Mexico and Brazil must change their automotive trade strategy

RIO DE JANEIRO, BRAZIL – It has been almost three years since Mexico and Brazil signed the Economic Complementation Agreement 55 (ACE-55) to free tariffs on light vehicle trade, which was expected to inject greater dynamism into trade between the two countries. Still, it has not been as beneficial as expected.

Under ACE-55, exports above the regional content limit of 40% had to pay an import tax of 35%. Luiz Carlos Moraes, president of the Brazilian National Association of Automotive Vehicle Manufacturers (Anfavea), explained that these restrictions caused Mexican exports to fall short of the stipulated vehicle quota.

Mexico’s shipment of units to Brazil fell almost 38% in 2019, implying a decrease of more than 24% in trade value, equivalent to more than US$323 million. On the other hand, Brazil increased the value of its automotive exports to Mexico by 51.4%, from US$433.6 million to more than US$656 million.

For the second year of ACE-55, vehicle trade between Mexico and Brazil plummeted due to the pandemic, both in nominal and relative terms, as domestic markets weakened, says Manuel Valencia, director of the International Business Academic Programs at Tecnológico de Monterrey. According to data from Mexico’s Ministry of Economy, Mexican imports of cars manufactured in Brazil amounted to US$486 million, or 7.6% of the total amount of Mexican imports in 2020.

The Tecnológico de Monterrey specialist points out that this dynamic could be explained by internal and external causes of the Brazilian and Mexican markets; in the case of Mexico, the lack of attention to the preferences of Brazilian consumers stands out in a meaningful way.

A RECOVERING MARKET?

Brazil’s domestic market comes from an 11.6% increase in vehicle production compared to 2020 -accumulating 2.25 million units-, in a context still challenged by the covid-19 pandemic, the global microchip crisis that also affected production chains in the country and, as another crucial external factor that stops trade, the economic problems faced by Argentina.

Argentina is Brazil’s leading trading partner in the Latin American region and the third after China and the United States; the crisis caused a reduction of between 50% and 34% in exports of Brazilian vehicles to that country in 2021. While the second regional place is occupied by Mexico, which also lost space due to the pandemic and significantly reduced the demand for Mexican vehicles in the South American country by between 20% and 17%, explains Guido Vildozo, light car market analyst for the Americas at the consulting firm IHS Markit.

The main brands exported from Brazil to Mexico are Chevrolet Tornado, Fiat Mobi, Fiat Palio Adventure, Fiat Uno, Ford EcoSport, Jeep Renegade, Renault Sandero, Volkswagen Gol, Volkswagen Saveiro, and Volkswagen T-Cross. According to Anfavea, the Brazilian automotive sector exported 376,383 units in 2021 to its trading partners, 16% more than in 2020. And it left a turnover of close to US$7.6 billion, an increase of 38% over the US$5.5 billion of 2020.

“It’s an excellent number, considering the scenario we are living,” says Moraes, president of Anfavea, who still foresees impacts on the sector “for some time” and a “moderate recovery” in 2022. “We have a lot of room to grow, and we will try to recover as soon as possible,” he says. Anfavea projects a 9.4% increase in 2022 production and exports of 390,000 vehicles, a 3.6% increase over 2021.

In the case of Mexico, automakers ended the year with mixed numbers, despite the effects of the health crisis. The National Institute of Statistics and Geography (Inegi) reported that automobile production fell 2% annually in 2021, with 2.98 million units assembled locally. Of those, 2.71 million light vehicles were exported, of which 30,409 were destined for the Brazilian market.

The Mexican Automotive Industry Association (AMIA) forecasts that the sector will rebound in the second half of 2022, although the recovery is expected to be very slow. The Mexican association points out that, at the beginning of this year, factors such as the global shortage of semiconductors and the weakness of the domestic market will continue to hit automakers and, consequently, vehicle exports to the South American country.

“Uncertainty is still present in both countries because supply chain bottlenecks continue to put pressure on the prices of some goods; in particular, inflation rates for new and used cars,” says Valencia, from Tecnológico de Monterrey.

A MATTER OF TASTE

If the pandemic affected both markets equally, why are the results disparate in the automotive trade balance and limit the benefits of ACE-55 for Mexico? Easy, it is imperative to consider the tastes and preferences of Brazilian consumers. Because nearly 8 out of 10 vehicles manufactured in Mexico are destined for the U.S. market, Mexican production is highly oriented to U.S. consumer preferences, which are not necessarily similar to those of the Brazilian market, says Guido Vildozo, light car market analyst for the Americas at IHS Markit.

It makes Mexican cars less attractive in Brazil, explains Brais Alvarez, automotive analyst at the consulting firm J.D. Power. “If we talk about Nissan’s Versa and March models, for example, they are produced in both markets. This limits Mexico’s potential to export to Brazil, considering that some of the cars that Brazil does not produce and Mexico does are much larger,” says Brais Alvarez.

On the other hand, “the Brazilian market is oriented towards greater consumption of homemade vehicles, so the impact of the trade agreement between the two countries has not been the best for customers,” adds Vildozo.

This trend would be mitigated if the Mexican industry focused on exporting to Brazil vehicles that that market does not have, such as those in the luxury segment, where domestic production has become more competitive due to BMW’s plant in San Luis Potosí.

“I would risk saying that Mexico is one of the countries that produce luxury vehicles the most. They make attractive models, like the crossover style, more stylish and sporty. They have the advantage of offering those products in high demand in Brazil. This is a strong point for Mexico because it would help it meet the regional content of 40%,” says Alvarez from J.D. Power.

Although ACE-55 is advancing slowly on both sides of the continent and its benefits are uneven, according to specialists, Mexico wants a more comprehensive agreement with the South American country, which is why Mexico will resume negotiations with Brazil this year to achieve a broader trade agreement that allows for innovation, diversification, and participation of different sectors.

In the meantime, Mexican and Brazilian automakers are revving up their engines to open trade in heavy vehicles in 2023 and thus realize the benefits that ACE-55 would bring to the industry. Mexican automakers need to improve their strategy by reorienting their offer.