Mexico’s trailer market

Much has changed in Mexico since President Enrique Peña Nieto was elected in 2012. During his first year in office, he has pursued a whole list of overdue structural reforms in labour market regulation, competition policy, as well as energy and fiscal policy.

Benefitting from Peña’s  determination to renew the country’s policy framework and his administration’s skilful macroeconomic management, Mexico has since established itself as Latin America’s new whizz kid, with a strong and powerful transport industry and ample economic potential waiting to be tapped into.

Even though economic growth in 2013 dropped to 1.1 per cent from the average of 4.3 per cent experienced between 2010 and 2012, Mexico’s rise to international stardom is unlikely to come to halt any time soon.

To accelerate growth again, the Peña government is already focusing on secondary legislation and demonstrating implementation progress – a strategy that could pay off well before the mid-term congressional election in July 2015, according to the World Bank.

“A gradual recovery of economic activity with more dynamic exports as the US economy gains steam and normalisation of public expenditures should bring economic growth back to a range of three to four per cent over the next few years,” it said in a recent report, giving hope to the commercial vehicle industry, whose weal and woe are closely linked to GDP development.

The recent liberalisation of Mexico’s somewhat hidebound energy sector is expected to especially boost the nation’s economic growth performance and has created enthusiasm in the investor community, as reflected by a recent credit rating upgrade to A3 by Moody’s.

Mexico’s manufacturing sector is mostt likely to benefit most from the availability of cheap domestic energy. In the past, Mexican businesses like Tytal, Lozano or Gami have been successful because of an improvement in human capital, but were held back by exorbitant electricity prices, which were almost 80 per cent higher than in the US.

Affordable energy could therefore be the last missing piece to make local vehicle and component manufacturing more competitive and attract much-needed foreign direct investment, as a recent research released by The Boston Consulting Group (BCG) uncovered.

A decade ago, average direct manufacturing costs in China were estimated to be six percentage points cheaper than Mexico’s, according to BCG’s 2014 Global Manufacturing Cost-Competitiveness Index. Today, Mexico is estimated to be four percentage points cheaper than China.

“The pendulum appears to be swinging back. Foreign investment in factories in Mexico is taking off again, even in industries in which China has been dominant,” says Eduardo León, BCG Partner and Managing Director based in Monterrey.

“In Mexico, the 67 per cent rise in average Mexican manufacturing wages from 2004 to 2014 was almost entirely offset by productivity gains in the modern industrial sector and an 11 per cent depreciation of the peso against the US dollar.”

But, while many have applauded Mexico for handing its northern neighbour a lesson in result-oriented, non-partisan governance, some still argue the recovery from the 2013 slump is coming too slow. In early August, The Economist wrote that Mr Peña’s job was “nowhere near complete” as economic activity in Mexico is still subdued, despite the World Bank’s positive medium-term view.

“The reforms’ costs have materialised faster than their benefits, regulatory uncertainty, higher taxes and denser accounting rules have all taken a toll on consumption and investment,” it said, claiming the best way to revive growth quickly would be to spend money on infrastructure.

Obvious priorities include new natural-gas pipelines and a new airport for Mexico City, two prestige projects that would entail ample work for the local commercial road transport industry. But to date, no shovel has hit soil.

What’s more, productivity among small businesses hasn’t improved as quickly as in large-scale companies that have had access to sufficient funding. According to US consultancy McKinsey, it fell 6.5 per cent a year between 1999 and 2009, and many small players still prefer flying under the radar instead of integrating into the formal economy – including a sizable portion of the trailer building and service industry.

As a result of that disparity, recent economic data has been somewhat patchy. Mexican industrial output shrank in June, in its first contraction since December, while consumer confidence fell to a five-month low in July – prompting the finance ministry to slash its 2014 growth forecast to 2.7 per cent from 3.9 per cent in May. Mexico’s central bank even trimmed its 2014 growth forecast to between two and 2.8 per cent, but policymakers said expansion would likely accelerate in the second half.

In a positive for the transport equipment industry, freight movements between the US and Mexico rose 10.6 per cent in June, according to US Transportation Department data. Reportedly, commercial vehicles carried some 67 per cent of the $45.1 billion of freight to and from Mexico, indicating increasing demand for professional transport equipment and services going forward.

Given the increase in NAFTA cross-border traffic und the resulting regulatory pressure on the road transport market, it’s safe to assume Mexico’s trucking industry will continue going down the professionalisation path – both in terms of service offering and equipment selection.

In fact, the country has already commenced a slow but steady transformation into North America’s new logistics and manufacturing hub – even though there are just over 100 trucking businesses in the country with more than 100 powered units to them. But with US OEMs like Navistar and Hyundai Translead already producing locally, that development is bound to continue well into the future – especially since Mexico has free-trade agreements with a record 44 nations.

“The quality of manufacturing in Mexico is good. It makes sense to develop important manufacturing sources in Mexico to export to North America and the rest of the world,” Carlos Pardo, Director General of Navistar Mexico, recently told the Mexico Automotive Review.

“Over the last few decades, Mexico has been developing commercial agreements with a lot of countries to become an important logistical hub. Mexico is now one of world’s key logistical spots, ready to receive or send goods from Asia, the Americas or Europe,” he adds, pointing out that demand for heavy trucks would grow more in years to come, and with it the need for articulated trailing equipment.

Unsurprisingly, this development has brought many a US brand to Mexico since the GFC shock faded away. According to Navistar chief Pardo, the market is rapidly catching up to the US and Europe in regards to procurement policies, especially within medium and large-sized businesses.

“The name of the game right now is fuel consumption. We can be sure fuel is going to go up. The next thing is uptime, how many hours the truck can work in a given month or year. The third is ergonomics, the driver needs to feel very comfortable while operating the vehicle so he can do it in a more efficient way.”

While Mr Pardo is evaluating the market from a truck perspective first and foremost, the trailer industry will be able to benefit from that change of mind as well – be it through more aerodynamic body design or electronic assistance systems like EBS.

However, a sizable segment of the market is still made up of individual truck owners and small family businesses that do not have access to financing; and until president Peña will convince the banking sector to be more aggressive in providing credit, that obstacle won’t go away anytime soon.

Then again, it’s not unlikely Mr Peña will indeed take action. According to Pardo, providing credit to the majority of small businesses would also help reduce the age of commercial vehicles in Mexico and thereby grow the domestic market, so the incentive for Mr Peña to act is two-fold. “Right now, the country is a 40,000 unit market, which is nothing for an economy the size of Mexico.”

Next to credit availability, load security is a pressing issue in a country that still struggles with patches of lawlessness – especially in the natural gas-rich northern region. But if President Peña can keep up the momentum during the last four years of his term, Mexico – and with it the nation’s trucking industry – has all the potential to firmly establish itself as a new international powerhouse.

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