Simplifying (and also exaggerating a little) Latin America has had a long love affair with the private motorcar, one which now faces an uncertain and possibly even troubled future.
For much of the 20th century the internal-combustion engine-powered motorcar was seen as one of the most desirable and industrially sophisticated products available anywhere in the world. For Latin American consumers, owning an automobile was seen as aspirational, a badge of progress and middle class identity, and an emblematic product that enabled an entire lifestyle. Society as a whole was deeply influenced by the motorcar, from the spatial organisation of cities through to the design of houses, the arrangement of highways and the location of transport arteries. Most importantly, governments throughout the region put a high priority on developing a locally-based automobile industry. Having one was a sign of development and a mark of prestige. Being able to assemble locally, using nationally-produced steel and other key components, was seen as a litmus-test of the ability to develop a sophisticated manufacturing sector, which in turn was seen as an essential step on the road to development and eventual ‘first world’ status. The larger LAC economies have in fact emerged as significant motor vehicle producers and exporters. Some have built up their industries behind protective tariffs and still find it difficult to be internationally competitive.
Others, particularly Mexico, have successfully used their lower wage costs and an increasingly skilled labour force to encourage international companies to ‘offshore’, setting up local assembly plants to supply the world (but particularly the North American market). Yet just as Mexican production and exports soared, two things have happened. First, the new Trump administration in the US has turned in a protectionist direction. And second, the upheaval in the global automobile industry, with its new emphasis on AVs, digital systems, electronics, IT, and robotics, may be triggering a ‘reshoring’ process where Mexico loses its comparative advantage. Here we look at what the implications of the automobile revolution may be for manufacturing within the LAC region.
The global automobile industry is concentrated in three major productive regions: North America, the European Union (EU), and Asia. A small group of countries dominate production and technological development: they are the United States, Germany, Japan, South Korea and China. China has expanded rapidly to become the world’s largest vehicle producer. Competition has become more intense, with the major car companies concentrating on a small number of new modular production platforms, and passing on increased responsibility to a range of first- and second-tier suppliers. Given the pace of technological change the new paradigm for the industry is to invest more heavily in research and development (R&D). No fewer than five of the 20 global companies that invest most heavily in R&D are from the automotive sector. Auto manufacturers invest around 5% of their sales in R&D, but suppliers of parts, accessories and components invest double that, around 10%. To maintain their contracts with the manufacturers, the suppliers need to be constantly innovating and updating their products.
According to the UN Economic Commission for Latin America and the Caribbean (ECLAC)[1], three major factors are driving what it calls the “far reaching transformation” currently under way in the global auto industry. These are (i) convergence with the digital economy; (ii) changes in the concept of mobility, and (iii) new regulatory requirements in safety, the environment, and energy efficiency. These have already begun to shake up the industry. ECLAC says that traditional auto-industry suppliers will see their share of the market decline from 10% to 3%, while suppliers of new technologies, electronics, and software will grow theirs from 1% to 10%. Today’s vehicles have about 60 microprocessors, four times more than a decade ago. In 2005 electronics and software accounted for 20% of the cost of a vehicle; today that proportion has gone up to 35%, and is expected to reach over 50% by 2030. About three out of every four vehicles sold in 2020 are expected to be connected to the internet in various ways.
Part of this upheaval is that the traditional industry structure, dominated by a handful of global manufactures (including names like Ford, General Motors, Fiat, Daimler, Nissan, Volkswagen, and Hyundai) is beginning to shift. The advent of AVs is creating a whole range of new alliances and players. At least four different types of company are now shaping the new industry. Apart from the traditional manufacturers, the new line-up includes ride-hailing companies, hardware providers, and software providers. Ford fired its chief executive in May 2017, partly because it was deemed to be lagging behind in the development of EVs and AVs; it then invested US$1bn to acquire Argo, an AV start-up, and forged an alliance with ride-sharing company Lyft. Intel, the computer chip-making company, bought Mobileye, an AV systems company, for US$15.3bn in March 2017. Components company Delphi bought AV start-up nuTonomy for US$450m and has since renamed itself as Aptiv. Carmaker Volkswagen has forged an alliance with Aurora, an AV start-up set up by former employees of Google and Uber. These changes mean that Latin American countries seeking to attract inward investment in the auto sector will have to deal with a new set of players.
