German Business Network (GBN)

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1 German Business Network (GBN) Webcast Mexico: Demanding challenges, big opportunities NAFTA, US Tax Reform, and more March 6, 2018

2 German Business Network (GBN) Mario Arregoytia Partner Leader German Business Center (GBC) Mexico Background Phone: Mail: Mario has been with EY for almost 30 years and worked as an Audit Partner since 2002 He is Leader of the German Business Center (GBC) Mexico and Central America Mining & Metals Leader Mario is in charge of the audit of one of the most representative German companies, Siemens Marcellus A. van Eck Executive Director Coordinator German Business Center (GBC) Mexico Background Phone: Mobile: or Mail: Marcellus is an experienced Certified Public Accountant within EY s International Audit and Advisory Services Practice in Mexico-City Marcellus is a vital and reliable source of information to support EY s efforts in Emerging Markets Page 2

3 Your hosts today Dirk Egbers Partner Global Leader of the German Business Network (GBN) Phone: Mobile: Mail: Marcellus A. van Eck Executive Director Coordinator German Business Center (GBC) Mexico Phone: Mobile: or Mail: Maria T Gonzalez Suarez Excecutive Director Indirect Tax Phone: Mail: teresa.gonzalez@mx.ey.com Mariana Covarrubias Uriegas Partner International Tax Services Phone: Mobile: Mail: mariana.covarrubias@mx.ey.com Raul Meyer Partner Advisory Phone: Mobile: Mail: raul.meyer@mx.ey.com Page 3

4 Webcast: Mexico Demanding challenges, big opportunities Agenda I. II. III. IV. Country Profile Marcellus van Eck NAFTA negotiations Maria T Gonzalez Suarez Effects of the US Tax Reform Mariana Covarrubias Uriegas Automotive Industry in Mexico Dr. Raul Meyer V. Q & A/Wrap-Up Page 4

5 I. Country Profile Page 5

6 Country Profile Country Overview When it comes to doing business, Mexico continues to be a very attractive country for foreign investors. Low wages and improved logistics have been part of the draw for OEMs to invest in the country, but what has really tipped the scales is Mexico s unrivaled trade relationships. Mexico currently has a network of 12 FTAs with 46 countries (plus other trade deals in Latin America and Asia Pacific, according to the government s trade office). The pacts give exporters from Mexico duty-free access to markets that contain 60% of the world s economic output. Relevant Information Area: 1,972,550 km 2 Population: 127,540,423 GDP Per Capita (US$): 9,040 PPP (US$): 17,274 Source(s): Oxford Economics, BMI Research, OEA, World Bank Page 6

7 Country Profile Macroeconomic Overview 3,00% 2,50% 2,00% 1,50% 1,00% 0,50% Expected GDP (%) Based on Purchasing-power-parity valuation Interest rate and inflation forecast Interest Rate, % Inflation, % 7,1 7,4 6,3 5,8 4,6 3,5 3,3 6,0 4,4 4,0 2,7 2,8 3,5 3,3 0,00% Mexico 2,20% 1,90% 2,71% 2,68% 2,74% 2,70% *Numbers forecasted based on previous years data Although the national GDP is expected to grow, the increase on inflation will make it hard for it to reach the government s target The average inflation reached 6.0% in 2017 and is expected to go down to 4.4% in 2018 Consumer spending is expected to keep growing, even though higher inflation has eroded real wage growth Source(s): Oxford Economics f 2018f 2019f 2020f *Oxford Economics, January 2018 Inflation is expected to enter its target range in Q4 2018, averaging 4.4% for this year The inflation overshoot in 2017 was driven by the liberalization of domestic fuel prices, depreciation of peso, among other economic aspects The average inflation reached 6.0% in 2017 and is expected to go down to 4.4% in 2018 In February Banco de Mexico increased the interest rate to 7.5% for 2018 Page 7

8 Country Profile Macroeconomic Overview Depreciation of the peso Appreciation of the peso 21,1 19,2 17,8 3,6 4,0 5,1 5,3 4,2 3,4 4,1 3,8 4,0 2,7 2,8 3,5 3,3 3,1 6,04,4 1,1 2,1 5,7 4,3 0,1 0,2 1,1 0,0-1,5-3,0-3,8-2,7-6,5 Inflation y-y% Peso Appreciation /Depreciation Forecasts Despite the strong depreciation following Donald Trump s threats to end NAFTA, the Mexican Peso staged a strong rebound the last months of 2017 Source(s): Oxford Economics Private consumption is expected to keep driving growth, even though it might lose its momentum due to the effect of the tight monetary and fiscal policy. In 2017 the country had a 1.2% contraction in investment due to traderelated uncertainty and the government s austerity drive. Oxford Economics expects a 1.6% recovery in 2018 and 2.8% in Page 8

