North And Centre Primary Beneficiaries Of Manufacturing Boom

BMI View: Mexico will remain an attractive destination for manufacturers, especially automakers, due to competitive wages, well established production and supply networks, and ease of access to the US market. The North and Centre regions of Mexico will benefit the most from the manufacturing sector boom, and we expect strengthening growth prospects in these regions to create significant opportunities in the services sector in subsequent years.

Mexico's manufacturing sector will continue to expand at a robust pace in the coming years, driven by ease of access to a recovering the US consumer market, competitive wages, and well-established supply networks, which will continue to attract foreign investment into the sector. The autos sector will remain a top performer within the broader manufacturing sector, given the expansion in production capacity in recent years, and the strong integration with the supply chain of the US market. The northern and central Mexican states, especially Coahuila, Puebla, the State of Mexico, Nuevo Leon, Guanajuato, and Aguascalientes will be the main beneficiaries of the robust expansion in the manufacturing sector.

Manufacturing Sector Overview

Expanding Autos Sector To Be A Major Driver Of Growth
Map Of Mexico - Top Autos-Producing States

BMI View: Mexico will remain an attractive destination for manufacturers, especially automakers, due to competitive wages, well established production and supply networks, and ease of access to the US market. The North and Centre regions of Mexico will benefit the most from the manufacturing sector boom, and we expect strengthening growth prospects in these regions to create significant opportunities in the services sector in subsequent years.

Mexico's manufacturing sector will continue to expand at a robust pace in the coming years, driven by ease of access to a recovering the US consumer market, competitive wages, and well-established supply networks, which will continue to attract foreign investment into the sector. The autos sector will remain a top performer within the broader manufacturing sector, given the expansion in production capacity in recent years, and the strong integration with the supply chain of the US market. The northern and central Mexican states, especially Coahuila, Puebla, the State of Mexico, Nuevo Leon, Guanajuato, and Aguascalientes will be the main beneficiaries of the robust expansion in the manufacturing sector.

Expanding Autos Sector To Be A Major Driver Of Growth
Map Of Mexico - Top Autos-Producing States

Manufacturing Sector Overview

With an estimated value of USD212.6bn in 2013, the manufacturing sector accounts for 82.0% of total goods exports and 16.6% of Mexico's GDP. The sector employs over 7.9mn people, about 15.8% of the total employed in the country, which means that the trajectory of the manufacturing sector has a large impact on the performance of services and consumer-related sectors. Manufacturing output has experienced average annual real growth of 2.0% over the last five years (2009-2013), just above Mexico's average real GDP growth of 1.9% over the same period. However, the 8.4% contraction seen in manufacturing output in 2009 during the height of the global financial crisis, outpaced the 4.7% contraction in Mexican headline growth, and since then, manufacturing sector real growth has outperformed real GDP growth by over 1.0 percentage point per year on average.

Cheaper Wages In Mexico Than In China
Average Annual Wages In Manufacturing Sector, USD Per Capita

We expect the manufacturing sector to be a top performer within the Mexican economy over our 10-year forecast period, forecasting the industry's value to more than double to USD577.8bn by 2023. Indeed, strong foreign direct investment (FDI) into the manufacturing sector in recent years, which hit a record high of USD28.1bn in 2013, representing 73.5% of total FDI, will continue to expand the sector's productive capacity.

More Investment Means Greater Production Down The Line
Mexico - FDI Into The Manufacturing Sector

Breakdown By Top Sub-Sectors

Food Processing

The largest manufacturing sub-sector is food processing, which with an estimated value of USD45.7bn accounts for 21.5% of total manufacturing production. The food processing sector has seen average real growth of 1.1% over the last five years, and we maintain a constructive outlook towards firms such as food conglomerate Grupo Bimbo and tortilla-maker Gruma. The average wage in the food manufacturing sector is USD2.0/hour, below the USD2.8/hour average wage for the entire manufacturing sector.

Transport Equipment Manufacturing

The second largest sub-sector is autos (officially classified as transport equipment), accounting for 16.8% of total manufacturing production with an estimated value of USD35.7bn in 2013. However, a number of sub-sectors, such as metals manufacturing (USD14.0bn), feed into the production of autos. The autos sub-sector is the fastest growing within manufacturing, expanding by an annual average rate of 10.1% over the last five years. The average wage in the sector is USD3.1/hour, among the cheapest for autos sectors globally. Most of the largest global car-makers have operations in the country, and several of them having announced plans to build new plants ( see next section), which means the sector will continue to expand at a robust pace in the coming years.

