Market Report: Mexico

From the September 2017 issue.

Despite the looming renegotiation of the landmark NAFTA treaty, Mexico is growing less pessimistic about us president Donald Trump. But that doesn’t mean the country can relax.

The G20 summit in Germany at the end of July not only gave a global stage to the growing anti-capitalism movement, with thousands of demonstrators marching against Donald Trump, but also provided new insight into the US President’s relationship with neighbouring Mexico.

At a press conference during the summit, Trump sat immediately next to his Mexican counterpart, Enrique Peña Nieto. After each head of state reflected on the progress being made on trade issues between the two nations – Trump has repeatedly expressed his dismay at the North American Free Trade Agreement (NAFTA), which was signed by the United States, Mexico and Canada in 1994 – journalists probed the US President on whether he was still going to make Mexico pay for the construction of his proposed border wall.

Under his breath, Trump muttered a soft “absolutely” – prompting analysts to not only question the seriousness of his wall building plan, but also the President’s overall impact on the Mexican economy.

“The somewhat muted response, which lies in stark contrast to the braggadocios tone with which he addressed the issue during his election campaign, is perhaps indicative of the minimal impact Trump has managed to have on Mexico, as well its economy,” says John Manning of Dublin-based news service, International Banker.

Even though Trump delivered on the promise of exiting the Trans-Pacific Partnership (TPP) and threatened to impose a sizeable 20 per cent tax on Mexican imports – partly to pay for the border wall – his presidency doesn’t seem to impact the US’s third-largest trading partner as much as widely anticipated, according to Manning.

While the peso did drop by a hefty 14 per cent against the US dollar by the time of Trump’s inauguration in January, Manning points out that it “rebounded strongly” and is now trading at a higher rate than at any point since the beginning of the new US administration. “For all of Trump’s rhetoric, it would appear that Mexico’s economy has been minimally affected; indeed, in some regards, it has even been boosted,” he explains.
New data by Mexico’s National Institute of Statistics and Geography (INEGI) seems to support Manning’s claim, stating the nation’s Gross Domestic Product (GDP) grew by 0.7 per cent during the first quarter of 2017, which was the same growth rate as that recorded in 2016’s final quarter and a healthy 2.8 per cent up on the same period a year earlier.

As a result, Mexico recently revised its economic growth estimate for 2017 from its previous estimate of 1.3 to 2.3 per cent to 1.5 to 2.5 per cent. “This upgrade was largely on the back of positive economic data over the last few quarters, implying that Mexico has thus far managed to remain immune to any potential economic punches being thrown by Trump,” Manning says.

The same is true for the Mexican transport equipment industry. Despite fears of rising import taxes, the industry is as healthy as ever, according to Stefan Kurschner, President and CEO of Daimler Commercial Vehicles Mexico – the leading OEM in the country. “We’ve seen three years of good growth and see the same to come. No matter what, we will see growth,” he said during a press briefing at the end of December, adding the country’s US$60 billion* transport market was strong enough to continue growing at double-digit rates in the foreseeable future.

Hyundai Translead, the nation’s largest trailer OEM, is also seeing ongoing growth, according to Global Trailer’s annual OEM ranking. Despite rising competition from CIMC Intermodal, the San Diego-based organisation, which has a production facility in Tijuana, Mexico, produced some 50,700** units in 2016 – 1,000 more than the year before.
And, there’s more to come. According to a bullish future outlook by US consultancy, Armstrong and Associates, US retail businesses like Walmart are increasingly expanding into Mexico to reduce lead times as “ocean transit cannot react as quickly to consumer demands as truckload transit,” which may “bode well” for 3PLs operating in the country – and in turn those supplying them with transport equipment and services.

