Automotive manufacturing plants in Mexico were closed for approximately two months due to the COVID-19 pandemic.
The automotive industry in North America is undergoing a time of unprecedented change as a result of the COVID-19 pandemic and the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) effective July 1, 2020. On top of the disruptions caused by the COVID-19 pandemic, the North American auto industry must contend with new rules of origin, labor value content (LVC) mandates, and steel and aluminum content requirements that are set forth in the new USMCA, as we discussed in detail in one of our recent Alerts.
A recent webinar by the international business magazine Mexico Now examined how these issues are affecting the Mexican automotive industry in particular. During this webinar, valuable insights were provided by key industry figures, such as Eduardo Solis, former president of the Mexican Automotive Industry Association (AMIA) and board member of the Confederation of Industrial Chambers of the United Mexican States (CONCAMIN); Guido Vildozo, senior manager of Americas forecasting for IHS Markit; Miguel Barbeyto, president of Mazda Mexico; and Francisco J. Sanchez A, government relations director for Delphi Technologies. Our summary of the webinar is provided below.
Reopening the Automotive Industry in Mexico
Automotive manufacturing plants in Mexico were closed for approximately two months due to the COVID-19 pandemic. For the safety of employees, those plants in Mexico that have started to reopen recently are operating with staggered hours. Plants are also following governmental protocols to ensure the employees’ safety, such as the use of antibacterial gels, temperature checks and social distancing.
Enforcement of sanitary protocols will continue for reopened manufacturing plants. Furthermore, companies will have to train and educate their employees on COVID-19 safety measures to help prevent spreading the virus.
Following the start of NAFTA, Mexico became a key part of the automotive industry’s supply chain in the region. Thus, the reopening of automotive manufacturing plants in Mexico has been synchronized with reopening plants in the United States and Canada.
The industry is currently experiencing a market decrease of 32 percent as compared to 2019. Furthermore, because of the COVID-19 pandemic, automotive manufacturers have placed several promotions in the market for the public. As a result, pricing actions (i.e., increase in prices) will likely need to be taken into account for 2021 vehicle models. By increasing prices, demand will likely go down, which will see further deterioration for the automotive industry, probably down to a 35 percent deterioration by the end of 2020.
Depending on how COVID-19 continues to spread in the upcoming months, especially in winter, there is a possibility for another shutdown of automotive manufacturing plants. This is a risk that exists and that is not easy to predict. As a result, it is important for automotive companies to continue to implement safety protocols and educate their employees on the matter.
The Impact of USMCA on the Mexican Automotive Industry
The USMCA imposes new challenges for the industry, with new passenger vehicles and light trucks being subject to a regional value content (RVC) requirement that starts at 66 percent on July 1, 2020, and increases incrementally over a three-year period to 75 percent starting on July 1, 2023. For heavy trucks, the RVC content requirement is 60 percent as of July 1, 2020, and increases incrementally to 70 percent effective July 1, 2027.
The USMCA also establishes higher RVC requirements for various kinds of vehicle parts. For example, the RVC requirement for core parts for use in passenger vehicles and light trucks will rise to 75 percent (NC method) and 85 percent (TV method) by 2023. In contrast, the RVC requirements for principal parts for use in heavy trucks will increase to 70 percent (NC method) and 80 percent (TV method) beginning July 1, 2027.
Additionally, the USMCA provides that 70 percent of a vehicle’s steel and aluminum must originate in North America and that the steel must be melted and poured within North America to be deemed to be originating from there. This requirement applies only to steel and aluminum that is purchased to be used for the production of passenger vehicles, light trucks or heavy trucks and does not apply to steel and aluminum purchased for other uses, such as the production of other vehicles, tools, dies or molds.
The USMCA’s auto-related labor value content (LVC) provisions are intended to be more protective of employees. They generally require that automakers certify that specific percentages of content are made by “high wage” workers (e.g., ones earning $16 per hour or higher). The specific requirements vary by type of vehicle and will be implemented on a phased-in basis (e.g., the LVC requirement for passenger vehicles will rise from 30 percent to 40 percent, and in contrast, the LVC requirement for light trucks and heavy trucks will rise from 30 percent to 45 percent).
With the new USMCA and the rules established therein, companies in the automotive industry will need to extend and improve their legal and human resources departments. This will represent higher costs for these companies, which in turn may be passed on to the consumer to the extent of approximately 1 percent to 2 percent.
New Technologies in Mexico
The automotive industry in Mexico is already manufacturing new technologies, such as electric, hybrid, connected and autonomous, among others, and is planning on manufacturing and developing more of these technologies in the future. Nevertheless, Mexico needs more infrastructure for these kinds of technologies in order to provide consumers with benefits and better service.
For More Information
If you have any questions about this Alert, please contact Eduardo Ramos-Gómez, Rosa M. Ertze, Geoffrey M. Goodale, Miguel de Leon Perez, any of the attorneys in our Mexico Business Group, any of the attorneys in our Transportation, Automotive and Logistics Industry Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.