Mexico set to thrash Brazil

It is not a headline you see everyday. Certainly not if you are talking football. But in the world of auto manufacturing, it looks like Mexico is set to take over Brazil’s place as Latin America’s top automobile producer for the first time in more than ten years.

Riding the crest of the BRICS emerging markets wave, Brazil is currently the world’s fifth largest car market. Over the next few years, carmakers will be investing about US$30 billion in expanding current factories or opening new factories there, but that doesn’t make it a success story; BMW has just spent US$250 million on its first factory in Brazil that will reach an annual output of about 32,000 cars, but at the same time it has invested US$1 billion in Mexico where it plans to produce 150,000 cars per year.

Nissan and Mercedes-Benz are also set to break ground on new plants in Brazil valued at US$1.2 billion but at the same time they are spending US$1.4 billion in an unlikely joint venture in Mexico that is due to be built adjacent to a US$2billion Nissan factory that opened late last year.

Brazil’s auto market is simply too large to ignore as the emerging economy creates a middle class that aspires towards car ownership and spurs sales growth. In the past decade, it is reported that some 40 million Brazilians joined the middle class. Last year, some 3.77 million cars were sold in the market, up from 2.46 million in 2007. Brazil has depended on its domestic market for growth unlike other countries with a large auto manufacturing base, such as Japan, Korea or Mexico, who have a more export-focused approach to the industry. Government policy has made imported cars expensive so manufacturers are setting up plants, but they tend to be small.

Bad infrastructure hurt the expansion but most troubling for global manufacturers is the lack of trade agreements that make Brazilian products uncompetitive in international markets. Mexico, on the other hand, enjoys lower wages and has trade agreements with 44 countries, not least of which is with their northern neighbour, the US of A, and exports have surged by 9% to 1.95 million units in the first nine months of the year.

On the other hand, Brazil’s exports have fallen by almost 39% to a paltry 262,000 units with trouble in the Argentinian economy - one of the key destinations for many of the GM cars exported from there - being chiefly to blame. Despite all of these seeming problems, car makers are falling over themselves to get into the market. Jaguar Land Rover is set to start producing the Discovery Sports in the market and are investing US$300 million in a new facility. Not to be left out, Fiat Chrysler is also in the process of building a plant that will churn out some 200,000 vehicles, starting with the Jeep Renegade. 

image: washingtonpost.com