Canadian automotive export market to Mexico: An expert overview

This is the first in a series of articles highlighting the top trends in the Canadian automotive industry, key opportunities for exporting vehicles, car parts and automotive manufacturing tools to different countries and how Export Development Canada (EDC) can help mitigate market risks. Today, we start with automotive exports to Mexico.

Mexico, as a key member of the Canada-United States-Mexico Agreement (CUSMA), is an important trade partner across all industries, but the automotive sector is a driving force.

Benefiting first from the former North American Free Trade Agreement (NAFTA) and now CUSMA, as well as other free trade agreements (FTAs) shared with Canada, including the Comprehensive and Progressive Agreement of Trans-Pacific Partnership (CPTPP), Mexico is the seventh-largest country for the assembly of original equipment manufacturers (OEM) of passenger vehicles. 

For that reason, many Canadian companies in the automotive sector are either active in Mexico or exploring opportunities in the market. Export Development Canada (EDC) regularly engages with these companies. As a leader of this outreach for more than two decades, here are some of my key insights. 

Types of automotive businesses 

Before discussing the market for automotive exports from Canada to Mexico, let’s quickly define the types of players: 

• OEMs: Original equipment manufacturers (OEM) in the automotive industry, include vehicle manufacturers, like General Motors, Toyota and Volkswagen. 

• Tier 1s: A Tier 1 auto parts manufacturer supplies components/assemblies directly to OEMs. 

• Tier 2s: A Tier 2 auto parts manufacturer supplies components to Tier 1 suppliers, which, in turn, incorporate these components into larger assemblies for OEMs. 

EDC market intelligence/trends

Here are three major trends I’m seeing in the Mexican automotive manufacturing sector:  

• Nearshoring 
• Production as a service 
• Outsourced manufacturing service 

Nearshoring  

Companies are moving more production to Mexico to avoid the implications of various taxation/duties, enabling them to benefit from CUSMA and meet the FTA’s rules of origin requirements. As more manufacturers (both OEMs and Tier 1s) set up/expand operations in Mexico, the supply base will need to expand and mature to maintain production quality and quantity. 

According to Jorge Rave, EDC’s regional vice-president for Latin America and the Caribbean, Mexico came out of the pandemic and ensuing supply chain crisis as a winner as the nearshoring trend gained momentum. 

“The idea of nearshoring had been around for the past 10 or 15 years, and this is the first time where Canadian companies operating in other parts of the world are coming back to North America. They’re really interested in playing a key role in the securitization of a regional supply chain,” says Rave, who is based in Mexico. 

This trend applies to both electric vehicles (EV) and traditional supply chains, but the increase in the EV space is especially notable, thanks to favourable tariffs in Mexico.  

Conversely, the geopolitical tension surrounding the growing Chinese presence in Mexico and the intentions of exporting Chinese product into U.S. and Canada pose potential challenges. 

Production as a service  

Some parts manufacturers have started transitioning their business models to being service oriented and invoicing for making a part as opposed to the traditional billing for the sale of parts.  

This has proven generally effective at minimizing the risk/impact of varying commodity prices. For that reason, operators don’t have to adapt to changing input prices.  

Outsourced manufacturing/maquiladora  

Maquiladora, or maquila, is a Spanish term that refers to foreign-owned, Mexican-based factories that are largely duty- and tariff-free. These plants combine Mexican labour with foreign technology, components and capital to assembly and produce a variety of finished products ready for exporting.  

Here’s a simple example: A Canadian company signs a contract via an American-based subsidiary and then outsources the work to another of their subsidiaries in Mexico. The contract is held by their U.S. subsidiary, but the company still benefits from the lower cost of Mexican manufacturing. 

Market risks 

While the market for exporting vehicles, car parts and the tools to build them from Canada to Mexico is a major opportunity, there are some risks. Two of the more prominent ones today are market oversaturation and construction of new facilities on greenfields (land not previously developed or polluted). 

Oversaturated market 

As more OEMs open production facilities in Mexico to seize opportunities in CUSMA, it’s coinciding with a North American industry peak of available models/nameplates. Given that new vehicle demand in the CUSMA region is relatively stable year-over-year (though trending upwards), this implies that more OEMs are fighting for a slice of the same size market. 

As a result, production levels risk being lower than anticipated. When this happens, car parts manufacturers risk losing money when amortizing capital investments via piece-price production, as they base their amortization billings on OEM projections. 

Greenfield facilities 

A rush to build new OEM facilities and requisite supplier parks is putting pressure on the construction and infrastructure trades, as new industrial parks are planned for the medium/long term in Mexico.  

This risk delays plant openings, potentially impacting production timelines. Extensive greenfield construction also carries with it a variety of environmental, social, and governance (ESG) risks relating to local environments and Indigenous peoples.  

Here are some examples of ESG risks: 

• Displacement of Indigenous people 

• Environmental assessments/impact statements when building in sensitive ecosystems 

• Risks of bribery/corruption to obtain permits when operating in some areas and/or under compressed timelines 

Mexican market opportunities for Canadian automotive exporters

There are several ways Canadian car and car part manufacturers can enter the Mexican market, including: 

Foreign direct investment (FDI)

As international companies invest in Mexico to leverage their access to 15 free trade agreements comprising 50 countries and as a selling point to Latin America, they’ll look to develop local supply chains that can support their establishment, growth and success. 

Mexico’s Maquiladora program (IMMEX)

The Mexican government has temporarily allowed the import of machinery and supplies to be used for manufacturing, transformation and repairing processes without paying taxes and some compensatory fees. Canadian companies can take advantage of this to increase competitiveness in the market. 

New tool manufacturing

Many Canadian TDM (tool/die/mould) companies have set up operations in Mexico, but largely with a focus on tool repair and maintenance. This has been historically seen as a solid market entry strategy that lets TDMs benefit from low labour rates and close proximity to customers. 

But there remains a notable gap in Mexico’s new tool construction capability, as most major plants outsource their tooling to established TDM companies in Canada and U.S. Should companies invest locally in appropriate technologies and staff training, there are good opportunities to seize market share. 

Stamping

Global Tier 1 parts manufacturers are pushing their Tier 2 metal stamping suppliers to open facilities in Mexico. This would support the expansion efforts of Tier 1 manufacturers inside Mexico. The Tier 1s want to work with suppliers who they know and trust, while also rewarding their suppliers who make the move into Mexico.

How EDC can help

“We have local knowledge of how to do business in different markets, but we also have the right people who have the connections, and we can leverage that benefit to Canadian exporters,” says Rave. 

Mexico represents a large export market for Canadian businesses, especially those within the automotive sector. In fact: 

• Mexico is Canada’s fifth-largest export partner. 

• Mexico is Canada’s second-largest automotive export market (more than $1.9 billion in 2023).  

• EDC’s Portfolio Credit Insurance and lending solutions, including our Export Guarantee Program (EGP), can reduce risk and facilitate new investments by Canadian auto parts manufacturers looking to export to Mexico.  

Want to learn more about the growing opportunity in automotive exports to Mexico? Connect with Mike Brownhill, our automotive exporting expert.