VZCZCXRO2827
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1890/01 1812128
ZNR UUUUU ZZH
P 302128Z JUN 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7229
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA 2629

UNCLAS SECTION 01 OF 03 MEXICO 001890 
 
SENSITIVE, SIPDIS 
 
STATE FOR EEB/TPP/BTA/GROUT 
STATE FOR WHA/MEX/ROMANS 
STATE PASS TO USTR FOR MELLE/SHIGETOMI 
STATE PASS TO COMMERCE FOR ITA/MAC/ONAFTA/WORD/OLSEN/BARRAGAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PINR PGOV PREL MX
SUBJECT: MEXICAN AUTO INDUSTRY ON ROUGH ROAD, SEEKING ROADSIDE 
ASSISTANCE 
 
REF: MONTERREY 206 
 
¶1.  (SBU) SUMMARY:  While the Obama Administration has acted 
firmly to aid the United States' beleaguered automotive 
industry, the Mexican auto manufacturers are looking askance 
at their own government's seemingly lackluster response.  In 
separate conversations, representatives from Mexico's auto 
industry voiced their cautious optimism to ECONOFF that new 
car sales will pick up soon, and that the industry will see 
better negative numbers for the remainder of the year.  What 
would really help, they said, is support from the GOM to boost 
the domestic market.  END SUMMARY. 
 
BAD NUMBERS 
----------- 
 
¶2.  (U) The numbers continue to paint a dismal picture for the 
auto industry in Mexico.  According to the Mexican Automotive 
Industry Association (AMIA), total production of new cars in 
Mexico for the first five months of 2009 was 41.7 percent less 
than the same period in 2008 - just over half a million cars 
compared to 858,398 the previous year.  Mexico exports 80 
percent of its manufactured cars; 71 percent of the total cars 
it produces are exported to the U.S. market.  In the first 
part of 2009, the total number of vehicle exports also fell 
41.5 percent from last year, from 683,070 to just under 
400,000 cars.  Even Mexico's domestic market has dried up - 
domestic sales dropped 30.6 percent from Jan-May 2008. 
 
A VIEW FROM THE AUTO INDUSTRY 
----------------------------- 
 
¶3.  (U) However, AMIA's President Eduardo Solis is optimistic 
that the sector has hit bottom, and that we should start 
seeing 'better negative numbers' beginning in July.  Solis 
told ECONOFF that the U.S. Consumer Confidence Index has been 
on the upswing for three months in a row, and given a two- 
month lag, U.S. sales will likely begin to pick up in July. 
(NOTE:  The Index now stands at 54.9, the highest level since 
September 2008.  END NOTE.)  Also helpful in boosting U.S. 
consumption of new cars will be the U.S. government scrappage 
program - officially the Consumer Assistance to Recycle and 
Save (CARS) program, signed into law last week by President 
Obama and scheduled to begin Wednesday, July 1.  Solis 
hastened to add, however, that the auto industry will still 
end the year in negative numbers, with an anticipated overall 
25 percent drop in sales and a 25-30 percent drop in 
production.  He does not foresee positive numbers until the 
end of 2010. 
 
¶4.  (SBU) When asked about the shift in the market demand for 
more fuel-efficient vehicles, Solis frankly disagreed that 
such a shift was occurring.  Both the U.S. and Mexican 
governments will have to force such a change, he said, through 
additional fiscal incentives for consumers and producers as 
well as programs such as CARS.  Even then, the phase-in of 
such vehicles could not occur until at least 2011.  If there 
is such a shift, Solis assured ECONOFF, the Mexican auto 
industry will adapt, but it will need help from the Mexican 
government.  The problem in the short-term is that many of 
Mexico's production platforms were installed within the past 
few years to manufacture the larger vehicles on American roads 
- the Chevy Suburban, the Dodge Ram pickup, and the Cadillac 
Escalade.  Given time and incentives, Solis said, Mexico's 
production platforms can be reconfigured to respond to any 
shift in demand. 
 
¶5.  (SBU) In the United States, Solis pointed out, it is the 
government that is pushing for better standards.  By contrast, 
in Mexico it is the industry that is pushing the government 
for improved regulations.  For example, only unleaded gasoline 
(regular - 87 octane, and premium - 91 octane) is available in 
most parts of Mexico today.  Ultra low sulfur (ultra bajo 
azufre, or UBA) diesel, which is used in lower-emission diesel 
vehicles, has yet to be introduced and made widely available 
in Mexico.  In order to introduce better technologies to the 
Mexican market, government support for increased fuel 
efficiency and lower emissions standards is essential. 
Unfortunately, the government has neither the understanding of 
the situation nor the fiscal means to address such a need, he 
 
MEXICO 00001890  002 OF 003 
 
 
lamented. 
 
