Clark Hill 2023 Automotive & Manufacturing Industry Outlook: Mexico Update

The automotive industry is fundamental to Mexico’s development and key to its economic growth. To understand the importance of the automotive industry in Mexico, below are some representative figures:

• Largest source of foreign currency;
• 6% of GDP;
• Approximately 1,000,000 direct jobs (22% of all manufacturing jobs in Mexico);
• During 2017-2022 accounted for 17.2% of all Direct Foreign Investment.

Mexico is the seventh largest vehicle manufacturer in the world, first in Latin America and the fourth largest auto-part exporter, being the number one supplier to the US market. 32% of Mexico’s total manufacturing exports are automotive products.

In February 2023, Elon Musk announced the construction of Tesla’s newest and largest Gigafactory in Nuevo Leon, Mexico. Tesla’s Gigafactory in Mexico will be the only manufacturing facility working on Tesla’s next-generation vehicles platform, representing an initial investment of 5 billion dollars and a total investment (when fully completed) of 10 billion. The Gigafactory production target is 1,000,000 million low-cost vehicles a year.

In addition to full local government support and the proximity to the US border, Tesla’s considerations to decide on Nuevo Leon, Mexico included: i) good source of skilled labor; ii) lower costs (even lower than China); and iii) gateway to major free-trade export markets. All major car manufacturers have invested in assembly facilities in Mexico (just in Nuevo Leon, Mercedes, Kia, Boing, John Deere, and GM have facilities), which makes Mexico  the number one source of skilled labor in low-cost manufacturing countries. Tesla will be able to drastically cut costs by up to 50% to manufacture the new-gen Model 3, allowing it to enter the $25,000 segment which is the largest market segment in the automotive industry. Mexico has more than 15 trade agreements, including among others, the T-Mec, European Union, Japan, and Latina America, which allow the bypass of import-export tariffs to approximately 50 countries.

Notwithstanding the cartels and high crime levels, Mexico continues to be appealing in the global market; all of Tesla’s competitors are already in Mexico taking advantage of what it offers. Mexico is one of the leading countries in exports of manufactured goods.

Tesla’s decision to set up its Gigafactory in Nuevo Leon, Mexico is also the result of “Nearshoring,” the process of moving production plants from a far location to the closest location, offering overall better production conditions. The vicinity to the US and the existence of the T-Mec give Mexico an advantage over other locations.

The Inter-American Development Bank (IDB) projections indicate that Latin-American exports may be increased by 78,000 million dollars per year because of the nearshoring, of which 35,300 million (45%) would correspond to Mexico. The direct foreign investment record amounts that Mexico has received in the last couple of years are direct evidence of the nearshoring effects. Mexico expects 2 to 4 million new jobs by the year 2030 as a result of the nearshoring process.

The views and opinions expressed in the article represent the view of the author(s) and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.