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UNCLAS SECTION 01 OF 03 MEXICO 000270 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EINV ELAB ETRD MX
SUBJECT: MEXICAN AUTO SECTOR OPTIMISTIC 
 
REF: MEXICO 7032 
 
Summary 
------- 
 
¶1. (U) Experts on the Mexican auto industry believe the 
industry will not only weather the expected slow down in U.S. 
demand, but will maintain its competitive edge over cheaper 
labor countries in Asia and South America. While production 
and exports will likely hold steady, domestic sales figures 
are likely to remain sluggish.  In 2006, Mexico's auto sector 
experienced increases across the board, but fell short of 
production, export, and sales objectives.  Production 
increased 23 percent, while auto sector exports came closest 
to meeting the goal with a 29.5 percent increase.  Domestic 
sales rose less than 1 percent due to a variety of factors 
decreasing demand. Investment in the sector also increased as 
auto makers expanded operations across the country. End 
Summary 
 
Production Increased 23 Percent in 2006 
--------------------------------------- 
 
¶2. (U) According to figures from the Mexican Association of 
the Automotive Industry (AMIA), Mexico's total light vehicle 
production for 2006 was 1,978,771 units, a 23 percent 
increase over 2005 production, but less than the Secretariat 
of Economy's (SECON) goal of 2 million units. 
 
¶3. (U) General Motors maintained the lead in production 
(502,544 units - 17.3 percent increase) but Ford motors 
experienced the largest yearly gain with a 137 percent 
production increase for a total of 349,901 units, due in part 
to the popularity of the new Ford Fusion brand which is 
exclusively produced in Ford's Hermosillo, Sonora Plant. 
Nissan and 
Volkswagen produced 408,439 and 347,020 units, respectively, 
increases of 17 and 15.5 percent.  Toyota, which opened its 
first Mexican plant in late 2004, produced 33,209 units in 
its first ever annual posting.  Honda produced 24,262 units, 
a 3.1 percent increase.  The two companies that saw declines 
are Renault, which was previously produced in Mexico by 
Nissan and has since ceased production, and Daimler Chrysler, 
which saw an 8.8 percent decrease (313,387 units). 
 
Exports Rose 30 Percent 
----------------------- 
 
¶4. (U) With 1,536,768 units, exports were closest to reaching 
the SECON goal of 1.6 million units, a 29.5 percent increase 
over 2005.  Ford Motors (and the Fusion brand) was the 
driving force behind the rise with a 185.6 percent increase 
in exports for a total of 302,780 units in 2006.  Ford's 
strong posting also moved its export market share from 
5th to 2nd place, tying Daimler Chrysler at 19.7 percent. 
General Motors maintained its leading market share at 26.9 
percent and 412,807 units (23 percent increase).  Nissan's 
exports grew 33.5 percent to 208,820 units and a 13.6 percent 
market share, while Volkswagen's 18.5 percent export increase 
gave it a yearly total of 283.564 units and an 18.5 percent 
market share.  New entrant Toyota exported 10,111 units for a 
.7 percent market share, and is expected to surpass Honda 
(15,107 units, 4.2 percent increase) in the near future. 
Renault's small export numbers fell 57.3 percent to 138 
vehicles, while Daimler Chrysler's 303,441 units was a 9.2 
percent decrease from 2005. 
 
¶5. (U) Except for the Caribbean, exports to countries outside 
North America increased in 2006.  Experts still stress the 
need for Mexico to reduce its dependence on the U.S. market 
for auto sales.  Carlos Ghosn, Chairman of Nissan-Renault, 
said that Mexico lacks the logistics and infrastructure to 
send products to Europe and South America.   He suggested 
that Mexico continue investing in infrastructure to make such 
operations more efficient and competitive.  In 2006, exports 
to Mexico's NAFTA partners were 1,349,768 units or 88 percent 
of all Mexican exports, a 26.8 percent increase from 2005. 
Exports to Europe grew 51.3 percent to 122,898 units, mainly 
attributable to Volkswagen's increased exports.  Exports to 
South America increased 83 percent to 54,112 units. 
 
Domestic Sales Remain Sluggish 
------------------------------ 
 
¶6. (U) Domestics sales for 2006 were 1,139,718, a .7 percent 
increase, and below the goal of 1.2 million.  GM and Nissan 
continued to dominate the market with 21.5 (245,090 units) 
 
MEXICO 00000270  002 OF 003 
 
 
and 20 percent (228,315 units) market share, followed by Ford 
(15.6 percent - 177,595 units), Volkswagen (11.8 percent - 
135,027 units), and Daimler Chrysler (11.3 percent - 128,446 
units).  Among the 11 most popular auto brands in Mexico 
(those with sales totaling more than 10,000 annually), only 
four - Daimler Chrysler, Honda, Mitsubishi, and Toyota - saw 
sales increase for 2006.  Toyota experienced the largest 
sales gain at 70.1 percent, a result of increased Mexican 
promotion. 
 
