement in the world," said Oscar Albin, president of Mexico's INA auto parts association.

"Trump changed his point of view to say: 'Mexico is not my enemy; Mexico is my partner that makes me competitive,' " Albin said in December.

Even Mexico's leftist president, Andres Manuel Lopez Obrador, has praised bilateral relations with the U.S.—and with Trump in particular—while embracing the USMCA pact. That's no small political risk, given the Mexican public's aversion to Trump for his comments against illegal immigration and pledge to build a wall between the two nations.

While critics blame Trump for economic turbulence in Mexico that helped spark a devaluation of the peso, rising inflation and higher interest rates, few attribute auto industry woes in general to a Trump slump.

"An uptrend can't last forever, and sure enough, we set a new (U.S.) sales record in 2016, and then it came down off of that in 2017, 2018 and 2019," said Swiecki. Mexico sends about 80 percent of its auto exports to the U.S.

Ford's reversal

The future of the Mexican sector was looking even more bleak in the early months of the Trump administration. One of the darkest days came just before the president-elect took office in 2017, when former Ford CEO Mark Fields canceled a $1.6 billion plant in San Luis Potosi to build a new generation of the Ford Focus sedan.

Fields defended the move as a business decision, but it widely was seen as a nod to Trump, who publicly expressed his gratitude. Other auto makers took note. Not by ending their investments in the Mexican auto industry, but mostly by burying them in Mexico-only press releases—or no press releases—while amplifying every dollar spent in the U.S., past, present and future.

With the decline of the U.S. sedan market, Fields has been vindicated in hindsight, although the cancellation remains symbolically important for the fear it struck in Mexican government officials and the auto industry in general.

"Yes, we had the cancellation by Ford for Focus at San Luis Potosi, but we can't say necessarily that it was Trump-related," said Guido Vildozo, senior manager for Americas forecasting at IHS Markit. "It was also related to the downfall of passenger cars in the U.S. None of the other (Mexican) plants saw their production being canceled."

For example, Vildozo said, Toyota stayed the course on its plans for a factory in Guanajuato state to build the Corolla sedan, announced in 2015, even as Trump criticized it. Rather than cancel a sedan factory, Toyota assigned the popular Tacoma pickup to the plant instead and moderately reduced its investment. Toyota also later disclosed it would add a new Alabama factory in a joint venture with Mazda, relieving some of the Trump pressure.

After the wild ride of the past three years, analysts now see a gradual return to order.

The successful negotiation of USMCA essentially takes the trading bloc full circle: All three nations and their respective industries will compete internally for automotive investment and collectively face off with Asia and Europe. The U.S. may have gained some advantage over Mexico through increased regional and high-wage content in the pact, but not by much.

"For now, our forecast basically calls for a status quo holding into the foreseeable future," said Vildozo. "From a tangible standpoint, we can't necessarily say that President Trump has damaged where demand is going to be as far as Mexico."

But even as Lopez Obrador and auto industry officials celebrated the apparent last steps toward ratification of USMCA in December, they faced the prospect of a painful decline in the auto sector after a decade of growth.

While not entirely absolving Trump from scaring off Mexico investors with his talk of blowing up the free-trade accord and imposing auto tariffs for national security reasons, top Mexican auto industry executives mostly blamed international markets for the drop-off in production and exports, along with deteriorating domestic economic conditions for waning sales at home.

"The market where we have done best is exports in the U.S., so I don't think the free-trade agreement or Trump are a good indicator" of the decline, said Eduardo Solis, president of the Mexican Automotive Industry Association, also known as AMIA. "In the U.S. market, from January to November, we have grown almost 5 percent. We have grown our market share to nearly 16 percent of U.S. sales."

Mexico exported 2.46 million vehicles to the U.S. in the period, more than Japan and Germany combined, AMIA said.

Solis contrasted the U.S. success with other markets where Mexico had previously performed well, given its dozens of trade agreements that allow for tariff-free exports. In Europe, Mexican auto exports fell 20 percent from January to November. In Latin America, they were off 29 percent, and in Canada, they marked a 13 percent drop in the period.

Another factor for Mexican export weakness, Vildozo said, is that the industry has not shifted quickly enough to making the light trucks—crossovers, SUVs and pickups—that Americans prefer.

Checking assumptions

The Mexican supplier industry fared better, as the value of parts such as electronics has risen with additional technology features.

Albin estimates Mexican suppliers produced nearly $100 billion in parts last year—an increase of 2.6 percent over 2018—and exported about $71 billion to the U.S., an increase of 2.7 percent. Once USMCA goes into effect, he expects investors who have been waiting on the sidelines to open and expand factories that will increase parts production by about $10 billion a year.

"The market where we have done the best is exports in the U.S., so I don't think the free-trade agreement or Trump are a good indicator" of the decline.

Eduardo Solis, president, Mexican Automotive Industry Association

Mexico's goal of reaching 5 million units of production by the end of this year was based on an overestimate of the market at home, in North America and globally, said Vildozo. It assumed U.S. auto sales would remain above 17 million, that Mexican exports to South America would increase sharply and that Mexico sales would rise to 2 million on an expansion of credit.

Vildozo sees U.S. demand eventually stabilizing around 16.5 million vehicles. In addition, Brazil is competing aggressively for sales in the South American market, and Mexican new-vehicle sales are suffering from an economic downturn and pullback in credit, he said.

"Mexico probably shouldn't have gone beyond 1.4 million units, but financing conditions were very attractive back in 2015 and 2016," he said. Additionally, Hyundai and Kia aggressively entered the Mexican market about the same time, forcing incumbent brands to defend themselves through incentives.

Political maneuvers

Mexico also got a new president, with Lopez Obrador taking office at the end of 2018 as economic growth slid to zero.

Critics say the populist leader's cancellation of a massive Mexico City airport under construction and intervention in the energy sector scared off private investment. The auto industry chambers have called on Lopez Obrador to support the sector by maintaining a limit on used cars flowing into Mexico from the U.S. and urging Mexico's Congress to pass tax breaks for vehicle sales.

Mexican industry executives blame international markets for the drop-off in production.

Guillermo Rosales, co-director of the Mexican Automobile Distributors Association, said the industry will continue to lobby for a program that would allow all new-vehicle owners to deduct interest payments from their taxes and to raise the deduction limit for businesses. Rosales estimated that up to 3,000 dealership salespeople have been laid off over the course of the 30-month sales downturn despite efforts by dealers to cut costs elsewhere.

"The first step is that we must accept that the auto market is in a state of crisis and a stimulus program is needed, given the importance it has on so many other types of economic activity," said Rosales.