By PriceWaterHouseCoopers.

I. Business environment in the automotive industry

1.1.    Macroeconomic environment

Currently Mexico is the eleventh most important country in vehicles production, and it is expected to become the fifth country with the highest volume of units assembled by 2010. Some of its competitive advantages are: the United States and Canada are the main buyers of vehicles and auto-parts produced in Mexico; Mexican labour allows flexible processes, from simple to highly-qualified, maintaining competitive costs; we have increased technologic development and improvement levels, and evidently Mexico is an attractive country for foreign investment in the automotive industry. During the first quarter of 2006 vehicles production increased to more than one million units, an unprecedented figure in a six-month period.

1.1.1.    The Impact of economic variables in the industry

In Mexico the automotive industry is the third most important activity, after oil extraction and the maquila industry.

1.1.2.    Technologic changes

Mexico’s labour includes highly qualified tasks as well as basic activities at very competitive costs, compared to other emerging economies. Mexico has world-class technical universities, as well as training and educational centres that promote research, development and technologic improvement activities.

1.2.    Industrial parks, generic and specialized by type of auto-parts.

The industrial parks include vehicle-assembly plants and are designed to operate “in the nick of time”. Some of the most important industrial parks are located in Aguascalientes, Sonora, Chihuahua, Saltillo, Guanajuato, Jalisco, Morelos and Puebla.

1.3. Strategic logistic access to the parks (air, ground and rail transportation).

Mexico has seaports with routes to the east and the west, which favours vehicles and auto-parts imports and exports into the Asia-Pacific region, Europe and the rest of North America.

The fact that the northern states of the country: Baja California, Sonora, Chihuahua, Saltillo, and Nuevo León share the border with the southern territory of the USA, simplifies the processes and reduces logistic costs. There are enough railroads and highways to transport vehicles and auto-parts to all the production centres of the country.

II. Foreign investment and foreign trade in the automotive industry

2.1. Foreign investment

In Mexico we have the Foreign Investment Law, which defines and regulates the activities foreign investors are allowed to perform, establishing percentages, limits, restrictions or conditions on participation percentages. It specifies the activities that may only be carried out by Mexican individuals, and those that allow a certain percentage of foreign investment.

In some cases there a few exceptions, which are subject to the decision of the corresponding authorities (The Ministry of Economy).

There are some restrictions for the participation of foreign investment, which can not be exceeded directly, or by using trusts, deals, statutory or partnership agreements, pyramid schemes, or any other mechanism granting control or a larger participation; except in case of a neutral investment, meaning it is not considered to determine the percentage of foreign investment in the social capital of Mexican companies or authorized trusts funds.

According to the Foreign Investment Law, trading corporations established in Mexico must stipulate in their bylaws an agreement by which foreign partners are compelled to be considered as Mexicans in regard to their shares, social capital, goods, rights, liabilities, concessions, participation or interests, as well as all the rights and liabilities derived from the contracts they sign as partners. Therefore, they can not request the protection of their governments. Otherwise, they shall include an exclusion clause for foreigners stating the partnership will not admit foreign participation.

Hence, partnerships that include an admission or exclusion clause for foreigners in their bylaws will have the right to own, for example, immoveable properties in Mexico for the development of their businesses.

Until 1999, companies devoted to manufacture and assemble automotive parts, equipment and accessories were allowed to have a maximum foreign investment percentage of 49%. After that year, regulations were modified to allow 100%, without having to request the approval of Mexican authorities.

Nevertheless, and according to the aforementioned law, there are some responsibilities on foreign investment that must be periodically fulfilled to inform authorities about the financial situation of the company, as well as any foreign investment change in order to simply business development opportunities for this industry in Mexico.

2.1.1. Tax Compliance

Natural persons and companies have the following tax responsibilities, among others:

• Submit tax returns specifying the tax results of the FY or its taxable profits.

• Elaborate a financial statement and have a CPA make the corresponding report.

