By PriceWaterHouseCoopers.

4.1.4. Wastes

Mexico has recent waste legislations that differentiate all kinds of wastes: dangerous, special-handling, and urban solids. The jurisdiction depends on the type of waste according to the aforementioned division. This means that dangerous wastes continue to be regulated by the federation, except for micro-generators (the ones that generate less than 400 grams of dangerous wastes per year), which are under state jurisdiction. Wastes that require special-handling are under state jurisdiction and urban solids are under municipal jurisdiction. Responsibilities depend also on the type of wastes generated, the resulting amount and their level of danger. This legislation sets the additional obligations and responsibilities of the owners of land and areas polluted by dangerous wastes.

4.1.5. Dangerous substances

In some cases, companies handle in their facilities highly dangerous substances; in order to do this it is necessary to obtain the authorization of the federal authorities.

4.1.6. Noise / electric and thermal energy

The industry must comply with the maximum external noise, electric and thermal energy emission standards. These issues are usually regulated by state or municipal authorities.

V. Analysis of the automotive industry:

5.1. Overview of the sector

The automotive sector is one of the most important sectors for the Mexican economy due to its production value, the jobs it generates and its impact in the foreign trade activities of the country. In the external sector this activity excels for its export (higher than any other sector) and import values, for the significant surplus of its trade balance, and because it is a very attractive area for foreign investment.

uded in the machinery and equipment subdivision show an increase higher than 4% during the last four months, and a market share 1% higher than the subdivision’s production value. In this case, the “relatively” most important activity is the manufacturing and assembly of cars and trucks, which represents 50% of the machinery and equipment subdivision, and its annual rate increased 28.9% from October 2005 to February 2006.

The main issues that characterized the recent evolution of the automotive industry in Mexico are:

• The recovery of the vehicles production from 2005 to 2006.
• The increase of exported units.
• The moderate increase of the internal retail sales during 2005 and 2006.
• And finally, the agreements between Mexico and Brazil/Argentina, which have shown a very unbalanced trade exchange; we import more than we export to both countries.

5.1.2. Recent evolution

MANUFACTURING PRODUCTION IN MEXICO

Source: GEA, base on the information provided by INEGI, Bancomext, Banco de México and AMIA.

5.1.3. Production

After a period of relative shrinkage in the automotive production between 2001 and 2004, when the number of vehicles manufactured in the country dropped an average of 4.5 per cent every year, in 2005 and the beginning of 2006 the trend changed drastically. In 2005 the number of units produced in the country increased 7%, while during the last five months (October 2005 to February 2006) the vehicle production volume increased 35.9%. The production decrease in 2001-2004 was caused by the competitiveness erosion in the external markets of some of the models produced in the country, especially in the USA. Besides, there was an increased competition from Asian vehicles. Also, many models exported by the Mexican automotive industry entered the final stage of their lifecycle in 2001-2004. Evidently, this behavior also resulted in a yearly average contraction of 4.8% of the production value from 2001 to 2004, a behavior that reverted in 2005 with an expansion of 3.7%. That behavior was basically recorded by the end of 2005 and the beginning of 2006. Actually, the annualized increase of the automotive production value between October 2005 and February 2006 rose to 23%.

5.1.4. Sales

During 2005 and the first quarter of 2006 the growth of the internal vehicles retail sales was moderate, 3.3% and 3.7%, respectively. This dynamic was lower than in 2004, when the internal vehicles sales raised 12.1%. The drop in interest rates and the higher access to credits are the two main factors that explain this behavior. Additionally, another element that contributed to the increase of internal sales is the important reduction of the “relative price” of cars (25% in actual terms between January 2000 and March 2006). Evidently, competition between distributors, financing plans (increasingly attractive), and macroeconomic stability continue generating a favourable environment for car sales.

