Automotive challenge 2016

Analysis of the relevance and need, based on the policies, rules, and
regulations, that current Mexican government has and the trends that
must be established to effectively attend the issues related with the
vehicular traffic, including the economic implication for the users and the
overall automotive industry.

Emilio Barrios Amaro a0137550@itesm.mx

ITESM-CEM IME

Rafael Torices Blanco a01375771@itesm.mx

ITESM-CEM LAE

Enrique De la Fuente Favela a01166482@itesm.mx

ITESM-CEM IQA

Claudia Mendoza Lugo a01204775@itesm.mx

ITESM-CEM IIS

Summary Abstract

This document provides relevant information and analysis in terms of regulatory policies
in Mexico, economic implications and trends to enable a correct implementation of
ecologic vehicles in the vehicular traffic of Mexico. It's certainly important to talk about
cost, affecting both, the consumer and the production sector, all produced by the dynamic
relation between policies, foreign investment, potential consumer behavior and further
strategies.

Keywords: Hybrid, Regulations, Investment

Mexico in the world

In a global context Mexico fits in the number 12 out of 55 countries that produces the
95% of the global pollutants including CFC. According to estimations done by the World
Health Organization (WHO), indicate that 80% of people that live in urban areas and large
cities, are exposed to air quality far beyond the acceptable limits of pollutants. Fortunately,
all around the world efforts are being made. The global shift towards low-carbon, circular
economy has started and its pace is accelerating. Regarding non-renewable transports, there
are several incentives for both, end-line consumers and producers, to move towards its
1
production and usage. Between governments, public and private organizations, several
strategies have been redefined, varying from country to country according to their specifics
requirements and forecasts, for the introduction and mass production of the so called
“ecologic” cars. (European Commission, 2016).
In recent years Mexican automotive industry reached over 3 million vehicles produced
annually placing Mexico as one of the top 8 vehicle producers worldwide, in recent years
the national exports in this sector have diversified, leaving Mexico as a very interesting
platform of investment, not only because of the national market but by the tax benefits that
are growing in the recent years which reduce costs of production and invite companies to
invest in the country, increasing the viability of new car assembly plant all over the
country.

Mexico and its pollution status

Mexico, same as the countries which have large cities and urban areas, has a dedicated
institution for tracking and monitoring how’s the contamination and pollutants
concentration in the most populated areas behaving. The Comisión Ambiental de la
Megalópolis (CAMe), accountable for the activation and follow-up of the Program for
Atmospheric and Environmental Contingencies (PCAA, for its Spanish acronym) has
decreed up to 10 environmental contingencies in the Mexican Valley since 2016 started.
This means that at least in the past six months, IMECA levels of ozone had exceeded the
acceptable IMECA limits (150 points). (Sedema, 2016)
In the National Urban Mobility Report 2014 - 2015, Mexico leverages and recognizes its
opportunity regarding the steps to be done to achieve a lower carbon footprint when it
comes to transport usage, design, and urbanization. It recognizes that the implementation of
new policies and actions will help in consolidating substantial progress, such as: strategies
to discourage car use, facilitate non-motorized transport mode, and encouraging the use of
public transport. In the same way, investing in the required infrastructure for leveraging the
use of energy efficient cars is recognized as some of the biggest opportunities for mitigating
current contamination levels in the large cities. (Barbosa, 2015)
During this paper, special focus is done in large cities only since the 72% of the
population lives in 384 cities of more than 15 thousands inhabitants, which form the
National Urban System. (op.cit.)

Regulations, policies and norms in Mexico

In Mexico, there are certain official regulations for the automotive industry in general
terms which help to constrain the greenhouse gases (GHG) emissions in order to achieve an
acceptable level of air quality. When properly applied, it ensures that air pollution will not
cause a severe damage for the people which currently lives in the large cities or even in
rural areas, which are susceptible to health problems related to breathing levels of ozone or
other pollutants in quantities bigger than the established by the WHO.
Being aware of these regulations is helpful in understanding the relevance and/or need of
the entrance of the ecologic cars in Mexico, along with its forecasted acceptance and
performance as an effort of improving our air pollution and more after, our economy.
Such regulations and policies are enforced by different legal departments and institutions,

