Why did Ford start producing tractor units
THE LONG HISTORY OF THE MEXICAN AUTOMOTIVE INDUSTRY
Supplier networks and government incentives attract automakers to Mexico
The history of the automotive industry in Mexico begins in 1925 when Ford established an assembly line in the country. Ford is still considered to be the longest-running automobile manufacturer in Mexico. In 1935, General Motors, then the largest automaker in the world, began production in Mexico. General Motors is currently the largest automobile manufacturer in the country. Chrysler began operations in 1937, cementing Mexico's place as a low-cost manufacturing base for US automakers.
Building on this foundation, the automotive industry has become the largest manufacturing sector in the country and today employs more than a million people. Mexico is the sixth largest manufacturer of cars and trucks, the fifth largest manufacturer of auto parts and even the largest exporter of tractor units in the world. The vast majority of this vehicle production (a good 90%) is exported. 79% go to the US alone.
This gigantic growth didn't happen overnight. Mexico's more than a century of automotive manufacturing experience has highlighted the value of international partnerships.
The early years of the automotive industry in Mexico
The first cars could be seen in Mexico City as early as 1902. While a total of 136 cars were registered in 1902, car traffic in the city rose to 800 in 1906. This growth led to the then President Porfirio Díaz launching the first Mexican road traffic regulations. Shortly after the end of the Mexican Revolution in 1920, the auto industry began to flourish in Mexico. In 1921, Buick was the first brand to be legally established in Mexico.
While the Detroit Big Three (Ford, General Motors, and Chrysler) led the move to Mexico, other automakers from around the world followed suit in the 1950s and 1960s.
In 1960, Toyota began producing the Land Cruiser and other vehicles thanks to a partnership with a local company. But this partnership came to an end as early as 1964. Nissan began production of the Datsun at a new plant in 1961. This was Nissan's first manufacturing facility outside of Japan at the time. In 1964, Volkswagen also decided on a production facility in Puebla, where the first legendary Beetles were produced as early as 1967. The country's manufacturing sector grew 7% annually during this era.
1960s-1970s: New Policies and Economic Uncertainty
There were many automakers operating in Mexico when the government passed an automotive decree in 1962 banning the import of vehicles, engines, and many other vital auto parts. The aim was to promote the national automotive industry in order to create more jobs and achieve significant technological progress. The new guideline stipulated that 60% of the vehicle's value had to come from Mexico, while auto parts plants could not belong to foreign companies more than 40%. Price controls aimed to achieve higher productivity.
Companies that spoke out against this policy then left the country. These included, for example, Mercedes Benz, FIAT, Citroën, Peugeot and Volvo. The American Big Three (General Motors, Ford and Chrysler) stayed in Mexico alongside American Motors, Renault, Volkswagen and Borgward.
The famous maquiladora program was also launched in Mexico in the 1960s. Maquiladoras in Mexico were originally designed to attract foreign investors and increase the employment rate. However, it took several decades for the program to reach its full potential.
In 1972, the Mexican government presented yet another new set of rules to increase the trade performance of the Mexican automotive industry. These new changes stipulated that the vehicle value no longer had to originate largely from Mexico. For this purpose, it was stipulated that car manufacturers had to export at least 30% of the import value again in the form of vehicles. However, automakers barely hit 16% by 1975. The government was all the more determined in 1977 to improve competitiveness. In order to meet the new requirements, many automotive companies had to modernize their plants.
1980s to 1990s: growth of the Mexican economy
Despite the economic slump of the 1980s, the measures implemented began to ensure additional investments from abroad in the automotive sector. One of the largest investments was the commissioning of a joint Ford and Mazda plant in 1986 in Hermosillo (Sonora). Although the auto parts were initially shipped from Japan, the formation of more and more local suppliers resulted in a steady increase in the local vehicle value. To enable quick production changes between different sedan models, Ford invested more than a billion dollars in a nearby supplier park, which significantly increased the productivity of the plant to a capacity of 300,000 vehicles per year.
This ever-expanding network of suppliers was not the only incentive that led to remarkable growth. Between 1989 and 1993, Mexico began implementing new policies to liberalize Mexico's auto industry and make it more attractive to foreign investment. These reforms included changes to the maquiladora program that allowed maquiladoras to sell up to 50% of their products directly in Mexico.
Since the North American Free Trade Agreement (NAFTA) was passed in 1994, Mexico has become more attractive as a potential trading partner for companies in the US and around the world. As part of NAFTA, maquiladoras benefit from waived import duties and lower duties on certain products. These incentives resulted in significant manufacturing growth in Mexico. The trade with the USA within the framework of NAFTA provided almost directly for significant economic growth.
In the late 1990s, the growth of the Mexican economy led to an increase in auto sales in Mexico. Even those automakers that left the country in the 1960s were relocating.
2000s to 2020s: Today's automotive industry in Mexico
Annual vehicle sales in Mexico reached one million units in 2005 and have grown steadily since then. This growth is certainly due to the continuous strengthening of the local supplier networks as well as the creation of additional incentives for foreign investment.
In 2006, the IMMEX program offered additional benefits to the existing maquiladora program. It reduced the costs and burdens of moving to Mexico. The program consists of five registrations depending on the type of product or services to be exported: Holding Company, Industry, Services, Shelter and Outsourcing. By incentivizing manufacturers to export goods, the IMMEX program resulted in a 99% increase in export trade in just over a decade, from 175 billion euros in 2005 to 350 billion euros in 2017.
In 2020, the NAFTA free trade agreement was replaced by the adoption of the agreement between the USA, Mexico and Canada. Known as the USMCA, the agreement has updated the rules of origin requirements to require automakers to maintain 75% vehicle value from North America, down from 62.5% under the NAFTA agreement.
Mexico's strong network of free trade agreements contributes to its attractiveness as a global export base. According to calculations by the Center for Automotive Research, the free trade agreements in Mexico lead to tariff savings of more than 3,300 euros per vehicle when exporting a vehicle worth 20,800 euros to the EU. The tariff advantage increases proportionally to the value of the vehicle.
A look into the future
Today there are numerous established automakers based in Mexico. These include Audi, Baic Group, BMW, FCA Group, Ford, General Motors, Honda, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volkswagen. General Motors has been the largest automaker in Mexico since 2019 and even outperforms Nissan. The car manufacturers all benefit from a large network of manufacturers of original parts.
The automotive industry in Mexico is currently preparing for the further development of the industry. Ford is considered to be the first hybrid car manufacturer in Mexico with the Hermosillo manufactured Ford Fusion and the Lincoln MKZ and is currently developing the Mustang Mach-E electric car at the Cuautitlan plant. Production of nine different electric cars began in Mexico in 2020.
"Mexico has tremendous potential to manufacture electric cars, has the necessary technical skills, and has lower costs than other countries," said Brais Alvarez, account manager at J.D. Power Mexico, across from MexicoNow.
The long history of the automotive industry in Mexico has strengthened the domestic supply chain while attracting foreign investment. It has become a powerful recipe for high quality, low cost vehicle production. With more than 3.9 million vehicles produced in Mexico in 2018, most of which were exported for sale around the world, Mexico's reputation as a dynamo for automotive engineering has stood the test of time.
Setting up the perfect production facility doesn't happen overnight - and certainly not without the right support. Contact Tetakawi when you are ready to join the Mexican automotive industry and want to learn more about the fastest, cheapest, lowest risk way to establish a maquiladora.
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