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Wells Fargo Securities Economics Group: Mexico Auto Sector Revitalized by Exports
Area Development Online News Desk (08/27/2012)
Source: Wells Fargo Securities Economics Group

In January 1993, Mexico exported 21,523 automobiles. In June 2012, the country exported 229,089 automobiles, an increase of 964.4 percent during the period. The 1993-2012 time period of Mexican automobile exports can be divided in three different stages. The first stage occurred between January 1993 and the middle of 2000, when Mexican automobile exports tripled. From there, we see a rise in exports during the second half of 2000 and then a process of contraction due to the 2001 U.S. recession, when automobile exports went from almost 150,000 cars per month to roughly 70,000 per month by the middle of 2005. We then see a third stage, when Mexican automobile exports climbed from 70,000 per month to today's almost 230,000 units, a stage that was temporarily interrupted in mid-2008 when the financial crisis affected the United States and the world economy but that resumed in vitality once the crisis ebbed.

While Mexican automobile production for the domestic market increased during the second quarter of 2012, it is Mexican automobile production for the export market that continues to drive the automobile sector. Mexican automobile production for exports increased 15.7 percent during the second quarter after posting first-quarter year-over-year growth of 15.3 percent. Domestic automobile production increased 12.7 percent year over year during the first quarter after dropping 6.3 percent year over year in the previous quarter.

Thus, we believe the vitality of the Mexican automobile sector will remain linked to the state of U.S. automobile demand. So far, U.S. automobile demand has remained very strong considering the weak recovery in economic activity experienced during the exit from the Great Recession (Figure 8). So far, this demand has been enough to keep the Mexican automobile sector and the Mexican economy growing.

To gauge the importance of manufacturing on the Mexican GDP and of automobile production on manufacturing GDP as well as total GDP, we calculated some interesting numbers on the contribution of these sectors and the size of these sectors in the overall Mexican economy. Today, the Mexican manufacturing sector represents almost 18 percent of Mexican total GDP, which is similar to the sector's size in 1993. However, in 1993 automobile production represented only about 13.5 percent of total manufacturing GDP. Today, that number has grown to almost 22 percent.2 This illustrates the growing importance of this sector in the Mexican manufacturing landscape and economy.

Having said this, automobile production is still a very small component of the overall Mexican economy. Automobile production represents only about 3.8 percent of total GDP. However, this sector's contribution to economic growth remains important for the Mexican economy. As an example, during the second quarter, manufacturing production contributed 0.79 percent of the 4.1 percent growth. However, of the 4.4 percent increase in Mexican manufacturing production, the contribution from automobile production to this growth was 2.8 percent. That is, automobile manufacturing contributed more than 50 percent to manufacturing sector growth.

Conclusions
The Mexican economy continues to move forward, and the prospects for growth, while weakened by the overall world economic environment, continues to be positive. One of the biggest risks to the performance of the Mexican economy is its still-strong reliance on the U.S. economy, which is especially important for its automobile production. Today, that dependency has served the country well because the U.S. economy, is growing faster than other regions of the world, even if that growth is still slow, and U.S. automobile demand remains relatively strong compared to the rest of the U.S. economy.

However, economic reforms need to move forward to allow Mexico to grow at a faster pace. One of those changes is the reform of the petroleum market. Petroleum production in the country continues to decline due to lack of investment in the sector, which has kept Mexico from realizing stronger economic growth at a time when petroleum prices are very high. Nonetheless, in spite of these concerns, we remain positive on Mexican economic growth.


This is an excerpt from "Mexico: Thanks to Auto Demand", a recently published Wells Fargo Securities Economics Group special commentary analysis of the Mexican economy in the second quarter 2012.
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