VZCZCXRO8523
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0206/01 1531547
ZNR UUUUU ZZH
P 021547Z JUN 09
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3753
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4819
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9338

UNCLAS SECTION 01 OF 03 MONTERREY 000206 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ELTN ETRD EFIN ELAB PGOV MX
SUBJECT: MEXICAN AUTO INDUSTRY HIT HARD BY U.S. RECESSION BUT EXPECTS 
TO REBOUND 
 
REF: 2008 MONTERREY 504 
 
MONTERREY 00000206  001.2 OF 003 
 
 
¶1.        (U)  Summary.  The deep U.S. recession has 
dramatically reduced demand in the Mexican auto industry, a key 
source of industrial production and exports.  Mexican auto 
producers are in an ornery mood, strongly criticizing the 
importation of used U.S. cars and their government's lack of 
support during the economic crisis.  Despite the GM and Chrysler 
bankruptcies, Mexican auto and auto parts producers are 
cautiously optimistic in the long run that their modern and low 
cost manufacturing industry will thrive.  End Summary. 
 
 
 
Importance of the Mexican Automotive Industry 
 
 
 
¶2.       (U)  The Mexican automotive assembly and auto parts 
industries are critical to Mexican manufacturing.  Speaking at 
the May 18 Auto Show in Saltillo, Eduardo Solis, President of 
the Mexican Automotive Association, stated that the Mexican auto 
industry provides 1 million jobs, and constitutes 17% of 
Mexico's manufacturing GDP, 13% of Mexico's industrial 
employment, and 21% of its manufacturing exports.   The Mexican 
automotive industry is primarily geared toward exports, as they 
export 80% of their car production, including 71% to the United 
States.  The auto industry is particularly strong in the 
Northern states such as Nuevo Leon, Coahuila and San Luis 
Potosi.  The Mexican auto parts industry is also important, 
accounting by itself for $18 billion in sales.  Finally, Solis 
emphasized how the auto industry has been a key magnet for 
attracting foreign direct investment, delivering $20 billion USD 
in FDI between 2000 and 2006, including $3.5 billion USD in 
research and development. 
 
 
 
Deep U.S. Recession Hits Mexican Auto Producers 
 
 
 
¶3.       (U)  An historic decline in U.S. car sales has led to a 
dramatic drop in Mexican production of cars and auto parts.  In 
recent years Americans purchased 17 million new cars each year, 
but auto parts giant Nemak expects car sales to decline to 9.5 
million units in 2009, and then recover slowly to 11.5 million 
in 2010, 12.5 million in 2011 and 14.5 million units by 2012. 
These projections are far below Nemak's forecast last October, 
when they expected U.S. car sales to total 13.9 million (see 
reftel).   As a resulting of falling demand, Solis expects auto 
production to drop by 29% in 2009.  The Mexican auto parts 
industry is also hard hit, because 63% of their sales are the 
U.S. Big 3 automakers.  Agustin Rios, Executive President of the 
Mexican Automotive Parts Manufacturing Association, expects a 
20% drop in Mexican auto parts production.  The situation in 
Nuevo Leon is worse.  Manuel Montoya, director of the Nuevo Leon 
Automotive Cluster, stated that the Nuevo Leon automotive 
industry is only operating at 40% capacity, and that the 
industry has shed 15% of its jobs in the last seven months. 
Interestingly, the industry lost 6,500 jobs in the last four 
months of 2008, but the pace of job losses has slowed, with only 
an additional 1,000 jobs lost in the first quarter of 2009. 
 
