4.1. Overview of Automobile Production and Export During the first two years of the Pandemic

Table 5 presents the world automobile production rankings of 2020 and 2021, the first two years of the COVID-19 pandemic. The overall automobile production decline in 2020 was 15.8% worldwide. Almost all the countries mentioned in Table 5 experienced a decrease of 16% to 30% except for China (-2.0%) and Korea (-11.2%), where the governments managed to control the disease outbreak to a greater extent. Mexico’s production declined by 20.8%; it has, therefore, been affected less than other emerging countries such as India (-25.0%),¹⁴ Brazil (-31.6%), and Thailand (-29.1%). Mexican production during the beginning of the pandemic was virtually halted, mainly because of the supply shortage triggered by the lockdowns in the US and Europe from March through May 2020; however, it recovered almost 90% of its regular years production by the end of August 2020.¹⁵

Despite the fact that the plant operations had mostly resumed, the world automobile production as a whole had not recovered by 2021. There was only a 3% increase in total production in 2021, which was far from recovering the 15.7% decline in production of the previous year. Mexican production also decreased by 1.3% in 2021. Many studies and news media point out that this manufacturing stagnation is mainly because of the supply shortage of semiconductors worldwide.¹⁶ Details will be discussed in the next subsection.

Table 6 shows the automobile production and export of OEMs operating in Mexico during the first two years of the COVID-19 pandemic. In 2020, the total production and exports decreased by 20.2% and by 20.9%, respectively, compared to the previous year. The decline in exports may have directly affected the decline in production, considering that Mexico is an export platform. Japanese OEMs were the least affected both in production (-17.5% on average) and exports (-16.2% on average) during the first year of the COVID-19 pandemic in 2020. Meanwhile, European OEMs were the most affected, with a decline of 29.8% in production and 30.6% in exports on average, followed by South Korea (KIA, -27.8% and -26.8%, respectively) and the “Big Three” (-21.8% and -24.2% on average, respectively).

By looking at each OEM in Table 6, the most affected OEM in the first year of the pandemic (except for Fiat, whose production was zero in 2020) is Ford (-45.5% in production and -48.0% in exports) followed by Honda (-37.1% and -33.4%, respectively) and Volkswagen (-32.6% and -33.3%, respectively). In contrast, OEMs that specialize in producing only luxury cars, such as BMW and Mercedes Benz, maintained their production levels and increased their exports in 2020.17¹⁴ This may indicate that the COVID-19 pandemic has not affected the consumption behavior of the rich; however, further verification is necessary.

With respect to the performances in 2021, the second year of the pandemic, both the total production and total exports have not recovered to the pre-pandemic level: the former declined by 0.1% while the latter only increased by 0.9% in 2021. However, we can see from Table 6 that the performances of each OEM vary considerably in 2021. For example, while Japanese OEMs as a whole showed a good recovery both in production (8.3% increase) and exports (16.0% increase), the American “Big Three” experienced a notable decline in production (-12.5%) as well as in exports (-7.0%) in 2021. European OEMs as a whole increased their production (13.4%) but slightly decreased their exports (-2.6%).

When we further disaggregate the performances into an individual OEM, Toyota, Ford Motors, and BMW are especially good performers who have increased both their production and exports drastically in 2021. Among them, Ford Motors outperformed by increasing the production and exports by more than 60% each. The reason for its sudden recovery is that the company completely stopped producing compact cars in 2021 in order to shift to producing pick-ups (to be discussed further in the next section). Toyota also concentrated on the production of pick-ups in 2021 and increased its production and exports by 31.3% and 36.4%, respectively. BMW has specialized in the production of luxury cars and increased its production and exports constantly, regardless of the pandemic. In contrast, GM, the leading OEM in Mexico, suddenly experienced a notable downturn by reducing its production and exports by far more than 20% in 2021. Further verification is necessary.

4.2 Global Semiconductor Shortages in the Automobile Industry

^{Clark and Dollar (2021)} argue that although there are many other sectors affected by the semiconductor shortage, the automobile industry is particularly affected. ^{Ramani et al. (2022)} seek to understand how this systemic disruption in the supply chain started, propagated, and will continue over time. They conducted a thematic analysis of 209 pertinent newspaper articles and then ran a stylized supply chain planning model. Their finding suggests that there was an interplay of the external shocks (COVID-19 and the resulting lockdowns) and the reaction of different players in the auto supply chains, resulting in “systemic” disruption (^{Ramani et al., 2022}).