2
each of them has its own legal procedures to ensure their fulfillment to help avoiding and
controlling atmospheric pollution. Some of these regulations are:
 Ley General del Equilibrio Ecológico y la Protección al Ambiente
 Regulation in regard of prevention and control of atmospheric pollution
 Mexican Official Standards
o Stationary sources
o Mobile sources
o Fuel Quality
o Air Quality
o Monitoring
 Ley General del Equilibrio Ecológico y la Protección al Ambiente
(LGEEPA)

The SEMARNAT (Environment and Natural Resources Agency) issues a series of

Mexican Official Standards (NOM) that regulates emissions coming from both, stationary
sources (e.g. chemical industry) and mobile sources (e.g. private cars, trucks, etc.); such
norms aim to limit up to certain levels the emissions of sulphur dioxide, nitrogen oxide,
particles and volatile organic compounds, and other compounds that are directly involved
in the production of ozone, main air pollutant. It also establishes the standards that regulates
fuels’ quality among others.
As part of this analysis, the focus will be the NOMs related to the mobile sources
weighting below 3,856 kilograms, also known as light vehicles:
 NOM-041-SEMARNAT-2015, which establishes the maximum permissible
limits of the emission of gaseous pollutants from the exhaust of the motor vehicles in
circulation that use gasoline as fuel.
 NOM-042-SEMARNAT-2003, which establishes the maximum permissible
limits of emission of unburned hydrocarbons, carbon monoxide, nitrogen oxides and
suspended particles from the exhaust of new motor vehicles in the plant, as well as
evaporative hydrocarbons from the fuel system that use gasoline, liquefied petroleum
gas, natural gas and diesel thereof, with a gross vehicle weight rating that does not
exceed the 3,856 kilograms.

Despite the fact that Mexico does have an organization in charge of controlling and
monitoring the air pollution, the updates to the NOMs are not as regular as they should be.
As stated by Kate Blumberg, ICCT (International Council of Clean Transport) specialist,
Mexico is currently behind the US about 10 years when it comes to emissions regulations
and its pollution levels are from 8 to 10 times more. The main reason behind this delay is
directly related to the fact that the policies are not updated with the same regularity as they
are in European Union and the United States.
A clear example of the mentioned above is one of the last regulations published by the
United States named TIER3, which implies a sulphur reduction in fuels of 10 ppm. Once its
fulfillment is complete, emissions of COV and NOx will be reduced by 80%, PM by 70%
and vapor emissions of gasoline will become almost 0. Benchmarking with Mexico, the
latest published policy in relation to sulphur content in fuels accepts between 30 to 80 ppm
(NOM-EM-005-CRE- 2015).
3
 Hence, electric and hybrid cars have a huge potential of growth in Mexico. The rationale
behind is that both, public and private sectors, are working together to give the consumers
of these vehicles huge incentives in terms of regulations, fees and monitoring procedures
given that they don’t pollute, or at least much less than normal vehicles.
To the present year, the benefits that come with acquiring an ecologic or hybrid car can
be translated into regulation exceptions and economic advantages over those who have a
internal combustion engine car. Some of the benefits are the following:
 Extent of payment of ISAN (Tax applied to the acquisition of new vehicles),
established in the article 16 of the Federal Income Law of 2015.
 An independent electricity meter will be installed by CFE (Federal
Commission of Electricity) in the residence of the car owner for its recharge
operation. The lowest fee (01) will be granted for this specific purpose.
 Extent of payment of ownership fee, which can be up to 8.7% of the car
value.
 A special identifier “E”, which allow the owner not to make the required
verifications of the program “Hoy no Circula” each semester.