All this poses a particular dilemma for Mexico, one of the region’s most successful car manufacturers. Through its membership of the North American Free Trade Agreement (Nafta) with the US and Canada, the country was able to invest intensely in developing the industry and has emerged as a privileged supplier to the US, the world’s second-largest vehicle market after China. The Mexican industry now contributes over 3% of the country’s GDP, generates an annual US$52bn trade surplus, and has attracted cumulative foreign direct investment (FDI) of 51.2bn from 1999-2016 (11% of the total). Mexico’s auto industry generates 900,000 jobs directly, and many more indirectly. No less than 80% of the total vehicles produced are exported, and the vast majority of them (86%) are shipped to the US and Canada. Mexico is now the world’s seventh-largest vehicle manufacturer, and the fourth-largest exporter. Starting out mainly as a low-cost assembly operation, the country has become part of a more integrated and sophisticated production chain.
The question is whether these gains may begin to slip back again as the next wave of global auto-industry innovation makes itself felt, perhaps marked by ‘re-shoring’ of important parts of the global automotive value chain. ECLAC notes that Mexico may be vulnerable because, although it has attracted first- and second-tier components suppliers, it still lags behind in terms of third- and fourth-tier suppliers. That means there are still some weaknesses in the local production structure. Mexico is lacking in small and medium-sized, high tech, knowledge intensive companies. In addition, although it has increased the supply of skilled labour and professional capacity (particularly in science, technology, innovation and enterprise development), it has not been able to do so at the same speed as other competing global automobile producers, China in particular.
ECLAC warns that “given the rapid pace of technological change in the motor vehicle industry, the advantages of Mexico’s wage gap with respect to the United States and Canada (which is a major source of competitiveness for the country) will dissipate rapidly. Advances and falling costs in robotics could threaten jobs in the industry in the medium term, at least for some of the best paid workers.” Added to these underlying medium-to-long-term concerns, Mexico has also had to contend with short-term uncertainty over the policies of the Trump administration relating to the auto industry, Nafta, and bilateral trade in general.
If Mexico, one of the most advanced automobile producers in the LAC region encounters a ‘reshoring’ threat to its automobile industry, then the likelihood is that other countries will face similar difficulty. But the future dynamics of the global automobile industry are hard to predict with any degree of certainty. Argentina-based researchers Bianca Pacini (Universidad de San Andrés) and Luca Sartorio (Universidad de Buenos Aires) have focused on the employment and trade impact of increasing use of robotics in production processes[2]. Academic research to-date paints a mixed, even confusing, picture. Different studies have suggested that anywhere between 47% and 13% of existing jobs could be at risk from automation. A 2017 study by McKinsey Global Institute concluded that only 5% of existing occupations are entirely made up of activities that would be technically possible to automate.
What Pacini and Sartorio try and assess is the contention, put forward by various studies (among others by Citibank/Oxford University and by UNCTAD) that growing use of industrial robots in developed countries could replace jobs that were previously offshored to developing and emerging economies, which would erode the latter’s traditional wage-cost advantage. They choose to focus on the automotive industry in particular, since it has the highest concentration of robotics. However, their empirical study of the automotive industry is not conclusive. They say there is some evidence that countries with intense use of robotics in the auto industry may be reshoring, but that their study of the industry from 2006-2015 also showed that “the stock of industrial robots makes a significant contribution to bilateral trade under different econometric specifications”. As they put it, “robots may increase production volume, therefore actually intensifying complementary bilateral trade”.
From a different perspective – that of a components supplier – there is also uncertainty about how changes in the industry will play out. In a speech last year Richard Smallwood, president of Sumitomo Rubber North America, said it was still unclear whether AVs would mean a utopian or dystopian future for drivers, auto-makers, tyre manufacturers and tyre retailers. The one certainty, he believed was that “AVs will still need tyres”, although the existing manufacturing and distribution model would undergo significant changes. Smallwood cited a projection by research group IHS Markit to the effect that AV sales would begin by 2025, and that almost all vehicles will be autonomous sometime after 2050.
One of the big drivers, as he put it, would be safety: “AVs don’t text, don’t get sleepy, don’t drink or do drugs, follow the traffic laws…. AVs don’t need to be perfect, just better than us.” According to Smallwood, the average cost of owning a private car is US$8,698 a year, and for 95% of the time it is not used. The shift to AVs could deliver savings of US$1.3tn annually including US$488bn from accident prevention, US$645bn from increased productivity, and US$169bnb from fuel savings. Because of ride sharing, new car sales might fall by as much as 40%. Cars would become a more utilitarian product with dwindling brand preference, and tyres would also follow that path. He expected commercial vehicles to become completely automated very quickly, except for delivery vehicles where “somebody has to take the packages to the door”. The biggest obstacle to commercial AV introduction would be the trade unions, who would try to save delivery driver jobs.
[1] Briefing Paper ‘Foreign Direct Investment in Latin America and the Caribbean, 2017’
[2] ‘Offshoring or Reshoring: the automotive industry’ in ‘Robolution: the future of work in Latin American integration’ IDB, 2017.
