Mexico Goes on Siesta

The good news for Mexico is that the news is not that bad.

Forecasts call for vehicle sales in the country to total 830,000 to 850,000 units in 2002, down from some 900,000 deliveries in 2001. But that's not a sharp decrease considering Mexico's history, when a downturn in the heavily relied-upon U.S. market coupled with a recent presidential election likely would have caused an economic collapse. “The falloff in Mexico will be nowhere near as disruptive as we've seen in prior cycles,” says Paul Ballew, General Motors Corp.'s general director of market and industry analysis.

While 2002 will be a setback for ambitious annual growth forecasts of 5% to 6% annually — next year the economy is expected to expand just 1.7% — Mexico remains an important emerging automotive market. It could match annual Canadian auto sales in the not-too-distant future, and GM ranks Mexico ahead of Poland and Thailand and behind China and Brazil on a list of up-and-coming markets. “Mexico continues to develop,” Mr. Ballew says. “It's an underserved market. We'll still have potential upside. We expect the market to double over the course of the decade. And we're starting to see some movement up into other market categories. All in all, the market is still on an upward growth rate. We expect it to be almost up to the size of the Canadian market by the end of this decade.”

Mexico's relative strength in 2002 is attributed primarily to steady credit availability, a strong peso, reasonable interest rates and declining inflation, which is expected to be at or below 5% next year. “Banks are starting to make more loans for buying cars, and car companies are giving good deals as far as financing plans,” says Luis Guzman, a research fellow at the University of Michigan's Office for the Study of Automotive Transportation (OSAT).

But there are signs of economic distress. President Vicente Fox's fiscal and social initiatives haven't been instituted, including plans to reduce new vehicle taxes and cut corporate income taxes to encourage foreign investment.

Fiscal reforms that were supposed to be approved in July still are being hotly debated in the Mexican congress and probably won't be passed until next year. Mexico's economy was expected to grow no more than 1% in 2001 compared to earlier forecasts calling for 5% to 7% growth. “Of course, a lot of this is driven by what is going on in the U.S. Since the Sept. 11 attacks, everything has just gone south,” says Gabriel Renero, an analyst at Deloitte Consulting in Mexico City. “There's a sense down here that as long as the U.S. doesn't recuperate, we won't grow at all.”

Work continues to make Mexico more independent of the U.S. via free trade agreements with the European Union and South American countries. “Those are good long-term things to do,” says OSAT Director Mike Flynn. “They need to essentially cut their dependency on us. They're reaching south and trying to become the gateway to the U.S. for South America. I think that's a good plan.”

Until then, Mexico — like Canada — will soldier on hand-in-hand with the U.S.'s fortunes and misfortunes. No one is sure what an ongoing military campaign and terrorist threats will do to the buying habits of U.S. consumers. But it's pretty clear that the longer the U.S. market struggles the worse the outlook grows for Mexico. Ward's data shows that about 75% of Mexican vehicle production is shipped to foreign markets — nearly all of it goes to the U.S. “Will (Mexico) be able to avoid a serious downturn if we don't? I think the answer is probably not,” says Mr. Flynn. “In some ways it could be worse because since our last recession their auto industry has grown as has its dependency on the U.S. market. So I think they'll be hit harder than last time. Mexico is just like Michigan: When times are good, they're really good. When times are bad, they're awful. The auto industry gets hit really hard and comes back late.”

That's an analogy President Fox doesn't want to hear. His remarkable victory last year, which ended the 70-year reign of the Institutional Revolutionary Party, came with high expectations that campaign promises to create over 1 million new jobs annually, cut taxes and raise wages would be delivered quickly. An increase in well-paying automotive-related jobs was expected to play an important part in those plans. But within the last year Mexico has been losing automotive jobs.

DaimlerChrysler Corp. is closing facilities in Toluca as part of the company's restructuring efforts. And Ford Motor Co. reportedly cut its personnel level in Mexico in November by 400 workers due to shrinking export production. There could be more layoffs on the way, especially at plants that assemble products also made in the U.S. United Auto Workers union members usually are assured about 95% of their weekly pay during layoffs. “With that guaranteed income strain, if you can possibly keep your U.S. plants running and building, you will,” explains Mr. Flynn. “It just becomes cheaper to close a Mexican plant instead of a Michigan plant.”

Besides current job losses, future plans may be changing as well, Mr. Flynn notes. “I think a big issue facing Mexico is how much expansion will we see in assembly capacity in North America? We've talked about (overcapacity) in the U.S.,” says Mr. Flynn. “But we may be at that point in North America. Now that (automakers) have been reminded that there is a downside in the cycle, are you going to be enthusiastic about putting a new plant anywhere?”

Like a traditional Mexican afternoon, it looks like the country's climb to economic heavyweight status will be on siesta in 2002.