9 Country Profile Investment Climate Investment climate FDI inflows per sector (Jan-Sept/17) By 2050, Mexico is still projected to become the world s seventh largest economy. Moody s has already affirmed Mexico s sovereign rating to A3, with a negative outlook. Mexico received $21,754.9 million USD of FDI between January and September 2017; this represents a 10% increase y-o-y New investments represented 32.27% of the total FDI FDI to the Mexico will most likely be affected by uncertainties over the direction of economic policymaking in the United States In 2017, 47.8% of the FDI came from United States, 12.1% from Spain, 7.7% from Germany, and 32.4% from the rest of the countries Mining of metal ores; 5% Other services; 10,00% Commerce; 7% Transportation and storage; 11% Financial Services; 11% Construction; 12% Manufacturing, 57% According to UNCTAD, Mexico is the 9 th most attractive country for foreign investors Source(s): Secretaria de Economia Page 9

10 Country Profile Ease of Doing Business Ease of doing business ranking (2018) Ranking of Mexico on ease of doing business topics (2018) Colombia Peru Resolving insolvency Enforcing contracts Trading across borders Mexico Paying taxes 115 Regional average (Latin America & Caribbean) India ,76 Protecting investors Getting credit Registering property Argentina Brazil Getting electricity 92 Dealing with construction 87 Starting a business Mexico ranks above the Regional average but still has a lot of room for improvement in most of the areas evaluated Source(s): Ease of Doing Business 2018 Mexico is ranked 49 out of 189 countries in terms of the ease of doing business surveyed by the World Bank. This is a decrease over its 2017 ranking (#47) but still higher than its regional average and other developing markets. Infrastructure (e.g. access to electricity) and administration (e.g. registering property and taxes) are areas in which Mexico needs the most improvement. Page 10

11 II. NAFTA negotiations Page 11

12 NAFTA negotiations Negotiations Timeline The sixth round of NAFTA negotiations between the United States, Canada, and Mexico began in January 2018 in Montreal, Canada March The deadline for the negotiations has changed from 2017 to March 2018 due to the fact that there was little progress during the past 6 negotiation rounds There has been progress on the following key topics: Anti-corruption Intellectual property Unsolved topics: Rules of origin Labor Rights Sunset Clause Source(s): El Financiero, El Economista, Forbes Page 12

13 NAFTA negotiations What would be the consequences for the US? President Trump has to consider several factors before making the decision of leaving NAFTA Trump has threatened to impose a 35% tariff on imported goods from Mexico. Negative impact on American firms Such tariff would hurt American firms which manufacture products and parts in Mexico and ship them back to the United Stated. The automotive sales impact would be 450,000 units in the US. Abandoning NAFTA would return Mexico-US trade relations to World Trade Organisation (WTO) rules. This would mean that the exports would be taxed according to the most favoured nation (MFN) tariffs, which would be higher for the US. Decrease of Republican support 14.7% of US oil exports go to Mexico. Mexico is the third largest importer of American corn. Most of the Southern States form part of Trump s Republican base and it would have a negative effect if the corn and oil sectors were affected Repercussions on the Automotive Industry Increases in tariffs Mexico is America's second largest market for exported goods. A 7.5% tariff would have a negative effect on the sales of American products. The Auto Parts Industry in United States could potentially lose around 50,000 jobs The $10 billion annual savings for the auto industry in North America would be lost Source(s): El Financiero, Bloomberg, Forbes, Automotive World Page 13

14 NAFTA negotiations Impact on US vehicles prices Price impact of a 20% border adjustment-tax (Average dollar amount needed to offset tax hike per vehicle brand) Tesla $0 Subaru $3,656 Ford $282 BMW $3,725 General Motors $995 Mercedes $4,211 Honda $1,312 Mazda $5,156 Fiat Chrysler $1,672 Mitsubishi $5,938 Nissan $2,298 Volkswagen $6,779 Toyota $2,651 Geely (Volvo) $7,643 Hyundai/Kia $2,704 Source: Baum & Associates Tata (Jaguar Land Rover) Average vehicle price increase $17,204 Tariff increases will mostly affect customers as they will face higher prices. As an immediate response to a border adjustment tax, the U.S. light vehicle prices would increase around 5.6% The current U.S. average transaction price for new vehicles is $34,968; increases are estimated at $1,970. U.S. sales were 17.5 million vehicles in 2016; the light vehicle price will increase the cost for consumers in $34.6 billion. The Border Adjustment Tax was not included in the new tax reforms. Source(s): Bloomberg, Auto News, Center for Automotive Research (CAR) Page 14

15 NAFTA negotiations Risks around the elections Rather than accelerating the NAFTA negotiations it seems that the political calendar is having the opposite effect. None of the three governments want to close a negotiation that might have an unpopular reaction among their voters. June & October Ontario & Quebec s provincial elections Political Uncertainty The latest polls show a tight three-way race for the presidency. November US legislative elections July Mexico s presidential elections Hard-left candidate Andrés Manuel López Obrador is leading the race with 34% of voting intention, followed by PAN s leader Ricardo Anaya (27%) and the governing party s (PRI) former finance minister José Antonio Meade (18%). An AMLO presidency will likely break with Peña Nieto s austerity but is unlikely to derail the country s structural reforms or threaten Banxico s independence Source(s): El Financiero, El Economista, Forbes Page 15

