New Developments in Conducting Business in Mexico and the Impacts on Automotive Manufacturers

0
63


NAFTA/Mexico Update

The global automotive industry is experiencing one of the most significant trade shifts in over two decades, specifically the new developments in conducting business in Mexico, including international trade and product safety.

In fall 2018, the United States, Canada, and Mexico reached an agreement to revise the 25-year-old North American Free Trade Agreement (NAFTA). The new agreement, now named the United States-Mexico-Canada Agreement (USMCA), is not expected to take effect until 2020 (at the earliest) as it needs to make its way through the legislative process in each country.

As it stands now, USMCA is expected to have a profound impact on the automotive industry, particularly due to a much stricter Rule of Origin – which says that 75 percent of a car or truck’s components must be manufactured in North America, an appreciable uptick from the current 62.5 percent under NAFTA.

Rule of Origin: As per the former Mexican Minister of Economy, Ildefonso Guajardo Villarreal, 70 percent of current production in Mexico already complies with the USMCA. It is expected that due to the USMCA requirements, Mexico will receive greater investments as a result of production transferring from China, Korea, Japan, and other countries. Regardless of their placement in the North American automotive industry food chain, in the short term, all players need to evaluate how the USMCA will impact their current activities, possibly as early as 2020, and take concrete actions based on same; in the medium term, companies operating in the NAFTA/USMCA region need to be on the lookout for USMCA´s intended “renegotiation” by the now Democrat-controlled U.S. Congress; and, in the long term, manufacturers should expect that Mexico’s export orientation and openness will remain unmodified.

Ultimately, the USMCA will require the supplier-to-OEM relationship to be much stronger and closer than in the original NAFTA. Companies that understand and prepare for the new requirements in advance will find that they have a strategic advantage over companies that are not proactive in preparing for the new marketplace rules.

Market Intelligence

Cost Impact of USMCA: In a survey of 100 U.S.-based auto executives conducted by Propeller Insights on behalf of LevaData in December 2018, 63 percent of automotive executives believed that production costs would increase due to USMCA. Although survey respondents seemed to believe there would be cost issues in the short term, 78 percent of automotive executives felt that the changes required by USMCA would have a positive impact on their company in the long term. Fifty-three percent of those surveyed felt USMCA would ultimately increase North American vehicle manufacturing and provide a net improvement for workers and consumers.

The survey also found that auto executives are very aware they will need to find ways to save money in the supply chain to decrease costs: 36 percent plan to renegotiate part supply deals to pass costs on to suppliers and 35 percent will look for cost savings in the production process. This comes because the proposed USMCA document requires automakers to manufacture 40 percent of their motor vehicles in facilities where assembly workers earn at least $16 an hour. Though this is largely not a problem for U.S. and Canadian production facilities, where workers already make more than that on average, it is problematic for Mexico, where workers often make less, though up to 15 percent can be credited through expenditures in technology and assembly of specific parts (engine, transmission and advanced batteries). Making matters trickier, many U.S. automakers recently moved some of their production to Mexico for that very reason – the work was cheaper than in the United States or Canada.

New Leadership in Mexico: NAFTA and USMCA updates are not the only developments those in the auto industry should be thinking about when it comes to trade with Mexico. Former Mexico City Mayor Andrés Manuel López Obrador began his six-year term as president of Mexico in December 2018. U.S. and other foreign companies operating in the country should be aware of changes his presidency might bring. If the United States withdraws from NAFTA, we think that Mexico will strengthen its internal export promotion programs so that the “near-shore” advantage, and manufacturing experience in complex (i.e., aerospace and motor vehicles) chains of production, is not lost. In particular, we expect continued strong support for low tariffs on the Mexican side and continued support for their export-oriented programs (commonly referred to as maquiladora), which give advantages to U.S. companies that operate near the U.S.-Mexico border and bring in goods from the United States for further processing in their facilities.

Recent Legal Developments

Revisions to Product Safety Regulations in Mexico: Mexico has revamped its product safety regulatory framework to bring aspects into conformance with the United States. Compliance with product safety requirements in Mexico used to be relatively relaxed, but is now more stringent. For example, it is now necessary to notify the Mexican regulatory agency when a company identifies a risk.

Along with recent changes to product safety and corruption risks, a few years ago class actions were permitted in Mexico and are becoming more relevant in this new environment. Companies should also be aware of the mandatory recall requirements enforced by the Mexican consumer protection agency (PROFECO) and should get their compliance programs up to speed. In what was once a voluntary process, PROFECO can remove or require repair for defective products, open investigations regarding product safety concerns, and impose relevant sanctions on manufacturing companies in Mexico that are not complying with product safety standards or that could otherwise harm the life, safety, or health of consumers.

Navigating the Road Ahead

Foley’s 2019 Automotive Industry Conference featured a panel of automotive executives and professionals from Mexico City who shared how they are Navigating the Road Ahead regarding the new developments in conducting business in Mexico, specifically international trade and product safety concerns. Bernardo Altamirano-Rodríguez, CEO of Mexico’s Better Business Bureau, noted that there are three basic restraints to conducting business in Mexico:

  1. Non-U.S. competitors that are conducting business in Mexico do not need to comply with the Foreign Corrupt Practices Act, which may put U.S. competitors at a disadvantage in Mexico.  While most countries have anti-corruption laws, U.S. enforcement of its laws is by far the most stringent.
  2. The USMCA’s new framework for government procurement.
  3. Political restrictions resulting from an ethical transformation away from corruption, which require a company to now construct a public relations narrative with clear goals, objectives, and societal benefits.

For an overview of the key insights shared throughout the conference, please read our blog article. For an in-depth analysis of The Top Legal Issues Facing the Automotive Industry in 2019, Foley’s Automotive Industry Team has prepared a comprehensive report examining what the legal landscape is likely to look like in 2019 and beyond.

Foley’s new Automotive MarketTrends newsletter focuses on different aspects of the automotive sector and highlights key trends in the industry on a quarterly basis.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney.
This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary.
The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites.
In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here