Mexico will overtake Canada in annual passenger vehicle sales by 2010, a situation one economist says could make it more difficult for Canada to lure future investments from automakers, including the construction of new assembly plants and manufacturing facilities.

In contrast to mature markets in the United States and Canada, demand for new vehicles in Mexico has been growing steadily and has doubled since 1990, according to a report yesterday by a Bank of Nova Scotia economist.

The report said Mexico, with a population exceeding 100 million, is expected to post car sales of more than one million for the first time ever in 2004. By comparison, Canadian auto sales are on track to close the year at between 1.51 million to 1.55 million units.

Mexico’s rapidly growing vehicle market, particularly for small cars, comes as the country benefits from improved economic conditions and as automakers roll out more vehicle selection, better incentives and financing plans.

At the same time, Mexico’s motor-vehicle-manufacturing sector has made strong gains in quality and productivity as a result of investments that have been made by automakers and suppliers — totalling roughly US$5-billion — since early 2003, the report said.

Carlos Gomes, a senior economist at Scotia Bank, said the combined trends make a more powerful argument for automakers to invest in Mexico over Canada, although he noted that Canadian automotive facilities are still among the most productive in North America.

According to the report, productivity at Mexican assembly plants has improved by 21% over three years, more than triple the gains made in Canada and the United States.