• Auditor’s report on the compliance of its responsibilities before the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), in case the company had an annual average of three hundred or more employees during the last FY.

2.1.2. Tax Incentives

2.1.2.1. Tax incentives for expenses and investments in technologic research and development

Taxpayers who pay income taxes on verifiable investments for the development of products, materials, production and research processes are granted a 30% tax credit.

2.1.2.2. Immediate deduction of new fixed assets

It is possible to apply the immediate deduction of new fixed assets during the same FY the investment is made, in the same FY they are used or during the following FY.

2.2 Foreign Trade

Mexico has many important support programs for production industries, especially the automotive industry, because of the relevance of this sector for the national economy.

Following you will find an introduction on the automotive industry support programs, which are intended to promote high competitive levels in international markets.

2.2.1. Temporary imports program for the production of export goods (PITEX):

This program allows temporary import activities of raw materials from any country, without paying import taxes (according to the provisions of the international agreements signed by Mexico), or VAT or compensation fees (if applicable). The machinery and equipment with the necessary characteristics to manufacture export products may be imported with the support of this program without paying VAT.

It is possible to have access to this program in fifteen business days, but it implies many control responsibilities. Following you will find some of them:

1. Generation of an annual report (summary of foreign trade operations)

2. Return of raw materials in 18 moths, at the latest

3. Automated inventory control system, properly recorded through a computerized system that differentiates national from foreign merchandise, including information on the exported or returned goods, the percentage they represent from the products temporarily imported, the damages and wastes that are not returned, as well as the ones bound for the national market using the first-in-first-out mechanism.

The life of this program is indefinite, as long as companies comply with the provisions and exportation of goods.

2.2.2. Maquila Program:

Similarly to PITEX program, the Maquila program allows temporary import activities of raw materials without paying foreign trade taxes, VAT and compensatory fees (if applicable). The machinery and equipment with the necessary characteristics to manufacture export products, imported with the support of a Maquila program, do not pay VAT on imports.

Additionally, it allows the importation of goods to offer certain services and their corresponding invoicing to residents abroad, such as exportation services (0% VAT), among others:

• Goods supply, storage or distribution services
• Merchandise packing, repacking, boxing, reboxing, bottling, marking and labelling;
• Merchandise classification, inspection, testing or verification;
• Pieces cutting, adjusting, sanding, gluing, polishing, painting or waxing
• Restoring and maintenance of goods;
• Washing or ironing clothes;
• Embroidering or stamping clothes;
• Shielding, modifying or adapting an automotive vehicle;
• Design or engineering of products, including software;
• Recycling or collection of wastes.

It is possible to have access to this program in fifteen business days, but it implies many control responsibilities. Following you will find some of them:

1. Generation of an annual report (summary of foreign trade operations).

2. Submit a monthly statistical report of foreign trade operations.

3. Return of raw materials in 18 moths, at the latest.

4. Automated inventory control system, properly recorded through a computerized system that differentiates national from foreign merchandise, including information on the exported or returned goods, the percentage they represent from the ones temporarily imported, the damages and wastes that are not returned, as well as the ones bound for the national market using the first-in first-out mechanism.

The life of this program is indefinite, as long as companies comply with the provisions and the exportation of goods.

2.2.3. Program for companies with high-export levels (ALTEX):

This program allows companies with high-export volumes to receive the refund of VAT credit balances in five business days, approximately.

It is possible to have access to this program in fifteen business days, but it implies many responsibilities, some of which are: the generation of an annual report (summary of foreign trade operations) and continued efficient export activities.

It is important to highlight that the submittal of the annual report renews the life of the program.

2.2.4. Sectorial Promotion Programs (PPS)

The PPS allow the definite importation of goods intended for production with a preferential tariff rate, regardless of the country of origin, and the exportation of the resulting products with preferential rates (foreign trade taxes from 0% to 5%). .... more information.