^{Ramani et al. (2022)} argue that the lockdown reduced the demand for automobiles, which caused several plants to cut production or completely shut down. The automotive manufacturers subsequently canceled orders for various components, particularly semiconductor chips. In parallel, work-from-home led to increased demand for electronic products. The semiconductor manufacturers reallocated their chip production capacities. When the economy reopened in the latter half of 2020, automobile demand increased as consumers returned to the market. Automobile manufacturers increased production and placed larger orders with the chip manufacturers (^{Ramani et al., 2022}), but they were already operating at full capacity (^{Leibovici & Dunn, 2021}), to supply to other sectors than the auto industry.

^{Ramani et al. (2022)} and ^{Clark and Dollar (2021)} point out that the semiconductor industry is capital intensive and thus has long lead times associated with capital expansion, requiring multiple years of design and construction. It also requires extensive human capital and learning-by-doing, making it difficult to replicate or copy (^{Ramani et al., 2022}). These factors inherent to the semiconductor industry have complicated and prolonged the crisis. The uncertainty caused by the US-China trade war led several companies to store semiconductors, which aggravated the crisis in some way (^{Ramani et al., 2022}; ^{Clark & Dollar, 2021}). In addition, ^{Krolikowski and Naggert (2021)} and ^{Leibovici and Dunn (2021)} show that semiconductor shortages are the cause of vehicle price rise in the US after 2020. ^{Ramani et al. (2022)} conclude that the crisis is expected to continue throughout 2023 or even 2024.

The next section focuses on the reasons why the business expansion boom of the Japanese automobile industry in Central Mexico ceased suddenly in 2016, in the midst of a growth trend.

5.1 What Happened in 2016?

Figure 2 depicts the change in annual automobile production from 2010 to 2021, according to the OEM nationalities in Mexico. The figure shows that the total production in Mexico increased continuously until 2017. The Japanese OEMs enjoyed an increase in production during the expansion boom of the 2010s, especially between 2014 and 2016. In 2014, Mazda began its operation in Guanajuato, concurrent with the operations of new plants for Nissan (2014 and 2017 in Aguascalientes) and Honda (2014 in Guanajuato). However, the total production of the Japanese OEMs peaked in 2016, and from 2017, it suddenly began to decline, decreasing by as much as 10% between 2017 and 2018. In contrast, the other OEMs, that is, the American “Big Three,” European, and South Korean, maintained their production level or even increased it (which is the case of the “Big Three” and KIA) during the same period. This indicates that some idiosyncratic shocks may have occurred only in Japanese OEMs.

Note: Buses and trucks, hybrid and electric cars excluded.

Source: Author's elaboration based on ^{INEGI (2022)}, Registro Administrativo de la Industria Automotriz de Vehículs Ligeros (https://www.inegi.org.mx/datosprimarios/iavl/)

Figure 2 Change of Annual Automobile Production in Mexico, 2005-2021 (thousand of units) 

To further examine this issue, Figure 3 depicts the annual automobile production during the last decade, disaggregated by vehicle segments. It is clearly shown that the production of compact cars (subcompact cars included) began declining in 2016, while that of light trucks (pick-ups and SUVs) continued to increase until 2019, just before the pandemic. Back in 2010, 1.42 million units of compact/subcompact cars were produced, accounting for 63% of the total car production in Mexico, whereas 0.8 million units of light trucks were produced, accounting only for 35% (2% for luxury cars with 45 thousand units). However, the situation reversed in 2017, when the production of light trucks accounted for 52% (2 million units) and that of compact/subcompact cars accounted for 47% (1.88 million units). This discrepancy widened in 2019, when the production of light trucks reached 63% (2.41 million units) before the start of the pandemic (that for compact/subcompact cars accounted for 43% with 1.3 million units). This must reflect the recent strong preference of us consumers for light trucks rather than compact cars, considering the exclusive export share to the US market discussed in Section 2. This tendency intensified further in 2020 (the first year of the pandemic), where light trucks accounted for as much as 68% and compact/subcompact cars accounted for merely 30%, although the total production decreased by more than 20%.

Note: "Compact" includes compact and subcompact cars.

Source: Author's elaborations based on ^{INEGI (2022)}, Registro Administrativo de la Industria Automotriz de Vehículos Ligeros (https://www.inegi.org.mx/datosprimarios/iavl/).