Chemicals Manufacturing

The third largest sub-sector is chemicals manufacturing, with an estimated value of USD24.7bn. The sector has been an underperformer, having contracted 0.9% on average, although energy sector liberalisation has the potential of reversing the sector's recent negative trajectory, especially in petro-chemicals. The average wage in the chemicals manufacturing sector is USD5.4/hour, the second-highest hourly wage in Mexico's manufacturing sector after the oil and coal by-products manufacturing sub-sector (USD7.9/hour). Major firms operating in the chemicals industry include conglomerate Grupo Alfa and Mexichem.

Mexico - Manufacturing Sector Key Figures
Sub-Sector Estimated Sub-Sector Value, USDbn Share Of Total Manufacturing Sector, % 5-Year Average Real Growth, % Average Wage (2013), USD/hour
Food Processing 45.7 21.5 1.1 2.0
Transport Equipment 35.7 16.8 10.1 3.1
Chemical Industry 24.7 11.6 -0.9 5.4
Basic Metals Manufacturing 14.0 6.6 0.4 4.4
Beverage And Tobacco Industries 10.8 5.1 1.8 2.6
Non-Metal Mineral Products Industry 10.8 5.1 -0.1 3.6
Measurement And Other Equipment, Electronic Components And Accessories 9.9 4.6 3.1 2.5
Machinery And Equipment 8.8 4.1 9.0 3.3
Oil And Coal-By Products 7.7 3.6 -1.4 7.9
Metal Products 7.2 3.4 1.6 2.6
Plastic And Rubber 6.4 3.0 4.1 2.9
Manufacturing Of Electricity Supply Equipment And Electric Devices And Accessories 6.3 3.0 0.2 2.8
Apparel 5.3 2.5 -0.1 2.0
Other 4.5 2.1 0.3 2.6
Manufacturing Of Furniture 2.6 1.2 -0.2 2.4
Timber Industry 2.2 1.0 3.4 2.2
Leather Products And Substitutes, (except leather clothing) 1.7 0.8 1.1 2.1
Textile Input Manufacturing 1.6 0.7 -0.2 2.6
Printing And Printing-Related Industries 1.5 0.7 -0.7 3.0
Textile Manufacturing (except apparel) 1.2 0.5 -1.1 2.3
Paper Industry 0.0 0.0 1.9 2.8
Source: INEGI, BMI

Autos Sector Set To Remain A Top Performer

We expect the autos sector to remain a top performer within Mexico's manufacturing industry, driven by a strong expansion in exports to the US. Our Autos team forecasts average annual vehicle production growth of 6.3% between 2014 and 2018, driven by strong growth both in passenger and commercial vehicles. Local parts suppliers have recently come under pressure to improve quality and meet standards demanded by international original equipment manufacturers (OEMs). Our Autos team expects local firms to partner with international players, which will attract additional investment into the sector and improve domestic technological capabilities, ultimately benefiting long-term auto production. The increasing localisation of the entire manufacturing process is a sign of a burgeoning autos hub that will beget further investment. Furthermore, the ease of exporting, by rail, road, air, and ship, to the US, as well as elsewhere in Latin America, will keep Mexico a highly desirable destination for autos production.

Robust Growth For Autos Sector Ahead
Mexico - Vehicle Production

The largest auto producers in Mexico are General Motors (GM) and Nissan, which together manufacture nearly half of light vehicles made in the country at their plants in the states of Aguascalientes, Coahuila, Guanajuato, Morelos, San Luis Potosi and the state of Mexico. In recent quarters, several major auto makers have announced plans to expand their operations in the country, and other global players intend to enter the market for the first time, strong indications that total production will continue to expand at a robust pace in the coming years. For instance, Honda recently opened a plant in Guanajuato, and Volkswagen's luxury brand Audi plans to open a plant in Puebla next year.

Selected Car Plants In Mexico By State
State City Company Product
Aguascalientes Aguascalientes Nissan March, Versa, Sentra, Note, 4-Cylindre Motors
Aguascalientes Nissan Sentra
Baja California Tecate Toyota Tacoma
Chihuahua Chihuahua Ford Motors
Coahuila Saltillo Chrysler Motors, Ram Trucks, Promaster
Ramos Arizpe GM Chevrolet Sonic, Chevrolet Captiva Sport, and Cadillac SRX, Motors, Transmissions
Guanajuato Salamanca Mazda Mazda 3
Silao GM Motors and Transmissions
Celaya Honda Fit
Guanajuato Volkswagen Motors
Jalisco El Salto Honda CR-V
Sate of Mexico Toluca Chrysler Journey And Fiat 500
Cuautitlán Ford Fiesta
Toluca GM Motors
Morelos Civac Nissan Pick-Up Trucks
Puebla Puebla Volkswagen Beetle, Jetta, Golf
San Luis Potosí San Luis Potosí GM Aveo, Trax, Transmissions
Sonora Hermosillo Ford Fusion, Lincoln MKZ
Source: AMIA, BMI