5.1.5. Foreign trade

A few years ago, most companies of the end-product automotive industry in Mexico applied the strategy of specializing in the production of only a few models, mainly for the exports market, and increased the internal offer through imported units. Nowadays, 75% of the vehicles production is exported and 63% of the integral sales volume is made of imported units. The main destination of the vehicles exported by Mexico continues to be the NAFTA countries, and imported units come mainly from the USA, Canada, Argentina and Brazil. From 2001 to 2004, vehicles exports showed a continuous decrease. However, in 2005 they increased 11.2%, compared to 5.9%, 6.6%, and 3.6% during the three previous years. Actually, during the last six months the annual growth rate of vehicles exports increased 43.3% (49.7% for cars and 31.9% for trucks).
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Although the USA market is the main consumer of cars in the world, Mexico’s exports to that country decreased 4.2% in 2005. Nevertheless, 86.1% of the exports went to the USA. It is important to mention the exports increase to Japan, from 0.0% in 2004 to 0.9% in 2005. Regarding the auto-parts’ sector performance, the US concentrated 92.5% of the value in 2005 (compared to 93.7% during the previous year).

5.2. Competitive environment

5.2.1. Competitors

According to the Automotive Industry Economic Census of 2004, there were 1,823 companies, 16.2% more than the Census of 1999 (1,569). There was a general decrease in the manufacturing units that employ fewer individuals. Therefore, in 1999 the units with less than a one hundred people concentrated 81.8% of the units, and 69.8% in 2004, a 12 per cent decrease.

5.2.2. Concentration of competitors

The concentration of the automotive industry competition in 2005, specifically in the cars and truck assembly and manufacturing sectors, is high. There are eight automotive companies registered in AMIA (The Mexican Association of the Automotive Industry), who manufacture the units in Mexico. Four of them concentrate 90% of the production. In 2005, General Motors was again the leader with 697 thousand units produced, concentrating 23.3%. It was followed by Nissan with 23% of the production (658 thousand units). Of these economic units, 69.5% are companies devoted mainly to the manufacturing of parts and accessories for cars and trucks. It is important to mention that the manufacturing and assembly of cars and trucks only represent 2% of the companies of this industry (30 units). On the other hand, the production of bodyworks, trailers and other parts represented 49% (526 and 369 units, respectively).

General Motors was also sales leader in 2005 with 249 thousand units sold (21.7%). It was followed by Nissan Mexicana with 20.4% of retail sales (234 thousand units). As for the geographical distribution of production, in 2004, 27.2% of the gross vehicles production concentrated in Coahuila, followed by Guanajuato and Puebla, with 21.9% and 20.2% of the production, respectively. However, due to the important foreign trade flows it is important to consider the retail sales behavior by company. In 2005, there were 26 brands available in Mexico. However, it is important to highlight the behavior of retail sales by company due to the significant foreign trade flows. In 2005 there were 26 brands available in Mexico.

5.3. Perspectives

5.3.1. Future changes for the industry

In the last few years the global automotive industry has been negatively affected by the high prices of some of its inputs (steel and fuels), and by the high prices of gasoline. All this has relatively favoured the demand of some vehicles with higher fuel-consumption efficiency. Likewise, some companies of this sector in the USA have faced serious financial problems originated by a relative decrease in the demand of their vehicles, the adoption of certain price policies and the elevated labour costs. These costs, derived from pensions programs and good healthcare services for workers. All this made some of the main automotive companies of the country apply important realignment programs that will include the closing of some assembly plants, as well as layoffs in the plants located in the USA and Canada. The outlook for the automotive industry in Mexico is favourable, because in the last few years the automotive companies have made important investments to expand and upgrade their production capacity and recently announced the construction of new plants. Actually, in general terms, the forecast of these companies in Mexico is they will have a positive performance for the rest of the year. However, the positive performance recently recorded in Mexico by the production and export activities is not risk-free. It is necessary to consider that during the first quarter of the year the total sales of vehicles in the USA showed and increase of only 1.1%. This would imply that the increase of the units exported to that market from Mexico, has generated a production substitution in both countries, and we do not know how long it will last. Nonetheless, assemblers keep trying to reduce costs, which has originated additional pressures in the auto-parts segment. These companies have been “forced” to settle in locations near the assemblers and to set “specific” distribution processes in order to minimize storage costs. It is expected for these trends to continue, adding more pressure to the margins of auto-parts manufacturers.

5.3.2. Market-growth perspectives

The perspectives of the automotive industry are favourable in terms of sales due to the economic recovery and the increase in model’s supply, which will generate even more competitive schemes to promote the consumption of these products. However, considering the previous year, dynamism levels will be lower. In 2006, sales to distributors are expected to increase 12.3%.