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Customer LoginsWhy does South America seek to extend import quotas with Mexico?
Brazil and Argentina are holding conversations with Mexico to renew the quota system that was implemented in 2012. The original agreement created quotas for three years and temporarily replaced the free trade established between Mexico and the Mercosul countries in 2002. The quotas expire on March 18, and officials have flown South and North with different expectations.
Mexico understands that the free trade agreement should resume because that is what was signed three years ago. Brazil and Argentina are desperately seeking for quotas renewal. This position shows what is behind each country's policies for the automotive industry. While Mexico has attracted investments to become an export hub, Brazil has attracted investments promising internal demand and charging higher taxes on imported cars. Argentina has scared several OEMs with its political and economic instability.
In 2014, the year when Brazil lost to Mexico a position in the global production ranking, Brazil exported only 20% of its total output. The percentage for Argentina was much higher, at 64%. On the other hand, Mexico sold abroad 84% of all light vehicles it built last year.
The following table illustrates this scenario: it shows the five vehicles with the highest production volumes in Brazil in 2014. Without any exception, they were basically sold in Brazil. Only two of them - the Volkswagen Gol and the Fiat Strada - were exported to Mexico. There, the Fiat pickup is sold as RAM 700.
More striking is the example of the Hyundai HB20. After years of consumer research, Hyundai came up with the HB20 exclusively for the Brazilian market, where it has been a real success. While traditional OEMs go back to two shifts and struggle with overcapacity, Hyundai's Piracicaba plant works in three shifts to make the HB20 in the hatchback and sedan bodytypes.
All the five vehicles are the fruit of Brazilian engineering, which shows the country has technical capabilities. So why cannot Brazil be competitive abroad? There are several reasons, in summary:
- High cost of production: labor is cheaper in Mexico
Brazilian real instability: the currency has depreciated 30% in the last 12 months
- Lack of infrastructure: there are no trains to take the vehicles from plants to ports, for example
- Old technologies: only last year ABS and airbags became mandatory, and infotainment systems are rare
- Different regulations: some OEMs do not release fuel consumption because the old engines they use are not fuel efficient
Without real chances to become a net exporter to any country outside of the Mercosul, Brazil will fiercely negotiate with Mexico to extend the quotas system. Regardless of the result, Brazil has a reason to celebrate: its policy made the dealer network have locally built products that were previously imported from Mexico, such as the Ford Fiesta hatchback, the Volkswagen Jetta and the Nissan March.
Augusto Amorim is senior analyst, South American light vehicle production forecast, IHS Automotive
Posted 27 February 2015