Drive into the Future: Navigating Change, Finding Opportunity

Few industries in today’s world are as established and entrenched as the automotive sector. The business of getting people and goods from one place to another has been an economic staple since the days of Henry Ford.

With seismic shifts in every aspect of the industry, however, this traditional sector is rapidly transforming, especially in Latin America. In the words of a February article from Reuters in Mexico City: “The shocks of the pandemic and two years of supply chain chaos are colliding with a once-in-a-century shift of the industry’s fundamental technology as combustion vehicles give way to electric ones.”

In Mexico, for instance, “nearshoring” trends are forecast to spur a surge in U.S. investment and Mexican exports. In Colombia, incentives to decrease urban pollution and in regulatory standards like Euro VI are placing heightened focus on sustainability and the shift from fossil fuel-powered vehicles to EVs. And throughout the region, China has been a growing presence at every step of the value chain, from manufacturing and materials to distribution and dealerships.

In short, change is the only constant today in Latin America’s automotive sector. If your business is vehicle-intensive, what changes will impact your operations? If you’re involved in the industry, what trends are shaping competition and the supply chain, and where do opportunities lie for investments, partnerships, and innovation? Read on for some of the latest developments.

Transformative change #1: Where and how vehicles are made

With shortages, delays, rising costs, higher prices, unsatisfied customers, and unfilled demand over the past few years, we’ve seen all too well the downsides of far-flung supply chains.

Companies continue to adjust and grapple with the challenges. At the beginning of 2021, Ford restructured its South American operations, shutting down production in Brazil and instead sourcing vehicles from Argentina, Uruguay, and other regional markets. In 2022, nearly a third of car manufacturers ranked lack of available shipping capacity as their most pressing logistics challenge.

Yet supply chain storm clouds may have created a silver lining—namely, a move to bring factories and parts closer to home. At the end of the year, a headline in Fortune declared: “Years of global supply chain chaos could mean a nearshoring jackpot for the Americas in 2023.”

Here are just a few examples in Latin America’s automotive sector:

German manufacturer Mahle is expanding its sizable Mexican presence with a plant to produce heat exchangers—a highly in-demand product for both internal combustion and electric vehicles. Also in Mexico, a new Metalsa plant in Guanajuato will be producing truck chassis and a new APTIV plant in Coahuila will be producing wiring harnesses, targeting customers from Toyota to Tesla.

Electronics are another area to watch. To meet the demand for advanced electronic components, U.S. manufacturer Flex is building a new state-of-the-art facility in Jalisco, with an eye toward electric and autonomous vehicles. And in the critical area of semiconductors, Mexico’s ambassador to the United States and Arizona State University have forged an alliance to increase North American production.

In the broader parts and components universe, companies with a LATAM presence are meeting the need for:

  • Brakes, driven by the restoration of the Brazilian economy, strong performance in the SUV sector, and new vehicle and road safety regulations
  • Composite materials to reduce overall vehicle weight and increase fuel efficiency
  • Tires, especially with Bridgestone’s expansion of its Costa Rica plant and steady growth forecast for the Latin American/Caribbean market overall

Meanwhile, carmakers themselves have been investing in technology to mitigate risk and maintain efficiency amid supply chain disruption. “Industry 4.0” initiatives range from Nissan’s Digital Acceleration Project in Mexico—using IoT and AI in areas such as engineering, maintenance, and quality and plant control—to Renault Curitiba’s RFID-enabled, end-to-end supply chain, which has significantly reduced shipping times and boosted on-time deliveries.

Transformative change #2: Who makes the vehicles

As Audi restarts production in Brazil, it joins a bevy of automakers with a significant Latin American presence: multinationals such as Toyota, GM, Nissan, and Volkswagen, and local companies such as Brazil’s Stallantis and Chery.

Meanwhile, brand names from the other side of the world are swiftly joining this mix: Great Wall (which purchased a former Daimler plant in Brazil), SWM, Soueast, DFSK, Shineray, and BYD, which aims to launch retail sales through  stores and dealers in Mexico. Market intelligence firm LMC Automotive estimates 41 China-sourced models sold in Argentina and 91 in Chile. In Ecuador, Chinese-made vehicles are estimated to account for nearly two out of every five sales.