One issue that could slow the sector’s impressive growth spurt is the high average age of transport equipment in Mexico, though. The average heavy truck in the country is 17.8 years old, according to Canada’s Truck News, with the average repair taking nine days to complete – a potential bottleneck that could quickly bring the sector’s expansion to a halt. A government scheme offering incentives to alleviate the issue by scrapping older equipment has seen limited success to date, says Kurschner, adding that more has to be done to upgrade what is a largely out-dated fleet, and thus risk-prone fleet.

Additional hindrances may surface should the part of the NAFTA agreement that has long permitted Mexican trucks to enter the US be waived during the renegotiation Trump has been touting, experts say. Until now, both countries have allowed each other’s transport businesses to deliver freight outside a dedicated industrial border zone – making cross-border truck transportation less expensive and more efficient, as a recent Congressional Research document emphasised.

“Without that reciprocity, Mexican trucks must transfer freight to US carriers near the border, which adds time and money to the shipping process,” explains Politico’s Lauren Gardner, saying the local industry is already preparing for a shift in dynamic by setting up small shuttle operations along the border to move cargo between Mexican and US transport businesses waiting on either side.

In line with that, investment activity in what has long been one of Latin America’s most economically stable markets is already showing signs of a slowdown. “Most multinational corporations are [at least] developing contingency plans to mitigate risks to their businesses and reassessing the country’s role in their global market portfolio and supply chains,” explains Antonio Martinez, Director of Global Economics Research at Frontier Strategy Group (FSG) – adding that Mexico’s fast-approaching July 2018 general election is further making the case for “incremental” investment, especially in the wider automotive space.

A key source of concern, he speculates, are more restrictive ‘rules of origin’, which would reduce the amount of materials allowed to be used tariff-free for products traded to and from NAFTA member countries. “This would amount to higher tariffs for inputs or final goods, which…would raise costs for multinationals and inhibit cross-national supply chain integration.”

For now, however, it would be sensible to assume that Mexico’s transport industry will continue to thrive, says Manning, despite Trump’s faltering G20 comment on the wall building project. “From the noises being made by both parties, it appears that the renegotiation of NAFTA is going well,” he summarises. “[For example,] a new sugar-trading pact has been agreed upon by the two countries that will undoubtedly assist further, broader discussions concerning the restructuring of NAFTA.”

With Trump having backed off from many of his threats against Mexico on trade and immigration, Manning says there is much to suggest that the Mexican economy, and with it the nation’s commercial road transport industry, can breathe a sigh of relief that the worst of the potential fallout is now firmly in the past – even though some experts suggest that it will take years for the relationship to stabilise. “Whilst not completely out of the woods…the subsiding of tensions will undoubtedly be welcomed on both sides of the border.”

Fast Fact
According to Antonio Martinez, Director of Global Economics Research at Frontier Strategy Group (FSG), Mexico will either face a long period of populist-driven uncertainty following the 2018 election, or the status quo will persist. In the first case, he says “prolonged and contentious negotiations over NAFTA and a close victory for [populist leftist candidate, ed.] López Obrador” will fuel depreciation of the Mexican peso and reduce investment. “Multinationals anticipating this scenario have delayed major capital investments, pursued a cautious approach to price increases, and increased investments in monitoring customer spending patterns and on lobbying and regulatory support,” Martinez says. Under the second scenario, NAFTA negotiations also remain undecided beyond the 2018 elections, but the “populist surge” he has observed in the wake of Trump’s election fails to materialise. Planning against this scenario would include investing in the Mexican market, he explains, while “monitoring the evolution of trade talks and resourcing lobbying efforts in Mexico and the United States”.

Fast Fact
Mexico is a key manufacturing hub for some of the most recognisable truck and equipment brands in the world – Kenworth, Freightliner, Hino, Volvo, Isuzu, Scania, Dana, Cummins and International all have a manufacturing presence there. Overall, however, automobiles account for the majority of Mexico’s exports (8.1 per cent), while vehicle parts represent 5.7 per cent. Computers (5.2 per cent), televisions (4.2 per cent) and mobile phones (3.9 per cent) round out the top five.

 

 

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