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Mexico’s $26B auto boom sags

Bloomberg News

The great Mexican auto boom, fueled by an almost $26 billion investment rush from foreign carmakers, is cooling off — and weakening a pillar of Latin America’s second-largest economy.

Auto production has fallen four straight months, the longest streak since 2009, led by drops at Fiat Chrysler Automobiles NV, Mazda Motor Corp. and Volkswagen AG. Export-oriented factories are selling fewer vehicles overseas as shipments to the U.S. stagnate and sales to the rest of the world tumble.

Cheaper gasoline prices have undercut demand for the small cars Mexico specializes in, especially in the U.S., its main foreign market. That’s slowing down the nation’s marquee manufacturing industry since Mexico exports about four out of every five vehicles it makes. The decline also marks at least a temporary hiatus in Mexico’s automotive ascent after a 50 percent jump in vehicle output in the five years through 2015.

“It’s a yellow alert for the Mexican economy because auto exports represent about a quarter of total exports,” said Carlos Capistran, the chief Mexico economist at Bank of America Corp. That’s one reason he’s forecasting an economic expansion of 2.3 percent this year, lower than the 2.5 percent median of 26 analyst estimates compiled by Bloomberg.

“The fall is due to lessened demand in the U.S. and Canadian markets, where we export half of our production,” Mazda spokesman David Hernandez said in an emailed response to questions. “We have a flexible production system that allows us to adapt to the market’s ups and downs with relative ease.”

Volkswagen’s current production is in line with plans, spokesman Rene Saldana said in an email. Fiat Chrysler didn’t respond to requests for comment.

U.S. auto sales slowed in May, adding to concerns that automakers may be unable to maintain last year’s record sales pace. That’s weighing on Mexico since half of all vehicles produced in the Latin American country are typically sold in the U.S. and sometimes more.

Mexico is particularly vulnerable because many of its factories make small cars, which can be built at a profit due to labor costs that are about a fifth of the U.S. level. With oil prices at half their level of two years ago, cheaper gasoline is prompting many buyers to opt for larger models.

“In the past, Mexico produced a big number of light trucks and now all of the investments have been for subcompact and compact cars,” said Guido Vildozo, an analyst at IHS Automotive. “Cheap gasoline means the consumer is going to go for a larger car.”

While domestic car sales in Mexico have been setting records, they’re not big enough to make up for the export shortfall. Automakers sold 1.35 million cars and light trucks in Mexico last year.

To be sure, the slowdown may prove temporary as new plants start production. Economy Minister Ildefonso Guajardo has said Mexico’s auto output will rise to 5 million by 2020. Output last year was a record 3.4 million.

The world’s automakers are pouring money into Mexican factories. Mexico has snared $25.8 billion in announced investments by global automakers since the beginning of 2010, according to the Center for Automotive Research in Ann Arbor.

Kia Motors Corp. opened a $1 billion plant last month near Monterrey, Mexico, to build compact sedans and other models. A joint venture of Daimler AG and Nissan Motor Co. are working on a factory that will also assemble compact vehicles, while Toyota Motor Corp. will make Corollas at an upcoming facility.

Some factories are for luxury models. Volkswagen is poised to bring an Audi plant online to build the Q5 sport-utility vehicle. BMW AG won’t be far behind with its own factory.

Those plants will fuel additional production and export gains in the long term, said Marco Oviedo, chief Mexico economist at Barclays Plc. For now, the auto industry’s role as a growth engine is diminishing.

“The auto sales numbers in the U.S. may have peaked last year,” he said. “Now companies have to make adjustments to production.”