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FM AMCONSUL MONTERREY
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INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4280
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 8776

UNCLAS SECTION 01 OF 03 MONTERREY 000504 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV ELTN ELAB MX
SUBJECT: MEXICAN AUTO PRODUCTION DECLINES REFLECT DECREASED U.S. 
EXPORTS 
 
MONTERREY 00000504  001.2 OF 003 
 
 
¶1.      (SBU) Summary.  Nuevo Leon's key automotive industry has 
suffered serious declines in automotive production and exports, 
reflecting the weakness of U.S. car demand and the declining 
fortunes of the Big Three U.S. automakers.  While automakers 
might move some car production to Mexico to reduce costs, this 
will not be enough to offset the overall decline in sales in the 
near term.  Although the next year or two will be difficult, 
Mexico should be well positioned as a low cost car and truck 
producer once the U.S. economy improves.  End Summary. 
 
 
 
Weakness in the Mexican Automotive Sector 
 
 
 
¶2.      (U)  The automotive industry is critical to Nuevo Leon. 
According to promotional material from the Nuevo Leon Secretary 
of Economic Development, Nuevo Leon produces 8.4% of the 
Mexico's total automotive GDP, estimated at $1,280 billion USD. 
The Nuevo Leon automotive cluster includes 145 Mexican companies 
and 50 foreign companies, many of them American.  The automotive 
industry is also important for the neighboring states of 
Coahuila and San Luis Potosi, where U.S. companies such as Ford 
and Chrysler have a major presence.  The Mexican auto industry 
in general is heavily dependent on exports, as 80% of Mexico's 
total production of 2 million light vehicles in 2007 was 
exported, primarily to the U.S. 
 
 
 
¶3.      (SBU)  The sharp decline in North American automotive 
demand is reflected in declining Mexican production.  Jose 
Carlos Pons, Strategic Planning Manager for Nemak (a major 
player in the worldwide transmission manufacturing market) 
reported that North American automotive demand has been over 16 
million units per year, but in September the company projected 
that demand would fall to 13.9 million units in 2008, and 
subsequently we have heard estimates that total demand will drop 
further, to 12 million units.  Pons thought that North American 
automotive demand would not recover for several years.  Mexican 
auto production has significantly declined as U.S. demand has 
faltered.  Mexican auto production fell 4.7 percent in August 
2008 compared to 2007.  The Mexican Association of Automobile 
Manufacturers stated that Mexico's exports were also down 14.7 
percent from August 2007, and Mexico produced 204,854 vehicles 
in August 2008, down from 215,004 in August 2007.   The downturn 
has also affected supplier sales.  Samuel Pena, Foreign 
Investment Coordinator for the state of Nuevo Leon, said in 
September that Nuevo Leon giant Metalsa, producing chassis and 
other auto components, suffered a 35% reduction in sales between 
2007 and 2008.   Jose De Nigris, Senior Manager with KATCON, a 
company which supplies GM of Mexico with Catalytic Converters 
and Front Exhaust Systems and exports 95% of its production to 
U.S. Markets, noted reductions in sales from the U.S. slowdown 
in auto production and recent increases in transport, steel and 
oil prices. The pessimism about the sector is accelerating.  In 
September, Pena claimed that the decline in U.S. economy would 
not affect Mexico until early 2009, but recently Pena confided 
to econoff that the Mexican automotive industry was now in `very 
bad shape'. 
 
 
 
¶4.      (U)  The slowdown in exports has resulted in job losses, 
although the total numbers are hard to quantify.  According to 
data published by the National Institute of Statistics, 
Geography and Informatics of Mexico 
 
(INEGI), the Mexican automotive and auto parts industry 
generated 15,640 new jobs in 2007 (an increase of 3.1%), but 
could lose approximately 6,000 jobs in 2008.   There have been a 
number of anecdotal reports of automotive layoffs, including 500 
in Metalsa, 800 at Tal-Port in Saltillo, Coahuila, and 1,700 by 
autoparts maker Delphi locally and in Chihuahua.   Given the 
forecast declines in automotive production and sales, many more 
layoffs seem likely. 
 
