Pacific Alliance member Mexico is poised to overtake Brazil, the leading economy in Mercosur, as the top Latin American auto producer for the first time in more than a decade as surging exports to the U.S. spur factory openings and record output.
After nosing ahead of Brazil in the first five months of the year, Mexico is projected to hold its advantage through 2014, for the first full-year lead since 2002, according to consultant IHS Automotive.
Mexico’s ascent is being fueled in part by auto sales running at the fastest pace in almost eight years in the U.S., the country’s largest market. The boom coincides with a slump in Brazilian production through May as domestic demand cools, setting up a shift in leadership of the Latin American industry faster than analysts predicted.
“The wind is in our sails” in Mexico, said Luis Lozano, lead automotive partner at PricewaterhouseCoopers, in a telephone interview from Mexico City. “People talk about the energy and telecom industries in Mexico, but the auto industry is going to continue as the icon of this country.”
Eclipsing Brazil, where output has fallen 14% this year, would vault Mexico to No. 7 among the world’s largest auto producers. China and the U.S. lead the global pack.
This year’s diverging fortunes of Mexican and Brazilian auto production reflect the state of their biggest markets. Brazil-made cars and trucks are too expensive, given high labor costs and taxes, to send abroad and go mostly to local buyers. Mexican factories export eight of every 10 cars they produce – with more than half going to the U.S.
The auto industry epitomizes the underlying economic fundamentals in the two countries. Mexico is starting to see signs of rebounding after growth missed forecasts in seven of the past eight quarters, while Brazil cut GDP estimates for this year and next and boosted inflation forecasts. Economists project that the Mexican economy will grow 2.8% this year compared with 1.3% in Brazil.
Auto output in Mexico rose 7.2% through May to 1.31 million vehicles, bolstered by new plants for Nissan, Honda and Mazda according to the Mexican Automobile Industry Association, known as AMIA. Brazil’s total was 1.27 million, according to Anfavea, Brazil’s automaker association.
Mexico’s proximity to the U.S. also gives it an advantage, as do labor costs for automakers that are about 20% of U.S. levels, says PricewaterhouseCoopers.
While Mexico’s exports to the U.S. rose 19% through May, Brazil’s shipments to its top trading partner, Argentina, declined 28%, according to Anfavea. Within Brazil, consumers have slowed purchases because of tighter credit and a weakening economy.
Even as exports are buoying Mexico’s auto industry, the low level of domestic sales is a weak spot, according to AMIA President Eduardo Solis. New car sales in Mexico totaled 1.06 million last year. Mexico should restrict used-car imports from the U.S. more stringently, he said.
“We have record production and exports and a domestic market that just isn’t turning the corner,” Solis told reporters in Mexico City.
Mexico is likely to produce 3.1 million autos this year, according to Solis, who said he was unsure whether the nation would build more than Brazil. IHS is forecasting Mexican output of almost 3.2 million, ahead of Brazil’s 3.17 million.
Mexico’s auto-production gains combined with Brazil’s losses may lead to a diplomatic confrontation this year between Latin America’s two biggest economies, according to Augusto Amorim, IHS Automotive’s analyst for South America.
In 2012, Mexico agreed to limit car exports to Brazil for three years after a surge in Mexican shipments to Latin America’s largest economy. That led to a 23% drop in Mexican-made vehicles exported to Brazil last year, according to AMIA.
While the pact is set to expire in March 2015, Brazil may look for ways to extend it, Amorim said. AMIA will probably meet with Anfavea and a similar trade group from Argentina this summer, Solis said.
“The commitment is to get back in 2015 to a free market,” Mexico Economy Minister Ildefonso Guajardo told reporters July 3 in Mexico City.
Automakers’ investments show the importance of both countries in the global production chain.
After the recent Mexico plant openings by the Nissan-Honda- Mazda trio from Japan, a combined investment valued at 4 billion dollars, Germany’s Audi AG is building a 1.3 billion plant to assemble the luxury Q5 sport-utility vehicle.
BMW announced plans last week to invest about 1 billion in a new factory in Mexico, that will produce about 150,000 cars a year. And in June, Daimler and Nissan said they would jointly produce luxury vehicles, including Infiniti compact cars, at a new 1.4 billion factory in Mexico, the biggest project to date in their four-year-old partnership.
“Whatever is made there can be exported,” to any of the more than 40 countries, including the U.S., that have free trade agreements with Mexico, IHS Automotive’s Amorim said.
“When you have Mexico adding a new factory to source the entire world, then you’re talking about big volumes.”
In Brazil, Nissan opened a 1.5 billion complex in Resende in April, and Chery Automobile Co. has a 530 million factory in São Paulo state debuting this year, marking the Chinese automaker’s first major investment outside its home country.
Fitch Ratings reaffirmed Brazil’s “BBB” credit rating with a stable outlook, but added it expects the next government to control spending in order to avoid additional fiscal deterioration that could trigger a downgrade.
The action concludes Fitch’s annual review of Brazil’s rating, as promised by analyst Shelly Shetty in March. Some analysts feared that, given the recent deterioration in the country’s economic fundamentals, Fitch could slap a negative outlook on the rating at the end of that process.
Competing firm Standard & Poor’s in March cut Brazil’s rating to “BBB-minus,” just one notch above junk level, interrupting a series of upgrades that catapulted Brazil into investment grade in 2008.
With a stable outlook, Fitch is giving plenty of room for the next president, who will be elected in October, to implement the policy adjustments needed to restore Brazil’s fiscal responsibility and investor confidence.
Among the most pressing issues, Fitch cited “concerns over lagging administrative price adjustments, reduced fiscal credibility and the lack of a comprehensive reform agenda.”
“While the election cycle is likely to delay these adjustments, Fitch believes that some progress is likely after the elections,” the firm said in a statement.
Brazil’s finances have deteriorated greatly under Rousseff, who granted billions of dollars in tax benefits to key industries in a failed attempt to jump-start an economy that has been stuck in a rut since 2011.
Fitch believes that the Brazilian economy will continue to expand in the range of 2% between 2014 and 2016.
“Fiscal accounts have deteriorated, as reflected in the primary surplus results… which underline the need for the government to control spending and waste”
The agency noted that, according to opinion polls, chances are that President Dilma Rousseff will face a second round of elections on Oct. 26.
“Irrespective of the outcome, Fitch expects some policy tightening next year, although the pace and degree of the adjustment and reform momentum could depend on the ultimate winner and the size of the governing coalition,” Fitch said.