Mexico and Brazil have taken different approaches to attracting OEM manufacturing investment, with Mexico now set to outpace Brazil in terms of automotive production, despite Brazil's much stronger internal sales market.

Mexico has been building more light vehicles than Canada since 2008, and is very likely to overtake Brazil this year – something that has not happened since 2002, according to IHS Automotive production analyst Augusto Amorim. Between January and June 2014, Mexico built 126,739 more units than Brazil. While Brazil's production decline in June is partly due to the country hosting the FIFA World Cup, with many workers not working full time when the national football team has been playing, many OEMs are idling production to compensate for record-high inventories, which are growing as potential customers prefer soccer stadiums to the dealer network. Brazil's sales slump is largely due to a lack of access to credit, as well as increased prices in 2014. Mexico's flat sales to date in 2014 are a result of consumer concerns over the impact that new financial and tax legislation will have on them.

Vehicle production year to date (ytd) - Brazil and Mexico

 

Brazil ytd 2014*

Brazil ytd 2013*

Change %

Mexico ytd 2014**

Mexico ytd 2013**

% change

Production

1,470,855

1,767,621

-16.8

1,597,594

1,488,162

7.4

Exports

156,741

247,060

-36.6

1,273,571

1,160,881

9.7

Sales

1,584,896

1,709,532

-7.3

500,360

501,987

-0.3

*Brazil results according to Associacao Nacional dos Fabricantes de Veiculos Automores (Anfavea)

**Mexico results according to Asociacion Mexicana de la Industria Automotoriz a.c. (AMIA)

Outlook and Implications

Looking past this year in the longer run, Mexico is forecast to solidify its lead over Brazil's production output. What is happening currently is a clear sign of different policies. Brazil has a larger internal market than Mexico – last year, the difference between Brazilian registrations and Mexican sales was 2,505,751 light vehicles. So far in 2014, Brazilians have still bought more than one million more vehicles than Mexican citizens. Brazil is the fourth-largest automotive market in the world, thus catching the attention of many OEMs. When imported vehicles started gaining traction in 2011, the local government raised taxes on them and created several rules for OEMs to comply with in order to pay less in taxes.

These rules call for local production, but do not consider exports. Brazil depends on Argentina to export vehicles, and the Argentine market has collapsed this year due to a fragile economy, with auto trade between them a point of dispute until an agreement was reached in early June that is in force for one year. Brazil has lost South American markets to China and Mexico, which has signed several free trade agreements to attract plants. Companies complain that production is expensive in Brazil – from labour to energy, taxes to transportation of goods – and the so-called "Brazilian cost" makes it difficult to export.

Source: IHS Automotive

"Just as an example," says Amorim, "let us look at Audi, which will make cars in Brazil and in Mexico in the near future. The German company will use Mexico as its global source of Q5 and Q6. In Brazil, it will make A3 sedan and Q3 for local consumption – at most, it will be able to export a couple of units to Argentina. As a result, our light vehicle production forecast is that Audi will build 21,929 units in Brazil and 140,309 in Mexico in 2017, the first full year of production in Mexico."

This year, new light vehicle registrations are going through a rough patch in Brazil, down 7.3% through June due to several reasons, including low consumer confidence, credit restriction, sluggish GDP growth, and higher interest rates. Inventories of new vehicles ended May at 41 days, a record high, and OEMs are starting to cut jobs. Examples from not only Mexico – Germany is another good example – show that exports do help the industry when local demand is low.

We forecast that Brazil will overtake Mexico again next year, thanks to all the new plants starting production in the country in 2014 and 2015. Ironically, much of the contributions will come from Nissan's plant in Resende (Brazil) that will replace the March and Versa imported from Mexico to the Brazilian market. However, Brazil should fall behind Mexico again in 2017, in part as Mexico is expecting richer production investment to come on line over the next several years. Then there will be no recovery back, despite the fact that Brazil's internal sales will continue to be significantly higher than those in Mexico.

Source: IHS Automotive

Mexico's strategy has created an export production base, taking advantage of the internal resources of the country as well as some transportation advantages. Brazil's focus on its internal market over exports leaves its production base challenged when the internal sales market sags, without a strong export market to soak up excess capacity in those cyclical situations.

Stephanie Brinley

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