The three major industries in Mexico are automotive, aerospace, and medical device manufacturing. One of the reasons for auto companies to move to Mexico is its location, with its closeness to the United States and the possibility that its western ports allow OEM manufacturers and Tier 1 and Tier 2 suppliers to export goods to Asia, Australia, and New Zealand. Furthermore, the country is attractive because of its 46 Free Trade Agreements and desirable supply chain solutions. The new United States-Mexico-Canada Agreement (USCMCA), which comes into effect on July 1st, will bring both challenges and opportunities to car makers and their global supply chains, since it requires automakers to use 75% of North American made parts by 2023 to be imported duty free.
In Mexico the automotive sector generates 900,000 direct jobs and has accounted for 12% of all foreign direct investment. Of every 100 vehicles that are produced in the world, at least 4.2 are assembled in Mexico. The country is home to 20 manufacturing plants for light vehicles and new plants are being built. As has happened in many countries due to the COVID-19 pandemic, the Federal Government ordered the closure of various industries including the automotive sector. Millions of jobs were affected and Mexico’s GDP will also receive a significant blow since the sector is very significant to the economy.
According to Reuters, the Mexican economy experienced a record contraction of 17.3% in March based on official data from the country’s national statistics INEGI. The effects of the COVID-19 lockdown devastated economic activity, particularly in manufacturing. Auto production almost ground to a halt in April and the country’s main industry group has forecast that output in the sector could drop by nearly 1/3 in 2020. The government hopes the economy fares better in May, when authorities gradually allow sectors such as car making, mining, and construction to start up again. The president of the Mexican Auto-parts Association (INA) expects a 32% drop in the billing of parts and components. Fausto Cuevas, the director General of the Mexican Association of the Automotive Industry (AMIA), stated that the decline of 30% in production and 33% fall in exports would be the biggest drop in the history of the country’s auto sector.
According to the Guardian, the carbon footprint of making a car is immensely complex since all of the emissions throughout the supply chain from extraction of metals to production have to be accounted for. The EPA estimates that a typical passenger vehicle emits about 4.6 metric tons of carbon dioxide per year. It is estimated that the carbon footprint of the automotive industry is responsible for 9% of the emissions of GHG according to a recent Greenpeace report from September 2019.
Mexico has the opportunity to green the COVID-19 economic recovery of its auto industry. The investment alternatives should include projects that improve management and quality of public transportation (used by 40% of the population), increase infrastructure for mobility of people and cyclists among others.
In 2015, Mexico’s Secretary for the Environment, Juan José Guerra Abud, stated that the transportation sector was the main source for Green House Gas Emissions (GHG) followed by industry and electricity generation. He went on to recognize the efforts of the automotive industry to introduce electric vehicles to the Mexican market since this type of initiatives are part of the combined measures that can help the country achieve its commitments to reduce GHG. Some of the measure that could be adopted today to continue to work with the automotive industry in pursuing sustainability after the pandemic are the following:
Dynamic regulations to support innovation
The world economic forum mentions the need for new, cohesive and dynamic regulations that provide companies with the certainty and clarity they require to make future investments. In the case of the car industry, the crisis has massively hurt liquidity, supply, production and demand resulting in revenue dropping around the world. In many countries, the car industry is a key driver of GDP, as well as, a major employer and trouble in this sector leads to challenges for the wider economy. Aside from the short-term assistance to the sector, governments and companies will need to look for long term measures like encouraging innovation.
When companies that want to innovate and bring new products to market are faced with rigid and fragmented regulatory landscapes it leads to uncertainty and unpredictability and typically increases production costs. To simplify and update regulations around piloting and testing could be a way of helping auto makers. To realize the great opportunities of growth, as well as, to ensure that the positive effects benefit society and mitigate the risks, governments should look to proactively shape the future of mobility
Alternatives to combustion engines
When looking into the future of mobility some companies are evaluating how to adapt to the user of the future and be prepared to produce what the market needs. In the case of AUDI, combustion engines will still be necessary for long distances but in urban settings hybrid and full electric vehicles (EV) can be an alternative.
According to the IEA Report there is a strong correlation between the availability of charging infrastructure and the size of the EV fleet. The existence of a more extensive charging infrastructure will be required within cities as the use of EVs and other forms of electric mobility increases. In the case of Mexico according to a study by CMS the further deployment of EVs faces various challenges including: charging infrastructure, trip range, electricity grid capacity and price. In the case of charging infrastructure, although there has been an increase in the number of stations, the energy supply infrastructure is still focused on a few locations like Mexico City and Nuevo Leon. These challenges are shared by Mexican government entities and private EV and infrastructure developers so there is an opportunity to improve infrastructure and continue promoting the adoption of EVs by purchase incentives in the form of reduced prices and tax exemptions.
The IEA report also reinforces the role of consumer incentives for the replacement of old, inefficient vehicles by new more energy efficient ones as a way of sustaining production facilities. In addition to job retention this incentive schemes (improved financing, tax reductions) can enhance energy security through reduced oil consumption and if designed correctly can reduce air pollution and GHG.
The Bloomberg New Energy Finance (BNEF) estimated that until 2050 77% of the investments in energy production will be in renewable energy. It is crucial that governments and investors don’t see the pandemic as a reason to halt renewables but as a reason to accelerate the transition.
The role of public transport
According to the IEA, public transport allows efficient and affordable travel for all, and has been especially important during the COVID-19 crisis for transporting essential workers. Public transport systems, which employ 13 million globally, are under substantial stress because of COVID-19 (UITP, 2011). Public transport also plays an important role by ensuring equal access to employment and education and is an energy efficient means of transport. It provides important job creation opportunities: constructing new public transport lines can produce around 30% more jobs per dollar than investment in roads.
Unfortunately, the Mayan train project will run on fuel and not electricity according to a recent article published in El Universal. According to the information form the National Fund for Tourism Promotion (FONATUR) the cost benefit assessment resulted in the diesel train alternative having a lower equivalent annual cost that the electric version.
Sustainable Production Practices
Water is a required during the manufacturing process and it can be a scarce resource in many places. Some companies like AUDI are moving to be waste-water free by using a lagoon to capture rain water that will be used in the process instead of fresh water.
The use of clean energy is another way in which the impact of the production process can be addressed by aiming at becoming a CO2 neutral facility. This not only depends on the companies ambition and sustainability strategy but implies that a renewable-based infrastructure has to be available in the area where the industry operates with enough capacity to support the transition.
Gas that is used during the painting process can also be substituted by biogas. As Andreas Leh, President of AUDI Mexico, explained in an interview to mexicobusiness.com biogas is not available in Puebla. This requires that the company explore a solution with the local government to build facilities for biogas production in the area. The project could be a sustainable opportunity for farmers to collaborate in the biogas production that would not only supply the painting portion but could also be used to power the 260 buses that travel daily to bring workers to the plant.
Activity Rating: ** Standing Still
Although certain incentives exist for the use of EVs and local governments are working with auto makers to find sustainable solutions, the government should be more aggressive in pursuing renewables adoption policies and electric alternatives for public transportation.
The creation of a charging infrastructure is critical for the adoption of EVs in the country as well as more support to promote the adoption if this type pf vehicles by consumers.
Unfortunately, the decisions to pursue investments in fossil fuels like the refinery in dos bocas or the dismissal of the electric train to support tourism in the Yucatan peninsula send the opposite message when it comes to the promotion of renewable energy practices.
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This Post was submitted by Climate Scorecard Mexico Country Manager Patricia Prat