Economic Implications for users and automotive industry

In this analysis we need to focus on the two different targets that are affected by the
official regulations and the tax benefits. Despite the tax incentives that have already been
granted we must consider first that companies use in most cases the same line production
for electrical cars and internal combustion ones, so there's not much difference in the
process, according to GMC line production.
The second option that we consider is the opportunity costs of the capital invested by
companies in developing sustainable technology, considering as a model of study the
percentage GMC invest in the last year according to their statement of expenses from 2015,
the amount of money they invest in new technology is nearly 17 million dollars per year
with an opportunity costs of 13 % from total gains, if we take the operating profit from
2015 we talk about 8600 million dollar that represent 1,118 million dollars of opportunity
costs, that is directly shown in the price of ecological cars that use all of this new
technology.
Considering the automotive trends that are been shown in last years, every automotive
company is increasing year per year the amount of money spend in sustainable cars, based
in many studies such as Bloomberg New Energy Finance (2016) in which a recent paper
shows that the total automotive market talking specifically about electric vehicles will own
35% of the global market.
The second target of the national regulation and economic incentives are the possible
consumers and the actual users, the comparison shown below is a proportional comparison
between two cars that are related by size, power and range (we will omit the brand name).

4
 Figure 1. Comparison between Electric and Combustion Car

The difference between having an Internal Combustion Car and an Electric one can be
shown in the next comparison chart taking an average life of use of 9 years.

Table 1. Comparison between usage of electric and combustion car.

Combustion Engine
Electric car
Car
Inicial Investment $ 680,400.00 $ 374,400.00
Gas consume (20,000km) $ 2,201.21 $ 21,476.92
Electric Consume
(20,00km) $ 2,930.40 $ -
ISAN $ - $ 63,648.00
Average Use 9 Years 9 Years
Use of gas first 4 years $ 8,804.85 $ 85,907.68
Use of gas last 5 years $ 13,757.58 $ 134,230.75
Repair Cost $ - $ 4,000.00
Batery NA $ 4,000.00
Mantenimiento (20k km) $ 2,700.00 $ 1,500.00
Tenencia (10 años) $ 6,622.47 $ 41,554.60
5
 Year 1 $ - $ 11,232.00
Year 2 $ - $ 8,424.00
Year 3 $ - $ 6,318.00
Year 4 $ - $ 4,738.50
Year 5 $ - $ 3,553.88
Year 6 $ 4,843.86 $ 2,665.41
Year 7 $ 3,632.90 $ 1,999.05
Year 8 $ 2,724.67 $ 1,499.29
Year 9 $ 2,043.50 $ 1,124.47
Cost Recovery $ 68,116.83 $ 37,482.28
Total Cost $ 692,141.67 $ 616,110.75

As it is shown in the previous comparison there's a very complex sustainable market in

Mexico based on the uncompetitive prices from the sustainable automotive industry
producing a low demand of electric cars.
Furthermore, Mexico is not taking leverage of the advantages that green vehicles bring
with them; however, there are potential opportunities identified within the Mexican market
and infrastructure in regard of manufacturing.
As a tool for synthetizing, a FODA analysis (Figure 2) is presented so that key features
and reasons can be fully identified and create opportunity out of them.

Strengths
1. On-going development of strategies, held
by the government, for the installation of
charging stations in private and public
spaces.
2. Installation of dedicated gauge by CFE in
households that have an electric car.
3. Automotive industry spends 100,000
million dollars annually in research and
development of new technologies.
4. Federal Commission of Electricity and the
Mexican Association of Automotive
Industry signed a collaboration agreement
to promote the use of hybrid and electric
vehicles.
5. Automotive industry has high
participation and presence in Mexico (18
of the most important manufacturers of
vehicles).
Opportunities
1. On-going regulations and norms to limit
the air pollution; however, there’s an
opportunity due to the lack of harshness
of these mentioned policies.
2. In such a global world, benchmarking and
Weaknesses
1. Usage of electric and hybrid vehicles in
Mexico is less than the
2. Not enough capital investment is done in
creating awareness of the advantages of
having an electric or hybrid car.
3. Forecast reveals a slow growth in terms of
sales expansion of electric cars due to the
current lack of infrastructure.
4. Price is far from being competitive
against an internal combustion engine car.
5. Overall efficiency in terms of distance
and speed are below those of the IC
engine cars.
Threats
1. Electricity required for recharging these
vehicles might require more fossil fuel
burning.
2. Carbon emissions can be indirectly
increased due to Mexico lack of