Figure 3 Mexican Automobile Production by Segments (thousand of units) 

In the next subsection, the shale oil boom in the 2010s in the US economy is discussed as a possible reason for the changes in consumer preference in the US.

5.2 Shale Oil Boom in the US

Figure 4 presents the quarterly retail price of regular motor gasoline in the US and the international crude oil price from 2010 to 2021. It is notable that the gasoline price fell suddenly in 2014 and remained at almost half of that price from 2014 until the end of 2020. Many studies argue that this oil price decline is mainly because of the so-called “shale oil” (or “shale gas”) boom in the US.¹⁸

Source: Author's elaborations based on ^{EIA (2022)} Short-Term Energy Outlook September 2022, Motor Gasoline Price (https://www.eia.gov/outlooks/steo/) and ^{IMF (2022)} Primary Commodity System, WTI Crude Oil Price (https://www.imf.org/en/Research/commodity-prices).

Figure 4 Motor Gasoline Regular Grade Retail Price and International (WTI) Crude Oil Price in the US (Quarterly, Nominal) 

During the mid-2000s, the application of hydraulic fracturing and horizontal drilling in the US, coupled with the surge in gas prices, enabled the extraction of huge quantities of natural gas from shale (^{Liu and Li, 2018}). The proportion of shale gas production in total us natural gas production increased from 2.2% in 2000 to 52.2% in 2016 (^{Liu and Li, 2018}). The advent of shale gas on an economically and commercially viable scale has changed the dynamics of the US energy profile, making it a net exporter of natural gas (^{Solarin & Bello, 2020}). Since crude oil and natural gas are substitutes in consumption, factories and other consumers would shift energy input from oil to natural gas as the relative price of each energy type changes (^{Liu and Li, 2018}). Furthermore, according to ^{Ellwanger et al. (2017)}, the US Energy Information Administration (EIA) estimates that between 2008 and 2016, us shale oil production rose from close to zero to about 4.25 million barrels per day of crude oil, which represented approximately 48% of total us crude oil production and 5% of global crude oil production in 2016.¹⁹ The international crude oil prices measured by the West Texas Intermediate (WTI) prices fell from an average of US$96.5 per barrel between the first quarter of 2011 and the second quarter of 2014 to an average of below US$50 between the first quarter of 2015 and the third quarter of 2017, with the lowest price of US$33.4 in the first quarter of 2016 (Figure 4).

In this respect, ^{Liu and Li (2018)} applied a structural vector autoregressive (VAR) model together with successfully introducing a placebo study, and concluded that the oil price gap (the real WTI) from 2007 to 2017 can be attributed to the shale gas revolution. ^{Ellwanger et al. (2017)} argue that the decision by the Organization of the Petroleum Exporting Countries (OPEC) to maintain output, in addition to the surprising growth of us shale oil production, exacerbated the decline in oil prices in 2014.²⁰

At the same time, many studies insist that the shale oil boom had a positive impact on the US economy, especially in terms of local employment and income (^{Solarin & Bello, 2020}). This could be a reasonable explanation for the changes in consumer preferences to pick-ups and SUVs in the US market, rather than energy-saving compact cars, which are the leading product of the Japanese OEMs. A business statistics company, Statista, also points out that US consumers were more willing to buy trucks over smaller, fuel-efficient sedans because of lower fuel prices, along with the recovery from the financial crisis.²¹ Figure 5 depicts the light vehicle (passenger cars and light trucks) retail sales in the US from 2010 to 2021. The trend resembles that of Figure 3, indicating that the light truck sales expanded rapidly especially in the second half of the 2010’s. The share of light truck sales reached 72% in 2019 with over 12.2 million units, compared to 51% in 2010 with 5.9 million units.

Notes: Light vehicles include passenger cars and light trucks. The values were not seasonally adjusted.

Source: ^{Statista (2023a)} Automotive industry in the United States. (https://www.statista.com/topics/1721/us-automotive-industry/#topicHeader__wrapper)

Figure 5 Light Vehicle Retail Sales in the US, 2010-2021 (thousand of units) 

In the next subsection, production performances of the Japanese OEMs will be discussed in detail in comparison with the American “Big Three” and the European OEMs, focusing on the production of compact/subcompact cars and of light trucks (pick-ups and SUVs).

