The development of the automotive industry in Mexico

The automotive industry in Mexico has its origins in the 1920s. It is now one of the most productive sectors of the national economy. Find out more about it.

The development of the automotive industry in Mexico
The automotive industry in Mexico is one of the most relevant business sectors in the country. Photo by Chad Kirchoff / Unsplash

The automotive sector represents one of the most important engines of growth given its high productivity, international relevance, the positive impact it has on regional development, its potential for linkages with other sectors and companies of all sizes, as well as its capacity to generate well-paying jobs. The following is the evolution of the automotive sector in Mexico: from a closed and inefficient industry to a productive and world-class one.

The Mexican automotive industry is made up of the Original Equipment Manufacturer (OEM), auto parts manufacturers, and distributors. The history of the automotive industry in Mexico dates back to 1925, with the installation of Ford's assembly lines, 22 years after Ford Motor Company was founded in the United States. In 1935 General Motors was established here and in 1938 Automex, which later became Chrysler, began operations. The three manufacturers focused their activity on the assembly of vehicles for the local market, which was satisfied with imports.

The main characteristic of the automotive plants that operated in Mexico from 1925 until the end of the 1970s was their low level of sophistication and value-added, the result of little investment in the sector and the lack of infrastructure. In 1950, 37,000 vehicles were sold in the domestic market and 60% of them were assembled in the country. At the beginning of the 1960s, the Mexican automotive industry was characterized by assembly plants with a national content of around 20%. Production at that time was not sufficient to supply domestic demand, so an important part of vehicle sales was covered by imports.

To supply the domestic market and promote the development of local industry, in 1962 the first automotive decree was issued with the following characteristics: vehicle imports were restricted, the import of engines and transmissions was limited, the minimum national content for vehicles manufactured in Mexican territory was set at 60%, and foreign investments in auto parts plants were conditioned to 40%.

As a result of the first decree, the automotive industry grew significantly. From almost 97,000 vehicles manufactured in 1965, the figure rose to 190,000 in 1970. On the other hand, imports were close to 40,000 units per year in the first half of the seventies and the second half of the decade they declined to less than 12,000. Furthermore, the national content goal set in this first decree detonated the auto parts industry in Mexico, thus boosting other sectors of the economy.

Despite the vigorous growth of Mexico's industrial plant during the 1960s and 1970s, protectionism gradually atrophied the capacities of the productive apparatus and, paradoxically, eroded the terms of trade. While from 1950 to 1966 export income was equivalent to just over 70 percent of imports, between 1967 and 1976 the percentage was only 54.3 percent.

The automotive industry was no stranger to this phenomenon. At the beginning of the 1970s, the seven manufacturers of the vehicles, established in the country, had their plants located around Mexico City, most of which had an obsolete infrastructure, while production costs were higher than in other countries. In addition, the quality levels of the Mexican automotive industry were not entirely satisfactory.

In an effort by the authorities to increase competitiveness through the promotion of exports, in 1972 the second automotive decree was issued and new regulatory policies were established. On the one hand, the percentage of domestic content required for vehicles destined for the export market was reduced and, on the other hand, terminal industry manufacturers were obliged to export an equivalent of 30% of the value of their imports. In 1975, there were 21 assemblers and 693 manufacturers of auto parts in Mexico.

In 1977, the government issued a new decree, whose main objective was to turn Mexico into a highly competitive exporting country by allowing greater foreign participation in the sector. As a result of this decree, U.S. automotive companies chose northern Mexico as a destination for their investments. This was due to the need to increase their competitiveness in the face of the efficient and economical Japanese vehicles that were beginning to penetrate their market. These investments were reflected in modern production centers such as the assembly and engine plants that General Motors installed in the Ramos Arizpe, Coahuila complex in 1981. That same year, Chrysler opened an engine plant, also in Ramos Arizpe. In 1983, Ford opened its plant in Chihuahua, and in 1986, together with Mazda, started up an assembly plant dedicated to the export industry, the most technologically advanced in Mexico at that time.

Between 1970 and 1981, vehicle production tripled from 190,000 units to 597,000 units. The record production of the automotive industry, reached in 1981, was possible thanks to the transfer of technology and massive imports of auto parts, which represented 51% of the country's trade deficit in that year. To face the crisis of the early 1980s, one of the main measures taken by the authorities was to open up the economy. Automotive companies joined the national effort to increase exports in the face of the contraction of the domestic market so that sales abroad increased significantly from 16,000 units in 1982 to 173,000 in 1988.

Between 1987 and 1998, vehicle production also grew significantly due to the expansion of the foreign market, largely as a result of the entry into force of the North American Free Trade Agreement. For the first time in history, the automotive industry's trade balance became positive, a situation that continues to this day. In 1994, 52% of production was exported and this figure increased to 84% in 1995, due to the contraction of the domestic market as a result of the crisis and an increase in competitiveness resulting from the devaluation of the peso.

In 2003, a decree was issued to support the competitiveness of the automotive terminal industry and to promote the development of the domestic automobile market. This decree promoted investment in the manufacture of light vehicles through the granting of various benefits. The decree allows automakers to import with zero tariffs the equivalent of 10% of the production in the immediately preceding year. In 2003, 75% of automotive production was destined for export and this percentage has been maintained to date.

Importance of the automotive industry today

Today, the Mexican automotive industry contributes to national GDP, manufacturing GDP and generates millions of direct and indirect jobs. In addition, Mexico is one of the world's largest producers of automobiles in terms of units produced. The automotive industry is also the country's largest source of foreign exchange with billions of dollars generated, which doubles the income from oil exports and far exceeds the foreign exchange received by the country from remittances and tourism.

Currently, automobiles manufactured in Mexico are exported, and two-thirds of these are destined for the United States. Trade openness, a strategic geographic location, skilled labor, demographic bonus, and a large population have allowed Mexico to become an ideal production and export platform for automakers from Europe, Asia, and the United States. Therefore, Mexico already has assembly plants in many states of the Republic. Mexico is also the second-largest exporter of heavy vehicles in the world. Production and exports of these vehicles continue their upward trend, which has rebounded in recent years. Tractor-trailers are the most exported heavy vehicles.

In addition, Mexico is a leading global auto parts producer and the number one supplier to the U.S. market. Modern auto parts producers have high productivity, which is higher than the U.S. average. Mexico is expected to maintain its leading role as a producer and exporter of vehicles and auto parts. This is the case of the automotive sector, which has managed to consolidate itself as one of the country's main industries and offers one of the most visible and attractive opportunities in the export sector, the country's main economic engine.