6
 reapplication of foreign policies and electricity creation via renewable
strategies is feasible. energies.
3. Since fuel costs are constantly increasing 3. The structure of the electricity supply
in Mexico, there’s an opportunity in system could be overloaded.
creating awareness of the advantages of 4. Long distances in Mexico might be a
electric cars over spending in fuel in a constraint for these vehicles due to their
regular basis. relatively short autonomy distance.
4. Effective communication from private and
public companies for expanding
acknowledgement of electric and hybrid
cars.
5. Worldwide concerns about air pollution
and climate change could serve as a
motive for buying these vehicles.
There’s not much competition in this sector;
hence, no cannibalization is predicted for the
manufacturing companies.
Figure 2. FODA

Figure 3 shows the main areas where actions must be done for enabling a successful and
continuous growth of the green vehicles in Mexico. Follow-up to these actions is a key
driver for an effective attention to the sustainability issues that this market tends to solve.

Figure 3. Ishikawa Diagram

7
Strategies

Two main strategies were identified by the time this analysis was done. By strategy, the
focus is nationwide and it refers only to the main actions that, according to the selected
criteria, are identified to have a high impact in the evolution of green vehicles in Mexico, in
terms of production and acquisition.

1. Built

The main strategy, a priori, is to have a proper infrastructure in terms of charging

stations. Even if the price of electric cars became competitive and /or affordable, it isn’t
currently a feasible option to have an electric car due to the lack of charging stations. Users
are forced to travel long distances in Mexico because of its large territory but when
thinking in the logistics for recharging the car, they aren’t any possibilities; hence, the perks
of an electric car are diminished as it most probably will have to use the gasoline engine
more regularly than it might be expected.

2. Update

Nowadays, regulations are obsolete and light. By light, it means that in comparison with
leading countries in terms of mobility and atmospheric regulation, Mexican regulations
allow up to 8 times more pollutants in the air than the EU and the US do. And by obsolete,
it means that they are not updated in a regular basis. Last update took over 12 years to be
done.

Transportation is a necessity shared by the entire population of a city, making this sector
one of the most important.
In the country the use of electric and hybrid vehicles is still reduced due the lack of
investment for the development of technology, marketing and uncompetitive price offered
to the consumer.
It´s important to notice that the marginal demand of electric energy will be taken from
non-sustainable industries considering that the 74% of the Mexican energy comes from
burning fossil fuels according to data from the annual report of CFE 2016, so the extra
energy will require more fossil fuel as an indirect inputs of the car.

References

El economista, (2014). Crecen las ganancias de GM en segundo trimestre. p.1. Available at:
http://eleconomista.com.mx/mercados-estadisticas/2011/08/04/crecen-las-ganancias-gm-segundo-
trimestre.
European commission. (2016). A European Strategy for low-emission mobility. Available at:
http://europa.eu/rapid/press-release_MEMO-16-2497_en.htm.
Forbes, (2015). ¿Por qué no hay autos eléctricos en México ?. p.1. Available at:
http://www.forbes.com.mx/por-que-no-hay-autos-electricos-en-mexico/#gs.Pg0npxo.
Gobierno del Estado de México, (2010). Inventario de emisiones del GEI. Toluca Estado de México, pp.2-14.

8
Híbridos y eléctricos. (2016). Informe Bloomberg: para el año 2022 está programada la revolución del coche
eléctrico. Available at: http://www.hibridosyelectricos.com/articulo/sector/informe-bloomberg-ano-
2022-programada-revolucion-coche-electrico/20160227102415011165.html.
Motor expansión, (2015). ¿Por qué México es tan atractivo para los productores de autos. p.1. Available at:
http://www.motorpasion.com.mx/industria/por-que-mexico-es-tan-atractivo-para-los-fabricantes-de-
autos.
Programa estratégico de la industria automotriz. (2012). [pdf] Ciudad de México, pp.7-22. Available at:
http://www.economia.gob.mx/files/comunidad_negocios/industria_comercio/peia_ok.pdf.
Reporte nacional de movilidad urbana. (2015). Ciudad de México. Available at:
http://www.onuhabitat.org/Reporte%20Nacional%20de%20Movilidad%20Urbana%20en%20Mexic
o%202014-2015%20-%20Final.pdf.
SEDEMA CDMX. (2016). “Programa para contingencias ambientales atmosféricas”. Available at:
http://www.aire.cdmx.gob.mx/default.php?opc=%27YqBhnmU=%27.