 
 
¶4.       (SBU)  Mexican auto producers must cut production even 
below the abysmal car sale figures to reduce the overhang of 
inventory.   Automobile analysts confirm that companies such as 
GM and Chrysler have 100 days of inventory of new cars waiting 
on the car lots.  Due to the bankruptcy of Chrysler, auto 
production and auto parts suppliers have shut down production 
for 2-3 months.  The same is true for many other brands, as many 
companies throughout the supply chain have slowed or stopped 
production.  For instance, Nemak, a Tier 1 worldwide supplier of 
cylinder heads and engine block, coped with a 40% decline in 
sales and ballooning inventory by reducing production by 54% in 
the first quarter of 2009.  Nemak also fired 3,500 employees, or 
22% of their work force, and they have reduced their capital 
investment by 50%.  Nemak is a division of the large Alfa 
company, which has other successful divisions such as the Sigma 
group (processed food) to rely upon.  The situation is much more 
dire for many other smaller producers in the supply chain, 
particularly those focusing exclusively on auto parts. 
 
 
 
 
MONTERREY 00000206  002.2 OF 003 
 
 
Fallings Sales in Mexican National Market 
 
 
 
¶5.         (U)  The Mexican auto industry is not going to be 
bailed out by domestic car demand, because Mexican car sales 
have also fallen substantially.  According to the industry 
magazine Mexico Now, Mexican auto sales will fall from 1.02 
million in 2008 to 779,000 in 2009 (a 24% reduction), and the 
Mexican market will not recover to 1 million new car sales until 
¶2015.  Subsequently, the April data shows that Mexican sales of 
new cars fell by 38%, so the Mexico Now forecast may turn out to 
be optimistic.  Curiously, Mexico's auto industry only supplies 
38% of local sales, while the remaining new cars are imported 
(albeit many with Mexican auto parts). 
 
 
 
¶6.       (SBU)  Industry leaders blame the depressed market on 
two factors besides the recession: lack of credit and imported 
used cars.   Financing has become increasingly important for new 
car sales, as the percentage of buyers who receive financing has 
risen from 30% in 2000 to 70% in 2008.  In the Coahuila auto 
show, Luis Gomez of Chrysler agreed that declining credit had 
had a dramatic impact in reducing sales of new cars, a point 
also made by several other contacts.  According to an analysis 
by the leading newspaper El Norte, new car credits fell by an 
average of 25% in the first quarter of 2009, including 
reductions by GMAC (-42%) , Ford Credit (-39%) and Chrysler 
Services (-71.5%).   Car loans from local banks fell at a much 
lower rate.  Katia Calderon, the head of GMAC, disagreed by 
noting that GMAC financing was available and GMAC had taken over 
financing for Chrysler cars.   Calderon did not think that lack 
of financing was an impediment to new car sales, although she 
acknowledged that a deterioration of the borrowers' credit 
worthiness (due to the deep recession) had led to higher credit 
standards. 
 
 
 
¶7.       (U)  The real bugaboo for Mexican car producers is the 
importation of U.S. used cars, which they claim has 
substantially reduced Mexican new car sales.  According to 
industry association head Solis, if not for used car imports, 
Mexicans would have bought 1.7 million new cars in 2008, instead 
of the 1.02 million which were purchased.   In the Coahuila auto 
show, speaker after speaker thundered against used car imports, 
claiming that they were old junkers which did not meet U.S. 
safety or emission standards, and demanded that the GOM enact 
new rules to greatly reduce used car imports.  The GOM decreed 
in December 2008 that all imported used cars must prove that 
62.5% of the car or truck's content was made in the NAFTA 
region, or the car is subject to a 10% tax.  In addition, there 
is an additional tax imposed on cars imported into the border 
area.  These standards are extremely difficult to meet for an 
older car, especially if it has had several owners.  Mexican car 
producers fully support the decree, and want even more 
protection based on safety and emissions tests.  If pressed, the 
car producers claim that these rules are NAFTA compliant, but 
the issue was rarely addressed in front of Mexican auto trade 
audiences. 
 