5.3 Why Have Only the Japanese OEMs Been Affected?

Figure 6 shows the annual automobile production by segments and OEM nationalities. It is notable from Panel (a) that, until 2013, the production of compact/subcompact cars was equally distributed among the “Big Three,” European (mainly Volkswagen at this time), and Japanese OEMs. However, the production share of the Japanese OEMs increased drastically to nearly 50% in 2014. Since then, Japanese OEMs have continued producing half the share of compact/subcompact cars, and in 2021, the Japanese and Korean OEMs together reached 87% (53% and 34%, respectively) as the other assemblers drastically have reduced their production in recent years. This might be partly because the new plants for Mazda, Honda, and Nissan started their operations in 2014, and simultaneously, the “Big Three” and European OEMs changed their production strategy in Mexico from compact/subcompact cars to light trucks (pick-ups and SUVs), as will be shown in Figure 7, according to consumer preferences in the US market. It is noble from Figure 6 that the total production of compact/subcompact cars in Mexico peaked between 2014 and 2015, and then began declining sharply since 2017. The loss of the total production of compact/subcompact cars was partially compensated for by the new entry of the South Korean OEM, KIA. KIA has established its presence as a producer of compact/subcompact cars using price competitiveness, not only in the US market but also in the Mexican domestic market.

Note: “Compact” includes compact and subcompact cars.

Source: Author’s elaborations based on ^{INEGI (2022)}, Registro Administrativo de la Industria Automotriz de Vehículos Ligeros (https://www.inegi.org.mx/datosprimarios/iavl/).

Figure 6 Automobile Production by Nationalities (thousand of units) 

Note: “Compact” includes compact and subcompact cars.

Source: Author's elaborations based on ^{INEGI (2022)}, Registro Administrativo de la Industria Automotriz de Vehículos Ligeros (https://www.inegi.org.mx/datosprimarios/iavl/).

Figure 7 Automobile Production by Segments (thousands of units) 

In parallel with the declining production of compact/subcompact cars, the “Big Three” had clearly shifted their production to light trucks since the early 2010s, as shown in Panel (b) of Figure 6. This trend has accelerated since 2017, and it can be seen from the figure that American OEMs virtually stopped producing compact/subcompact cars (Panel [a]) and specialized in producing light trucks (Panel [b]) in Mexico. The share of light truck production of the “Big Three” had been dominant with 70-80% until 2015. Since then, its share has declined with the increase of light truck production by European (including new entries) and Japanese OEMs in recent years; however, the American share still accounts for more than half of the total light truck production until the present. Panel (b) indicates that several European OEMs such as Mercedes Benz, Audi, and Volkswagen have also joined in or started the production of light trucks since 2016 (more details will be discussed later). In contrast, it shows that the production of light trucks by Japanese OEMs has been gradually increasing; however, the growth has not been enough to compensate for the loss in the production of compact/subcompact cars indicated in Panel (a). In the end, the share of light truck production by Japanese OEMs remained almost unchanged (around 20-25%) during the last decade until 2020 and finally reached 31% in 2021 (Panel [b]).

Figure 7 shows the annual automobile production by segments of Japanese OEMs (Panel [a]), the American “Big Three” (Panel [b]), European OEMs (Panel [c]) and Korean OEMs (Panel [d]). As shown in Panel (a), Japanese OEMs have specialized almost exclusively in the production of compact/subcompact cars in their Mexican plants: the annual production of compact/subcompact cars accounted for more than 70% until 2015, and it was only in 2019, when the production of light trucks exceeded 50%. Japanese production of compact/ subcompact cars increased drastically from 568 thousand to 862 thousand units (an increase of 42%) in 2014 when Mazda, Honda, and Nissan began operating their new plants in Guanajuato and Aguascalientes. With this, the total production of the Japanese OEMs (compact/subcompact cars and light trucks) peaked in 2016, with 1.39 million units, and began to decrease since then. Although the Japanese OEMs gradually increased the production of light trucks in the second half of the 2010s, it has never been enough to compensate for the production losses of compact/subcompact cars.

Conversely, Panel (b) shows that the American “Big Three” have been constantly replacing the production of compact/subcompact cars with that of light trucks over the last decade and have sustained the total production growth until 2018. The production share of light trucks reached 86% and 90% in 2019 and 2020, respectively. In 2021, the production share of light trucks accounted for as much as 99%, as Ford Motors, that had produced most of the compact cars among the “Big Three,” completely shifted to light trucks (both SUVs and pick-ups); GM produced only 9,047 compact cars in that year in Mexico. This drastic shift in production toward light trucks by the American “Big Three” clearly supports the hypothesis of the change of preference in the US market to light trucks during the 2010s. This trend seems to accelerate amid the COVID-19 pandemic and the subsequent semiconductor shortages, which requires further verification in a future study.