North And Centre States To Benefit The Most From Autos Boom

The bright outlook for Mexico's autos manufacturing sector will bring significant economic benefits for the northern and central states, where production is concentrated. This will open up substantial opportunities for firms in the services sector that target the consumer. The northern state of Coahuila holds the largest share of total autos production at 19.8%, through the operations of Chrysler and GM. The next top producers are Puebla (13.5%), state of Mexico, Nuevo Leon (10.5%), Guanajuato (9.8%), Sonora (9.2%), and Aguascalientes (7.8%), all within the northern and central regions of the country.

Bright Growth Outlook For States With Autos Hubs
Mexico - Share Of National Autos Production By State, %

Moreover, rising FDI into the manufacturing sectors of the northern and central states points to continued production growth over the coming years, which means employment levels will increase, resulting in greater demand for services in those regions. Puebla had the largest FDI inflows into manufacturing last year, coming in at USD1.2bn, followed by the state of Mexico (USD947.4mn), Coahuila (USD737.5mn), Guanajuato (USD617.1mn) and Aguascalientes (USD539.5mn).

Robust FDI Will Continue Increasing Production Capacity
Mexico - FDI Into Manufacturing By Selected States, USDmn (2013)

The services sectors in the states that are major auto producers have already been growing at a faster pace than the national average in recent years, and we expect this trend to continue in the coming years. For instance, in Guanajuato and Nuevo Leon, the services sectors have seen average real growth of 3.3% and 3.2% respectively in the last five years, above the national average of 2.6%. The largest services sector among states that are top autos manufacturers is the state of Mexico, with an estimated value of USD77.0bn, representing 9.8% of the national services sector.

Attractive Opportunities For Services In Autos-Producing States
Mexico - Services Sector 5-Year Average Real Growth, % (LHS), And Estimated 2013 Sector Value, USDbn (RHS)

Commerce And Financial Services Poised For Strong Growth

Within the services sectors of the northern and central states, we identify commerce (retail plus wholesale), real estate and financial services, as the sub-sectors that have the strong growth potential. All three tend to be the largest in terms of industry value, and have seen the fastest growth rates in recent years. We expect a further expansion in manufacturing activity will continue to support strong growth in the coming years. Moreover, financial sector reform, which was approved in 2013, will bolster consumer credit demand, by regulating interest rates and reducing fees, which will further boost the services sectors. For instance, in the state of Mexico, the commerce sector, with an estimated value of USD22.bn, has expanded by an average of 4.1% in the last five years, while the real estate (USD22.9bn) and financial services (USD3.4bn) have seen average growth rates of 2.8% and 13.7% respectively. We see similar opportunities in the services sectors of other top autos-producing states, which have similar dynamics as the state of Mexico.

Key Figures Of Top Autos-Producing States
State Nominal GDP (2013e), USDbn Share of National GDP, % 5-Year Average Real GDP Growth, % Population Population, % of National GDP Per Capita, USD Manufacturing Sector Value, USDbn 5-Year Average Real Growth Of Manufacturing Sector 5-Year Average Total FDI, USDmn 5-Year Average Share Of National FDI, %
Aguascalientes 14.1 1.1 2.4 1,290,439 1.1 10,899 4.0 2.7 392 1.7
Sonora 37.1 2.9 3.1 2,899,391 2.4 12,811 7.0 1.3 138 0.7
Coahuila 43.4 3.4 3.4 2,992,947 2.4 14,490 16.8 6.5 386.2 1.4
Nuevo Leon 94.4 7.4 2.9 5,067,529 4.1 18,628 23.3 4.4 1919.3 8.6
Jalisco 79.6 6.2 1.7 8,004,756 6.5 9,950 15.0 0.0 1027 4.7
San Luis Potosi 25.0 1.9 3.5 2,815,581 2.3 8,893 6.9 4.8 218 0.8
Sonora 37.1 2.9 3.1 2,899,391 2.4 12,811 7.0 1.3 138 0.7
State of Mexico 116.8 9.1 2.5 16,526,231 13.5 7,070 27.6 1.7 1223.3 6.0
Puebla 42.2 3.3 3.2 6,294,126 5.1 6,712 10.2 3.8 547.8 2.2
Guanajuato 50.3 3.9 3.2 5,974,557 4.9 8,413 14.1 3.5 397.7 1.7
National 1284.1 - 1.9 122,332,397 - 10,497 212.6 2.0 23100.8 -
Source: INEGI, BMI

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Sector: Country Risk, Autos
Geography: Mexico
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