 
 
Complaints that the GOM has Failed to Support the Auto Industry 
 
 
 
¶8.       (U)  Almost every industry contact complained to 
econoff that the GOM has done little to support the Mexican auto 
industry during this difficult time.   The GOM has a 
pro-employment program to support industries with temporary 
plant shutdowns.  However, El Norte reported that by late May 
the GOM program to preserve employment in the automotive and 
electronic industries had only spent 25% of its 2 billion peso 
budget ($154 million USD).  Moreover, the program had only 
supported 230,000 workers, less than half of its goal of 500,000 
workers.  Of the supported workers, 73% were in the automotive 
or automotive parts industries, and 27% were in electronics or 
machinery.  Auto industry leaders have repeatedly complained 
that the GOM program had too many requirements and red tape to 
be effective.  For example, Tier 1 producer Metalsa kept paying 
its workers even though they were not working, but kept track of 
their hours, and Metalsa plans to recoup these hours from its 
workers when production ramps up.  However, since the workers 
were being paid, we understand that Metalsa was not eligible for 
 
MONTERREY 00000206  003.2 OF 003 
 
 
the GOM program.  The GOM agreed on May 28 to create more 
flexible regulations so that more companies would subscribe. 
Industry association head Solis demanded even more support, such 
as lines of credit and loan guarantees for new car purchases, 
the GOM should renovate its car fleet by buying new cars; the 
GOM should maintain the December 2008 decree on used cars; and 
the GOM should initiate common safety and emissions regulations 
for U.S. and Mexican cars.  Solis and others also compared the 
GOM unfavorably to Germany, which they claim provides a 2,500 
Euro credit for new car sales, a Brazilian program to provide 
consumer credit, and the U.S. programs to help the U.S. 
automakers. 
 
 
 
Impact of GM and Chrysler Bankruptcies 
 
 
 
¶9.       (U)  Industry leaders are cautiously optimistic that 
the bankruptcies of GM and Chrysler will not substantially 
disrupt Mexico's industry because Mexican plants are modern and 
cost efficient.  This issue is critical for Mexico, not just for 
final assembly, but the Mexican auto parts industry supplies 63% 
of its production to GM, Ford and Chrysler.  However, the 
economic fundamentals point to Mexico overcoming the crisis. 
Several observers concurred that Mexico's plants are newer and 
more efficient than those in the U.S., and combined with 
Mexico's substantially lower labor costs, meant that a purely 
business decision would be to send auto production to Mexico. 
For example, Garcia of Chrysler assured the Coahuila audience 
that Chrysler planned to continue operating all of its Mexican 
car production plants.   The Mexicans' primary concern is that 
GM and Chrysler will face political restrictions on their 
ability to out-source production.   El Norte reported on May 30 
that GM agreed with the United Auto Workers union (UAW) to 
produce a subcompact car in the U.S., instead of sending the 
production to Mexico or China.  Michele Compton, an American 
lawyer from Detroit, said that the new Ford agreement with the 
UAW requires Ford to notify the UAW if it plans to ship 
production to Mexico, but the UAW does not have veto power over 
Ford's plans.  Compton explained that any restrictions on auto 
production are likely to affect final auto assembly and Tier 1 
suppliers, so there may be more opportunities for Tier 2 
suppliers and others lower in the supply chain. 
 
 
 
¶10.   (U)  Mexico should also benefit from the approximately 30% 
depreciation of the peso, which has made its auto industry more 
competitive.  Garcia commented that labor constitutes 9% of 
Chrysler's total costs, so Mexican production has become even 
more competitive.  Tier 1 supplier Nemak also considers the peso 
depreciation a great benefit, because like all tier one 
suppliers their sales are denominated in dollars and euros, 
while labor and some other costs are in pesos.  Mexico would 
also greatly benefit if it develops more second and third tier 
automotive suppliers.  Trade magazine Mexico Now estimates that 
Mexico could reap an additional $5 billion USD through producing 
additional products for the supply chain. 
 
 
 
¶11.   (U)  Comment.  Mexico still has a significant cost 
advantage, which has only grown with the shrinking peso, and it 
could grow further if Mexican industry continues to develop more 
auto components.  Therefore, in the long run, the future still 
looks bright for the Mexican auto industry.  However, unless 
U.S. auto demand quickly ramps up after the recession, the short 
term will be difficult, especially for smaller auto parts 
suppliers with little financial capacity to weather the storm. 
End Comment. 
WILLIAMSON