A THREE-YEAR campaign to raise awareness of the huge business potential for the UK's small and medium sized companies has been launched by British Trade International. The automotive sector is one of the key sectors for the first year of the campaign, alongside energy, engineering, electronics and the oil and gas sectors.

Richard Caborn, the UK's minister for trade, said that the UK was already the second largest investor in Mexico after the US and that Mexico was the UK's fastest growing market in Latin America.

"This growth is set to increase much faster in the near future," he said. The campaign's key aims are to raise awareness of the country's potential among British investors and exporters, support outward investment into Mexico, encourage the use of digital technology in commerce and develop regional links.

"There are a number of UK companies that are already reaping the benefits from doing business in Mexico. Yet, according to research we commissioned amongst 300 UK small-medium sized businesses, a staggering 74 per cent of respondents do not consider Mexico for export/investment purposes," said Caborn.

It was against that background that the trade mission visited Mexico. The trip was timed to coincide with the Inauto show (see Ian Wagstaff's report on page 3) and took in visits to the Volkswagen factory in Puebla and Nissan's plant in Aguascalientes among others.

The Mexican auto industry is mature - it is the world's 11th largest producer with total output of 1.45 million vehicles in 1998 and forecast to rise to 1.58 million this year. The domestic supplier base has been growing at around seven per cent a year since 1994, mainly as the result of Mexico joining NAFTA, the North American Free Trade Agreement which also encompasses Canada. A total of $6.98 billion has been invested in the auto parts industry in those six year - from $869 million in 1994 to $1.49 billion last year. Mexico is the world's tenth largest trading nation with total trade forecast to be $280 billion this year.

There is a total of 17 assembly/production plants in the country, DaimlerChrysler and General Motors have four each; Ford and Nissan three each, and Volkswagen, BMW and Honda one each.

Springboard to the US

There was one clear message from the trade mission: Mexico-based automakers want to reduce their dependence on the US and Canadian markets by taking full advantage of the EU trade agreement.

The agreement, expected to come into force on July 1, will see the removal of all trade tariffs by 2007. Tariffs on exports of cars and vans will be cut from 20 per cent to 3.3 per cent from July and eliminated by 2003.

"The agreement is justice being done to the non-US automakers and puts us on the same competitive level as companies like GM and DaimlerChrysler," Thomas Karig, vice president for government affairs, at VW in Puebla, told me.

"Our exports to Europe will become more competitive and the agreement will reduce our dependence on the North American market." VW's Puebla plant is the sole source of the new Beetle.

The trade agreement is also expected to help European companies wanting to do business in the Americas, said Jose Illanes, automotive director at Bancomext, the Mexican bank for foreign trade.

"It's an opportunity for European players to reach the American market - Mexico will be a springboard for them." This echoes views expressed by Mendel Goldstein, the EU's chief negotiator on the trade pact.

Illanes envisages Mexico becoming a gateway not just to North America but also to Mercosur and Caribbean countries. European exporters have seen their share of the Mexican market drop from more than 10 per cent in 1993 - the year before Mexico signed up to NAFTA - to six per cent in 1998.

He said that Mexican industry had "reached a level of manufacturing that is very good, but what we lack is product knowledge and technology."By 2004 the Mexican market will be completely open to North America and by 2007 to Europe. We could have a huge number of imported vehicles, so Mexican companies will need to expand abroad.

"Britain's procedure and industrial discipline can help us develop a more competitive Mexican industry. Labour costs make Mexico very attractive - it might be unfair, but it is a reality with wage costs at $4-$5 an hour. Mexican workers can be very flexible according to production needs and we can be competitive at far lower production levels.

Individual company unions, no nationalised unions like the UAW." Under the terms of the agreement, EU exports to Mexico will be granted similar treatment to that enjoyed by the US and Canada. The EU will liberalise 82 per cent of its trade with Mexico immediately, while remaining tariffs will be eliminated by 2003. More than 50 per cent of EU exports will enter Mexico tariff-free, as soon as the accord is in place.

The agreement will also make it easier for European manufacturers to set up operations in Mexico. Companies that include a specified amount of Mexican labour and parts in their products will be able to export free of duty to the US and Canada, back to Europe and to other Latin American countries that have trade agreements with Mexico.

EU trade commissioner Pascal Lamy described the accord as a "win-win agreement - good for both the EU and for Mexico because it will allow us both to compete effectively in each other's markets and substantially improve our bilateral trading relationship across the board.

Mexico's domestic market

Being so close to North America is both an advantage and disadvantage. Great for exports but suppressing the domestic used car market since two and three year old cars find their way south, although the trade is illegal.There are other problems - fairly common to those used to dealing with emerging markets. These relate largely to income and financing, lawyer John Rennie Rogers, a 40-year Mexican veteran, told me. "Even six or 12 months of zero per cent finance is not enough for people to buy a car," he said. "And then there's the political consideration: if you can afford to have a car, you can afford to pay taxes, so car owners attract extra taxes including new car purchase tax and use of vehicle tax."

Even so, by next year, the sale of domestic vehicles is expected to be more than 500,000 units (Mexico has a population close to 100 million), an increase of 80 per cent over the 1997 figure. The biggest increase is expected to be among luxury and sport utility vehicles.

There are more than 500 component companies established in Mexico - Delphi Automotive Systems is the largest. Other multinationals include Lear, Johnson Controls, TRW, UT Automotive, Essex and Trico.

More than one-third of the component companies operating in Mexico are large organisations with more than 250 employees; 31 per cent are small, employing between 16 and 100 staff and a further 27 per cent are identified as medium sized (101-250 employees).

The origin of the technology is dominated by the US; about 12 per cent comes from Germany and only three per cent from the UK - a position that British Trade International feels could be improved upon.

Braking systems, electrical and transmission units, engine components, moulded plastic sections, stamped parts, steering assemblies and trims are all identified as opportunities for joint ventures, technology transfer and distribution agreements. Significant demand is also reported for raw materials used in the manufacture of spare parts and components. Key areas of opportunity where the UK does have expertise includes high-tech componentry, and the mainstream application of motor sport technology.