BMI has significantly revised up its 2010 production forecast for Mexico to 2.21mn units (against our earlier forecast of 1.82mn units) thanks to a robust 67% year-on-year (y-o-y) increase in output, to 1.66mn units, in the first three quarters of this year, according to the Mexican Auto Industry Association estimates. As well as benefiting from growth of more than 10% y-o-y in new vehicle sales in the US during the first three quarters of this year, the rise in the country's auto production was led by the increasing share of Mexican-made vehicles in US sales. We are cautious about this trend, however, given that we believe that a slowdown in US demand is imminent. New vehicle sales growth in the US has consistently been declining every month since the beginning of this year. August 2010 saw the market falling to its lowest level since August 1983. Our Macroeconomic team expects a slowdown in the economy from H210, continuing well into 2011, which will hit Mexican export demand. Meanwhile, a strong rebound in vehicle production in 2010 will create a high base effect for 2011 production levels, limiting growth to a modest 6.4% y-o-y, to 2.3mn units in 2011. In the longer term, we expect Mexican carmakers to seek growth in higher demand potential markets in Latin America and Asia, which should take the country's total production to over 3mn units by the end of 2015. The outlook for domestic sales looks less promising, however. By the end of September 2010, total new vehicle sales had increased a cautious 6.7% y-o-y, to 565,789 units, prompting BMI to limit its end of year forecast to only 7% y-o-y, to 830,500 units. Overall recovery is likely to be painful for domestic sales as the proposed hike in income tax and VAT come into effect next year, further acting as a restraint on household spending. In addition to these constraints, the government's move to introduce minimum fuel economy standards for the auto industry between 2009 and 2012 and the speculations about a slew of other regulations will make consumers cautious about new vehicle purchases during the forecast period. BMI therefore restricts its vehicle sales forecast to 1.2mn units by the end of 2015. One of Mexico's biggest strengths is that there remains significant potential, both in terms of production and domestic demand. In September 2010, Mexico secured a US$550mn investment for engine production from Volkswagen thanks to its low-cost production and highly qualified workforce. Meanwhile, Swedish automaker Saab Automobile plans to begin sales of its cars in Mexico along with other new markets such as China, Russia and Brazil in H111. With such developments, BMI's view that Mexico will be one of the best performers in the region firmly remains in place. [ABSTRACT FROM AUTHOR]