¶6.  (SBU) On the issue of used cars, Solis stated emphatically 
that most used vehicles from the United States have a 
deleterious effect on new car sales in Mexico.  Many of these 
cars have been identified as at the end of useful life in the 
United States, yet they are shipped to Mexico where they gain 
a second life.  NAFTA, Solis said, was not intended to be used 
as a means to send garbage to each other.  Moreover, the 
impact on new car sales is indirect but important, as they 
depress the market in a rollover effect that eventually 
prevents a potential purchaser of a new car from trading in 
his two- to three-year old car.  Solis, a former NAFTA 
negotiator for Mexico, insisted that he is for the trade of 
used cars but that we must trilaterally negotiate a protocol 
of common trade for such vehicles. 
 
GM'S OUTLOOK 
------------ 
 
¶7.  (SBU) In a separate meeting with ECONOFF, GM Director of 
Government Relations Mauricio Kuri echoed many of Solis's 
comments.  The GOM, he said, needs to send the right signal 
that it supports the automotive industry in Mexico, and create 
programs that work.  70 percent of new car sales in Mexico, he 
pointed out, are conducted with financing.  Unfortunately, 
that credit has dried up or the standards are now much higher 
so as to depress the domestic market.  Kuri was critical of 
the 2 billion peso (US$ 154 million) government pro-employment 
program, meant to support industries with temporary plant 
shutdowns.  GM has had rolling shutdowns of its plants in 
Mexico, but as it kept its workers on the payroll, it did not 
qualify for the government program.  These programs, Kuri 
complained, have such crazy rules that are so complicated that 
they actually hurt rather than help.  (NOTE:  Local press 
reports that Volkswagen was the first auto manufacturer in 
Mexico to avail itself of the government pro-employment 
program, receiving 18.6 million pesos (US$ 1.4 million) on 
June 9, and is seeking another package of 21.7 million pesos 
(US$ 1.6 million).  The press also cites sources that say GM 
will soon follow.  END NOTE.) 
 
¶8.  (SBU) Kuri commented on GM's restructuring plan.  Plants 
were closed and jobs were cut in the United States and Canada, 
he said, to reduce labor costs.  GM's plants in Mexico are 
more modern and cost-effective than their northern 
counterparts and will stay open to make the most of these 
efficiencies as well as Mexico's competitive advantage in 
lower labor costs.  Kuri said that GM's green technology 
production had remained in the United States, while Mexico had 
focused on producing GM's pick-up and SUV lines.  He did not 
say that the production of smaller, more fuel-efficient cars 
would shift to Mexico from the United States, but he 
acknowledged that GM's Mexico plants have the requisite 
technology to produce the next generation of cars.  The bottom 
line, he concluded, is that Mexico's GM branch is well-placed 
to be very profitable to the company. 
 
FORD 
---- 
 
¶9.  (SBU) Separately, Raul del Campo, Ford Motor Company's 
Director of Government Relations, bragged to the Embassy's 
Economic Specialist that Ford is the only U.S. auto 
manufacturer that has not required a bailout program from the 
U.S. government, and that it could emerge from the current 
crisis as the largest U.S. automaker (NOTE:  GM had 18.6 
percent of the U.S. market in the first quarter of 2009 to 
Ford's 14.7 percent.  END NOTE).  He claimed that Ford's 
production will be able to adapt to any shift in market demand 
since their platforms are flexible.  However, del Campo also 
insisted on a scrappage program to increase domestic sales. 
 
¶10.  (U) Since these meetings, ECONOFF has learned that the 
Secretariat of the Economy is expected to announce an 
incentive program in July.  It is still developing the plan, 
but it is considering funneling US$ 60 million to incentivize 
the sale of new vehicles in Mexico, either through a tax 
deduction for the purchase of a new vehicle, the elimination 
of the tax on new vehicles (ISAN), or a direct economic 
 
MEXICO 00001890  003 OF 003 
 
 
support to auto production plants and distributors.  However, 
industry representatives are arguing in support of a scrappage 
program similar to CARS. 
 
¶11.  (SBU) COMMENT:  All indications are that the Mexican auto 
industry will recover.  However, much depends on circumstances 
beyond its control - consumer confidence in the U.S., USG 
incentives for new car sales, and decisions on whether to out- 
source production to Mexico.  As for the decision over which 
it holds some sway - that of the GOM to incentivize new car 
sales in Mexico - it appears to be making some headway, but 
any program must be simple and accessible in order for it to 
be truly effective.  Post will continue to monitor 
developments in the government domestic market incentive 
program and the industry's response. 
 
¶12.  (SBU) A final note on used cars in Mexico; something that 
has been largely overlooked in the public debate in Mexico 
over the importation of used vehicles from the United States 
is the fact that it makes vehicles affordable for an entire 
sector of the Mexican population.  The economic contribution 
of this mobile workforce is difficult to measure but according 
to our counterparts in the border consulates, is significant. 
END COMMENT. 
 
FEELEY