Dean Barber

A Defining Combination in Mexico

In Manufacturing, Places on July 14, 2013 at 6:45 am

Maybe you have heard me say it before, but it bears repeating: I’ve never met a state that I didn’t like.

Of course, I’m playing on a quote by Will Rogers, who said he never met a man that he didn’t like. Well, I wish I could be so generous, but some folks just don’t sit right with me.

I was a northern state not long ago, a fine place indeed, good people. But this one fellow, an economic developer, said the damndest thing that really stuck in my craw. He said that people working in automotive plants in the South were, and this was his words, mostly “barefoot hillbillies.” I swear I am not making this up.

I think my jaw may have actually dropped. And for just a moment, the Scots-Irish rebel in me emerged as I had this sudden urge to slap his jowls, call him a scoundrel and challenge him to a duel.  But this was a dinner party, and Cracker Dean didn’t need make an unpleasant scene.

But I could not let his snide slur about my people go unchallenged, as I consider myself a hybrid son of the South. (My mother was from Chattanooga, Tenn., and my father from Pittsburgh, and I grew up in both the South and the Midwest).

“Well, if what you say is true, and let me assure you that it is most certainly not, then you are essentially asserting that Mercedes-Benz, BMW, Volkswagen, Toyota, Honda, Nissan, Hyundai, and Kia were all wrong for having built assembly plants in the South. Let me get this straight, is that what you are saying?”

He looked at me in a dazed manner as if I had planted a two-by-four between his eyes. I don’t recall him saying much to me the rest of the night, which was fine by me. But despite his ignorance (talk about the pot calling the kettle black), I would never hold that against his state or region in a site selection project. There are people who say dumbass things everywhere.

No doubt, I have written a few in this blog. So I forgive Mr. Yankee Dumbass and will ask for your forgiveness as well.

The Big Fish Swam Away

Earlier this year, I was sitting in the office of an economic developer in the South who spent most of his career in the automotive industry. He had worked in senior management positions for both domestic and foreign automakers. Leave it to say, he has a deep understanding of the industry.

We were talking about Audi’s decision to build a $1.3 billion assembly plant in Mexico.  My host was genuinely perplexed. “I don’t understand that decision,” he said.

Keep in mind that economic developers in Tennessee, Georgia and Alabama were biting at the bit over the prospect of getting this Audi plant. They knew it was coming, and they knew they were in a very good position to get it.  It all made a great deal of sense.

Any future Audi plant could use many of the same suppliers now in place for parent company Volkswagen, which had completed an assembly plant in Chattanooga and began turning out Passat sedans in 2011. There were also a host of other nearby German tier one and tier two suppliers serving Mercedes-Benz in Tuscaloosa, Ala., and BMW in upstate South Carolina.

In short, economic developers in the South just knew they had another big fish circling their bait. But then the big fish unexpectedly swam away.

To many, Audi went off script by choosing Central Mexico for its first assembly plant in the Americas, although VW has a plant in nearby in Puebla City and an engine plant in Silao. But the more you look at it, the more it makes sense.

A Dream Moment?

Audi Chairman Rupert Stadler said something quite revealing at May 4 ceremony to lay  the foundation stone for the future plant, which will build 150,000 of the Q5 sport-utility vehicle annually starting in 2016,

“Mexico was chosen very deliberately,” Stadler told more than 500 industry and government officials gathered outside the town of San Jose Chiapa. “It is situated between North and South America, making it a linchpin between the two regions.”  Mexico was, according to Stadler, an “ideal export base.”

Audi executives touted Mexico’s good infrastructure, competitive costs and existing free-trade agreements in picking the site, which will cover an area the size of 400 soccer fields. They called the Mexican plant a “dream moment,” a bit uncharacteristic for Germans. But maybe the beer and tequila, not an especially good combination, were flowing by then.

Being on the doorstep of the United States certainly doesn’t hurt. But it’s worth noting that Mexico has 12 free trade agreements with 44 countries, while the U.S. has 14 trade deals covering only 20 countries.

Also, Mexico’s total compensation per worker was $3.94 an hour in 2010, only slightly above that of China, where wages are rising and transportation costs are greater because of the distances involved. Compare that with $34.59 in the United States and $52.60 in Germany.

“Mexican auto factories and Mexican manufacturing offer First World productivity and quality at Third World wages,” said Harley Shaiken, a professor of education and geography at the University of California at Berkeley in an interview with The Washington Post. “That is an unusual combination, and right now it is a defining combination.”