¶7. (U) According to Emilio Mosso, Director of Automotive 
Industry at SECON, the apparently stagnant sales numbers are 
a result of two main factors that affected demand during 
¶2006.  First, many consumers chose to defer vehicle purchases 
because of the uncertainty inherent in a presidential 
election year.  Second, with the strength of the construction 
and housing markets during 2006, many Mexicans chose to 
purchase homes instead of new vehicles.  He explained that, 
although fewer cars were purchased, the cars were generally 
higher quality and more expensive, which bodes well for 
future years' sales projections. 
 
¶8. (U) Conversely, the Mexican Association of Automobile 
Distributors (AMDA) and AMIA are up in arms about a recent 
change in the tax law that reduced the tax exemption for new 
car purchases (reftel).  They claim the reduction -- to cars 
valued at less than 175,000 Mexican Pesos, MXP (16,204 USD) 
from the previous 300,000 MXP (27,777 USD) -- will push even 
more Mexicans to import used cars from the U.S. and further 
threaten domestic auto sales.   Adres Ocejo, president of 
AMDA, said that the tax coupled with the Used Car Import 
decree of 2005 that allows Mexicans to import and register 
U.S. cars between 10-15 years of age, could lead to 50,000 
fewer cars being sold in 2007. 
 
Investment Strong in 2006 
------------------------- 
 
¶9. (U)Despite the anticipated slow down in U.S. demand, 
investments in 2006 were strong as companies sought to expand 
production at Mexican plants.  The auto industry announced 
investments for 2006 totaling more than 4 billion USD for 
modernizing and expanding production lines.  Daimler Chrysler 
announced a 1 billion USD investment for modernizing its 
Toluca plant.  Ford invested 2 billion USD in its Sonora auto 
parts plant.  Toyota announced a 37 million USD investment in 
its Baja California plant to increase production capacity. 
Honda's 64 million USD investment in its Jalisco plant was 
also geared towards increasing operations. 
 
¶10. (U) Cesar Flores, president of AMIA, told EconOff that 
continued investment is a product of continued demand for the 
models produced in Mexican factories.  These tend to be 
smaller, cheaper, and more gas efficient than the models 
produced elsewhere.  Demands for these models would show 
smaller decreases even as total U.S. auto demand declined. 
He expected Mexico to see a period of short, slow growth, but 
was optimistic that the U.S. deceleration would not lead to 
problems for the Mexican auto sector. 
 
Technology Key to Maintaining Competitiveness 
--------------------------------------------- 
 
¶11. (U) The industry is looking to technology to increase 
their global competitive edge.  Rodulfo Raul Leon, in charge 
of auto industry investment at SECON, explained that Mexico 
is poised to become a North American auto engineering center 
due to its overabundance of automotive engineers and the U.S. 
shortage.  He explained that SECON is supporting joint 
automotive engineering hubs between the National Autonomous 
University of Mexico (UNAM), the University of Windsor in 
Ontario, and the University of Michigan, that it hopes will 
increase Mexico's desirability with U.S. automakers while 
providing additional opportunities for Mexican students.  He 
also said that Mexican companies are liaising with 
universities to set up their own centers.  These centers aim 
to give students hands on experience which in turn would 
produce better job candidates for the businesses.  For 
example, Technological Solutions of Mexico has established a 
research and development center in a Guadalajara university 
run jointly by students and company engineers. 
 
Comment 
------- 
 
¶12. (U) Comment: The auto industry in Mexico can expect to 
continue its promising path.  Even if oil prices decline, the 
 
MEXICO 00000270  003 OF 003 
 
 
Ford Fusion, PT Cruiser, Volkswagen Jetta, and other small 
models produced in Mexico will maintain their popularity.  As 
the Big 3 continue reacting to rising production costs in the 
U.S., they can be expected to at least sustain their 
profitable production centers south of the border. 
 
¶13. (U) The threat of Asia and South American competition is 
small, though constantly growing.  Vehicles produced in 
Mexico, which has a more developed industry and a longer 
history of producing cars for export, are of much higher 
quality than the competitors, particularly those produced in 
China.  However, as the competition increases production, 
their quality will improve.  Proximity to the U.S. also 
remains important, but lack of infrastructure and high energy 
costs keep Mexico from taking full advantage of its 
geographical advantage.   Many companies wishing to expand 
find themselves constrained by the cost of shipping inputs 
and finished product via truck or the rundown rail systems 
that cannot handle increased traffic.  If Mexico can solve 
these problems, while persisting in its efforts to increase 
the technological value added to its products, the auto 
industry will be able to maintain its edge in the global 
market. End Comment. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
GARZA