As with sectors from mining to telecommunications to simulation technology, Asia’s superpower is finding opportunity across Latin America’s automotive industry. Chinese brand Changan, for example, is entering the Mexican market just as GM models Chevrolet Equinox, Spark, and Beat are being discontinued. The MG ZS, a sports utility vehicle (SUV) by Chinese manufacturer SAIC, is among Chile’s best-selling light vehicles.

One reason for the popularity of Chinese-made vehicles is price: a Volkswagen T-Cross small SUV is nearly one-third more expensive than the similar MG ZS, for example. Some Latin American car owners also cite the fuel efficiency and economical spare parts of Chinese brands.

Carmakers—both entrenched manufacturers and newcomers—have been adapting to these consumer preferences. With the Dodge Journey and the Chevrolet Captiva and Groove, both Dodge and GM are rebranding vehicles from the Chinese market for Latin America.

Transformative change #3: How vehicles are powered

From hybrid and electric BMWs and Minis to BYD electric compacts, SUVs, and from sedans to Renault Megane and Kangoo models, EVs are becoming more prevalent on Latin America’s roads, particularly in Brazil, Argentina, Colombia, and Mexico.

Companies are finding opportunity in the shift, from infrastructure to the vehicles themselves. Shell is rolling out EV chargers throughout its service station network in Argentina, facilities like GM complexes in Coahuila, Mexico and Bogota are being converted to produce EVs, and companies like Dutch truck manufacturer DAF are upgrading to meet Euro VI vehicle emissions standards. Mexico is in talks to build several manufacturing hubs for electric vehicles across the country.

Much of this activity is also happening in Brazil, especially as President Luiz Inacio Lula da Silva makes clean energy an economic priority for the nation. Brazilian automaker Stellantis, which has plants across Brazil and Argentina and an industrial partnership in Uruguay, is investing in the development of ethanol hybrid cars. Other investments and announcements have included:

  • BYD’s planned acquisition of Ford’s Camacari plant for producing electric cars
  • US auto supplier BorgWarner’s Sao Paulo factory for EV batteries
  • A partnership between Rockwell Automation and Bravo Motor Company to manufacture lithium batteries and EVs in the Minas Gerais province

Transformative change #4: How vehicles are purchased

Concurrent with the rollout of Evs is a growing need for second-hand fossil fuel vehicles. “Lucrative growth” is predicted for Latin America’s used car market, and more and more buyers are connecting with vehicles online via channels like Brazilian startup InstaCarro and Argentine platforms TuCarro, DeMotores, and Autofoco.

How can a buyer ensure a good deal, rather than suffers a scam?, a Mexican unicorn that is one of Latin America’s fastest-growing technology companies, is built with such assurance in mind. What about repairs and parts after the purchase? Platforms like LEPO and Autominuto can help car owners find products and services nearby.

Online auto shopping may be here to stay—and a wave of the future. Approximately 1 out of 5 (20%) of vehicle purchasers today are comfortable buying vehicles through a completely digital process, according to research by Mercado Libre. And Rajat Mahajan with Deloitte India cited “rise in digital sales” among its top trends for the automotive industry in 2023.

Transformative change #5: New concepts of mobility and ownership

Mahajan also highlighted “alternate mobility and ownership” as something to watch in 2023. This trend is particularly relevant in Latin America, where access to financing and the high costs of purchasing and maintaining a vehicle are common barriers to car ownership.

We spotlighted alternative mobility and ownership solutions, including vehicle “subscriptions” and fleet management as a service, in previous blogs. It’s an area to watch as Latin America’s transportation sector evolves. In ride sharing, for example, a partnership appears to be developing between Chinese auto giant BYD, ride-hailing app Didi Chuxing, and Mexican EV provider VEMO. Meanwhile in Colombia, customers are leaning into two-wheeled transportation. The nation is second only to Brazil in terms of LATAM motorcycle sales, with more motorcycles reportedly sold here than in the entire United States market.

Ready to get started?

Specialized consultants and advisors can help you explore business opportunities in Latin America’s dynamic automotive sector. For more information, contact us.