 
 
Possible Offsetting Factors Could Assist the Mexican Auto 
Industry 
 
 
MONTERREY 00000504  002.2 OF 003 
 
 
 
 
¶5.      (U)  Mexico could still benefit as the low cost North 
American producer since automakers will face pressure to reduce 
costs by locating in Mexico.  According to Pena, a Mexican 
automotive technician earns $9,000 USD per year, much less than 
a Korean ($20,000) or American ($25-30,000), but still much more 
than a Chinese technician ($2,000).  Pena maintained that the 
Big Three American automakers and other foreign car companies 
would continue to locate in Mexico to reduce costs, and their 
suppliers would follow.  According to the trade magazine Mexico 
Now, in 2007 GM and Nissan produced almost 500,000 light 
vehicles in Mexico, Volkswagen made 400,000, Ford and Daimler 
Chrysler produced 300,000 units and Toyota perhaps 30,000 units. 
 In the production of new automotive parts, assembly plants in 
Mexico are now requiring that their suppliers are as close as 
possible to them in order to reduce inventory volumes. This 
shift in production locations has forced many U.S. first- and 
second-tier suppliers to move to new facilities so they can 
lower costs and reduce freight and handling expenses in the U.S. 
  An upcoming U.S. Commercial Service Market Research report has 
found large investments in 2007 and 2008 by premier companies 
such as General Motors, Nissan and Toyota.  Moreover, Pena 
contends that the trend towards smaller cars will benefit 
Mexico, since Mexico focuses mainly on the production of small 
and medium-sized cars.  Note.  Mexico also produces trucks and 
SUVs, such as the production of the RAM truck in Coahuila, which 
could be negatively affected by this trend.  End Note.  We also 
heard from a manager of industrial parks that several automotive 
suppliers are looking to move to Nuevo Leon, although these 
moves are dependent on the industrial park locating financing 
for the companies. 
 
 
 
¶6.      (U)  Mexico could potentially benefit from expanding its 
domestic market for new cars.  The Mexican Association of 
Automobile Manufacturers (AMIA) reports that Mexican production 
for the domestic market has remained steady at approximately 
400,000 units from 2004 to 2007.  AMIA is trying to fend off 
cheaper imported used cars to support the domestic market for 
new cars, which carry significantly higher prices than 
comparable new models in the U.S.  AMIA reported that over 3.1 
million used cars have been imported into Mexico from the United 
States since a 2005 Mexican presidential decree allowed imports 
of cars of between 10 and 15 years of age from the U.S., 
dragging down domestic sales of new cars. A modified decree, 
introduced this year in response to local auto industry 
complaints, now only permits imports of cars that are exactly 10 
years old, resulting in a 48% drop in used-car imports. However, 
as of January 1, 2009, a provision of the North American Free 
Trade Agreement (NAFTA) takes effect that will allow imports 
into Mexico of cars of 10 years of age and upwards. Mexico's 
local auto industry is currently trying to reach an agreement 
with the government on potential legislation to curb the looming 
influx of used cars without modifying NAFTA. 
 
 
 
Long Term Boom For Mexican Automotive Manufacturers? 
 
 
 
¶7.      (U)  Sergio Ornelas, editor of Mexico Now trade 
magazine, predicted that after the current slump, the Mexican 
automotive industry will roar back in 2011 as the low cost North 
American producer.  Monterrey TEC business school dean Salvador 
Trevino agreed that Mexico could do well in the future, provided 
that the Detroit Big Three Automakers survive.  According to 
Mexico Now, the Big Three account for over 50% of the automotive 
production in Mexico. 
 
 
 
¶8.      (SBU)  Comment.  There is little doubt that the Mexican 
automotive industry will suffer a significant decline for the 
next several years, which will impact employment going forward 
as production, sales and exports decline.  It seems likely that 
automakers may try to reduce costs by moving more production to 
Mexico (and increasing the pain in Detroit), but this trend will 
be overwhelmed by general declines in production for the next 
two years.  Given the probable weakness of the Mexican economy, 
and the availability of cheaper imported used cars, it seems 
 
MONTERREY 00000504  003.2 OF 003 
 
 
unlikely that the domestic market for new cars will grow. 
However, given Mexican cost competitiveness in the region, it is 
quite plausible that the Mexican automotive industry will emerge 
stronger than ever once North America resumes its economic 
growth.  End Comment. 
WILLIAMSON