Geopolitics in 2020 – Alfonso Lobo

Geopolitics for 2020 and their impact for Global Business: 2 scenarios.

I believe that one of the most important sectors in the world and especially in the United States is the automobile sector.

My two scenarios are

1: There will be an agreement between countries to continue manufacturing cars in a current way. What consequences will we have?

2. Will we see the rupture between large economies such as the United States and China? 

Where the automobile sector plays a very important role in the economy and even for Mexico.
To develop a little more the scenario one where currently the big companies struggle to continue with their current production form. There is a compelling reason why companies seek to manufacture their products outside the United States.  The most logical is that labor, energy , and materials are cheaper in other countries than the United States itself. A clear example is what happens in Mexico. The cars made in Mexico for which Trump attacked General Motors, the largest automotive firm in the United States. Mexico exceeded in 2010 the two million cars produced.  In 2015 it exceeded 3.25 million units, in 2019 it exceeded 5 million, according to a study by the US Center for Automotive Research.

The geographical position of Mexico has been an important factor in the development of its automotive industry.   The nation’s access to the Pacific and Atlantic oceans is a key advantage for companies in the sector seeking access to both the European and Asian markets.   In addition, the geographical situation of Mexico in relation to the United States and Latin America allows access to the largest buyers in the automotive sector.  Thus, Mexico is among the first 10 manufacturers of cars, trucks and auto parts, and eight of the 10 most important automation companies have at least one assembly plant in the country.

The company Carmatch carried out a special analysis of statistics in the automotive industry and its relationship with the global economic outlook and I would like to list some of the most important ones. This industry encompasses different sectors, since it not only involves the purchase of vehicles, but also the production thereof, and the generation of the raw material they use.  Therefore, it has large implications for the employment it generates, the currency it contributes, the relationships it has with other sectors of the economy, its share in the gross domestic product, and in foreign trade. In 2018, the production of automobiles, trucks and auto parts contributed 20% to the total Gross Domestic Product (GDP) of the manufacturing industries.  

The value of automotive production amounts to 760,356 million pesos.   The automotive sector in Mexico is one of the most dynamic, contributes positively and significantly to GDP,  the Commercial Balance, employment in the country and the good performance of the domestic market. Automotive exports from January to August 2018 generated 91,946 million dollars, the equivalent of 31% of the total for shipments abroad. According to the latest INEGI survey, in which household income and expenses were recorded, Mexican families allocate 14.4% of the total salary for transportation (it includes the purchase of vehicles, maintenance, accessories, fuel, and others). Mexico is one of the main producers of vehicles worldwide, it is the first in Latin America, the fourth exporter of light vehicles.   As for Exports, it ranked fourth worldwide, after Germany, Japan, and the United States.  For these reasons, it is very important for Mexico to continue with the current form in the manufacture of vehicles in our country.

As a second scenario and continuing with the automotive sector.
What could happen if the strict tariff measures are applied to vehicles imported to the United States?

Donald Trump, warned that it will impose a 35% border tax on vehicles imported into the US market from Mexico. To measure the impact this would imply, it is important to mention that Mexico represents one fifth of all vehicle production in North America and has attracted more than 24 billion dollars in investment for the sector according to the Automotive Research Center in Michigan. The industry is projected to double in size between 2010 and 2020, at a time when automakers are investing around $ 13 billion to move 3.3 million units of capacity from Japan, Germany and South Korea. Mexico is a country where most of the big carmakers and feel bound by the unique position for free trade.

Some examples of the number of vehicles manufactured in Mexico and exported to the United States are:
* Nissan is the largest car manufacturer in Mexico. They produce almost a million vehicles and export 50% to the United States.
* General Motors manufactures 700 thousand cars with an investment plan of 5 thousand million dollars and 5 thousand 600 jobs. While in the United States, more than 2,000 employees were fired in two plants.
* Volkswagen manufactured more than 500 thousand vehicles, has 16 thousand 500 employees in Mexico.
* Honda as Toyota, the vehicles made in Mexico of each company represent 10% of the sales in the United States.
* Mazda, vehicles manufactured in Mexico represent 30% of total sales in the United States.
* Kia Motors built a plant in Mexico with a value of one billion dollars.
* BMW built a plant in Mexico with a value of two billion dollars.

Although Mexico is not the largest importer of cars to the US, since Japan, Germany and Canada are in the first place, it has a couple of advantages over other countries. Simon Jack, Business Editor of the BBC, says “Cars made in Mexico can pass through the border without paying taxes”, explains that Mexico has more than 40 free trade agreements with different countries and the European Union that allow it imports raw materials with the collection of preferential tariffs. Without a doubt, the consumer will be affected tremendously, the increase in prices for vehicles will undoubtedly be the largest in history and consequently the decrease in sales. This will bring a negative spiral and will impact many other peripheral businesses that depend on this industry.