For a long time, the leading European OEM in Mexico has been Volkswagen,²² which produced exclusively compact cars until 2015. Audi and Mercedes Benz have newly emerged in Mexico, starting their operations in 2016 and 2018, respectively. BMW, which began operating in 2019, has so far specialized in the production of luxury cars. Panel (c) shows that the production of European compact/subcompact cars (mainly Volkswagen) peaked in 2012 and has experienced a sharp decline since then. However, the total car production recovered in 2017 after Volkswagen started producing light trucks (SUVs) in 2016, and other OEMs mentioned above joined in the production of light trucks and luxury cars in Mexico. It is notable that the European production of light trucks and luxury cars has not declined (and even increased in 2021) during the pandemic, so it can be assumed that high-end vehicles have not been affected by the pandemic or the subsequent production bottleneck induced by chip shortages.

Panel (d) shows that the Korean OEM (KIA) was the only exception among major OEMs in Mexico, as it succeeded in expanding its production of compact/subcompact cars using its price competitiveness during the second half of the 2010s.²³ However, it clearly suffered from the production decline during the first year of the pandemic and had not yet recovered in 2021.

In sum, only Japanese OEMs have experienced a total production decline since 2016. Considering other major OEMs’ performances, it can be concluded that this phenomenon was not caused by the uncertainty surrounding ex-President Trump’s administration, but rather by the difference in production and marketing strategy (not having shifted to the production of light trucks in a timely manner) of Japanese OEMs (except for Toyota, as will be discussed below).

5.4. Different Performances Among the Four Japanese OEMs in Mexico

To analyze the above-mentioned unfavorable trend of the US market to the Japanese OEMs further, Figure 8 presents the production of each Japanese OEM operating in Mexico by vehicle segments. Panels (a) and (b) show that the production of Nissan and Mazda, which have heavily relied on the production of compact/subcompact cars (colored in blue and sky blue, respectively) suddenly declined in 2017 and 2016, respectively, despite the expansion boom of the Japanese automobile industry in Mexico (overviewed in Section 3). Both OEMs have attempted to recover their total production by introducing the production of SUVs (colored in yellow) in 2013 (Nissan) and in 2018 (Mazda); however, this has not fully compensated for the production decline of compact/subcompact cars, although it should be noted that Mazda, amid the pandemic in 2020, increased its production of SUVs.

Source: Author’s elaborations based on ^{INEGI (2022)}, Registro Administrativo de la Industria Automotriz de Vehículos Ligeros (https://www.inegi.org.mx/datosprimarios/iavl/).

Figure 8 Automobile Production of Japanese OEMs by Segments (thousands of units) 

Panel (c) indicates that Honda had once increased its total production by introducing the production of subcompact cars in 2014; however, this effect was short-lived. The production of SUVs more than doubled in 2015, while that of subcompact cars almost halved in 2016. Honda’s total production peaked in 2016 and then began to decline. The sudden decline in the production of SUVs in 2018 was caused by the halt in factory operations affected by the flood in Guanajuato that lasted for half a year.

Conversely, Panel (d) shows that Toyota exclusively specialized in the production of pick-ups (colored in orange) until 2013. Although the production of subcompact cars began in 2014, Toyota continued to increase its production of pick-ups, becoming the only Japanese OEM that improved its performance continuously. Notably, Toyota’s production of pick-ups remained almost unchanged in the first year of the pandemic (2020) and even hit its production record with about 222 thousand units in 2021, although the assembler completely stopped the production of subcompact cars in 2021. This might be explained by the fact that the production (demand) of pick-ups has not been affected by the pandemic and the subsequent semiconductor shortages. GM and Chrysler also maintained their production level of pick-ups in both 2020 and 2021, although their total car production in Mexico declined.²⁴ Further analysis would be necessary at this point.

In conclusion, Japanese OEMs adopted the strategy of producing compact/ subcompact cars in Mexico during the expansion boom in the 2010s. However, this coincided with a us shale oil boom and they instead lost momentum in the US market and after 2016. Therefore, their production declined well before the COVID-19 pandemic affected the world economy.