16 NAFTA Recent Developments MEXICO CANADA TCLAN United States Mexico and Canada want an agreement suitable for the parties Proposals for modernization, trade facilitation and in general more flexibility Aggressive, impassable, unworkable positions. Sunset Clause Complicated topics in automotive, agricultural, textile productive sectors They agreed to Enforcement but with different applications Page 16

17 NAFTA Canadian Ideas The idea is to change the methodology for calculating the regional value content, including: Intellectual Property New investments on facilities or production lines Steel and aluminium that come from the NAFTA region Mexico is now working on consolidating all these ideas Page 17

18 NAFTA 7 th Round of Negotiations Automotive Rules of origin will be negotiated into an intersessional conference US government is now working with the three Automotive Terminals Steel and Aluminum safeguard could be imposed by US government to all countries including Mexico and Canada. Page 18

19 III. Effects of the US Tax Reform Page 19

20 Effects of the US Tax Reform Key business tax provisions Corporate tax rate and corporate AMT 21% tax rate, effective 1/1/18 Eliminates corporate AMT FDII Domestic corporations allowed a deduction against foreign-derived intangible income (37.5% deduction initially, reduced to % for tax years beginning after 12/31/25), In general, the provision includes sale of goods and rendering of services Expensing Allows immediate write-off of qualified property placed in service after 9/27/17 and before The increased expensing would phasedown starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement. Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50% expensing for the first tax year ending after 9/27/17 Participation Excemption Domestic corporations allowed a 100% deduction for the foreignsource portion of dividends received from 10% owned (vote or value) foreign subsidiaries. (Deduction not available for capital gains or directly-earned foreign income) Page 20

21 Effects of the US Tax Reform Key business tax provisions Net Operating Losses (NOLs) Limits NOLs to 80% of taxable income for losses arising in tax years beginning after Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward indefinitely Interest Expense Deduction Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased by those items. Regulated utilities generally excepted Interest Expense Deduction Dividend Received Deduction Domestic production Deduction Others Page 21

22 Effects of the US Tax Reform Other key international provisions One-time transition tax on post-1986 earnings of 10% owned foreign subsidiaries accumulated in periods of 10% US corporate shareholder ownership. 15.5% rate on cash and cash equivalents, and 8% rate on the remainder Mandatory annual inclusion of global intangible low-taxed income (GILTI) determined on an aggregate basis for all controlled foreign corporations owned by the same US shareholder. Partial credits for foreign taxes properly attributable to the GILTI amount No deduction for certain related party payments made pursuant to a hybrid transaction or entity If certain thresholds are met, a base erosion minimum tax levied on an applicable taxpayer s taxable income determined without regard to certain deductible amounts paid or accrued to foreign related persons; depreciation or amortization on property purchased from foreign related persons; and certain reinsurance payments to foreign related persons. Generally 10% rate for tax years beginning before 12/31/25, and 12.5% thereafter, but 11% and 13.5% for banks and registered securities dealers Page 22

23 IV. Automotive Industry in Mexico Page 23

24 Automotive Industry in Mexico LV Sales and Production Highlights 3,2 3,4 3,5 1,1 1,3 4,0 4,4 LV sales and production in million units ( F) 4,7 4,7 4,7 4,7 4,7 4,9 1,6 1,6 1,7 1,6 1,6 1,7 1,7 1,8 1,9 CAGR sales 2017F-24F: 2.0% CAGR production 2017F-24F: 2.8% F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Sales Production After a strong start to 2017, Mexican LV reached a record number of 3,773,569 units produced In 2017, 3,102,604 LV units were exported, representing a 12.1% increase y-o-y The total sales within the domestic market was constituted by 41% vehicles produced in Mexico and 59% produced in a foreign country LV exports to United States represented 75.3% of the total exports Source(s): LMC Automotive, AMIA Page 24

25 Automotive Industry in Mexico Key Industry Megatrends Retail transformation New business models Digital strategy Supply chain and advanced manufacturing Increase in complexity Focus on flexibility New mobility models Car Sharing Car Pooling Collaborative consumption 5 Big Data Analytics to improve customer experience and business processes 6 Connectivity Digitalization on the value chain Robotics Autonomous Vehicles Increasing investment on autonomous vehicles Page 25

26 Automotive Industry in Mexico Key Challenges Battling to own relationships in a digital marketplace Accelerating pace of disruptive competition and innovation Digitalization across the value chain Unprecedented scrutiny Diverse sources of unpredictability Securing resources for business continuity EY s recent analysis of the automotive C-suite s agenda showed that most of the organizations are not prepared in terms of execution and resource alignment in order to enable a faster innovation and change Page 26

27 Automotive Industry in Mexico SWOT Analysis Source(s): BMI Research Page 27

28 V. Q & A/Wrap-Up Page 28

29 Thank you!

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