That defining combination is attracting billions of dollars of new automotive investment every year.

But Wait, There’s More

Just this past week, Denso, a tier one Japanese automotive supplier, said it would spend $51.4 million to expand operations at its production facility in Silao. The expansion involves adding a new product line to build alternators beginning in October 2014 for North American customers including Ford and Toyota.

Also last week, Nissan said it had signed a deal with real estate developer firm Vesta for the construction of an industrial park near its assembly plant now being built in the central state of Aguascalientes. Nissan expects that the proximity of the park to its manufacturing facility will allow for certain advantageous production flow processes.

Nissan will begin phase one operations at the $2 billion plant later this year. The Japanese automaker currently exports to 115 countries from Mexico.

Last month, General Motors, which employs 15,000 people in Mexico, said it would invest $691 million to expand its Mexican operations. About $211 million will be spent on expanding its Toluca plant, where GM builds V8 and four-cylinder engines.

The company will spend $349 million for a new transmission plant in Silao that will build 8-speed transmissions, and $131 million to expand the next-generation transmission plant in San Luis Potosi. 

The U.S. automaker, which has operated in Mexico for 78 years, builds the Chevrolet Silverado and GMC Sierra pickup trucks in Silao; Chevy Sonic and Captiva, and Cadillac SRX vehicles in Ramos Arizpe; and the Chevy Aveo, Trax and Tracker vehicles in San Luis Potosi.

Only a few days following the Audi ceremony, Honda announced that it would build a $470 million transmission plant in the central state of Guanajuato, not far from an $800 million assembly plant now under construction and expected to begin operations in early 2014.

Mazda’s new $650 million plant at Salamanca is scheduled to start operations in March 2014. Already the company has announced plans to raise production by 90,000 units to a total of 230,000 units within two years. The plant will eventually employ 4,500 people, and marks the return of Mazda manufacturing to North America after Mazda6 production was moved back to Japan last year.

Mexico’s Gain Not a U.S. Loss

Last year, Mexico attracted $3.7 billion in announced investments by automakers alone, matching the U.S. total, according to the Center for Automotive Research in Ann Arbor, Michigan. IHS Automotive estimated that investments by automakers in Mexico over the next few years could total $3 billion annually.

But Mexico’s gain does not mean a U.S. loss. Automotive jobs will grow on both sides of the border, making the broader North American economy more competitive against Asia and Europe.

“Mexico is not siphoning off jobs from the U.S.,” George Magliano, senior economist at IHS Automotive, an industry research firm, told The Washington Post. “North America is becoming a new hub for export production, and the bulk of it is occurring in Mexico,” he said. “But some of it is happening in the U.S.”

Of the more than 15.5 million vehicles estimated to be built in North American auto plants last year, more than 10 million were built in the U.S., while Mexico produced about 3 million and Canada 2.5 million. By 2020, IHS projects the industry will make 11.7 million in the United States, 4.1 million in Mexico and 1.9 million in Canada.

That is what I would call a good deal, both for the U.S. and Mexico. Canada, not so much, which I am sorry to say.

Now I could show my chauvinistic ignorance and lament why all these automotive companies are making such horrific blunders by building new plants in Mexico and employing people who don’t really know much of anything. But then again, I don’t believe that. I don’t think these big investments are blunders at all.

No, I think these companies have found something good down there in Central Mexico, which is removed from the drug cartel violence at the border. Matter of fact, I’m sure of it or they wouldn’t be lining up to spend billions down there.

They’re speaking with their actions and that tells me something. I hope to learn more about it and if I do, well, I’ll be sure to let you know. In the meantime, hasta la vista or … 

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Plano, Texas — Telephone: 972-767-9518

If your company needs an optimal location for future operations due to expansion or consolidation, we can help. If your community needs to improve its competitive standing by leveraging strengths and addressing weaknesses, we can help. All requests for information are considered confidential.

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  1. Although I would say Mexican production quality is slightly better than China, I resent that with Audi’s move to Mexico, their car prices will not reflect the loss of quality that this shift engenders – after all, their brand and pricing was built on the notion of quality. Southern American production quality is far above Mexican production quality – you get what you pay for in production and consumers need to push back. I stopped buying Gucci when they moved the majority of their production to Mexico from Italy – the prices didn’t drop, but the quality certainly did – their products would fall apart and could be bought cheap on the side from people working at the plant. I think consumers need to push back and support companies that provide quality for the price not just branding.

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