Dean Barber

Why Mexico Works for Automotive

In Site Selection on March 9, 2014 at 8:06 am

With a multi-billion dollar wave of new assembly plants, Mexico will soon become the United State’s No. 1 source of imported cars, overtaking Japan and Canada in the process. And that’s a pretty big thing.

To provide you some context, when the North American Free Trade Agreement was signed two decades ago, Mexico produced 6 percent of the cars built in North America. It now provides 19 percent.

Total Mexican car production has risen 39 percent from 2007, to nearly 3 million cars a year. And the total value of Mexico’s car exports surged from $40 billion to $70.6 billion during that period.

Now you don’t have to be a Nobel prize winning economist to figure out why this is happening.

No. 1, labor rates are much lower. Mexico’s 580,000 auto workers are paid about $16 a day, more than $4 less than what the average U.S. autoworker is paid every hour. More than half of all Mexican workers earn less than $15 a day, according to Mexico’s census agency.

That’s comparable if not better than China, where wages have been rapidly growing. Not so in Mexico where wages have been flat.

No. 2, they’re here, meaning that Mexico sits on the doorstep of the U.S. Unlike China, there are no long and vulnerable supply lines and many of the vehicles being built in Mexico are assembled with parts made in the U.S. and Canada. Keep in mind, those parts cross the border without tariffs under NAFTA.

They’re All There

Just about every major carmaker in the world has production facilities in Mexico, where they continue to invest. Automakers have committed $9.6 billion to Mexico since the start of 2011, with investments by General Motors Co., Ford Motor Co. and Volkswagen AG as well as Japanese automakers, according to the Center for Automotive Research.

Nissan, Mexico’s largest automaker by production and domestic sales, opened a $2 billion factory in November in the central state of Aguascalientes, where it is expected to turn out 175,000 vehicles annually. And just last month, both Honda and Mazda opened new assembly plants in the nearby Mexican state of Guanajuato.

Honda’s new $800 million assembly plant in Celayato will build the 2015 Fit subcompact hatchback and crossover variant. The Celaya plant will turn out about 200,000 units annually, and will boost Honda’s annual North American production capacity to 1.92 million units.

The Honda Fit assembly plant will be mated to a $470 million continuously variable transmission plant, which will open in late 2015 on the same grounds, with initial capacity of 350,000 units, rising to 700,000 at its peak. About 80 percent of the 200,000-unit annual production will be for the United States and Canada, with the remaining 20 percent for Mexico.

With Celaya’s startup, Honda has invested $21 billion in North American manufacturing facilities, including eight automotive assembly plants. The Celaya facility is Honda de Mexico’s second auto plant. The first plant, located near Guadalajara, opened in 1995.

Only 25 miles to the west of Honda’s new plant, Mazda is staking its U.S. future on a new $770 million factory in Salamanca that will be its first wholly owned plant in North America. The new plant will build the Mazda 3 and Mazda 2. Nearly 56,000 models of output are anticipated this year, but production will ramp up shortly thereafter as 175,000 units are expected to be built in 2016.

Mazda’s U.S. sales of more than 280,000 vehicles ranked fifth among Japanese automakers in 2013, according to Bloomberg. A venture that made Mazda 6 sedans in Flat Rock, Michigan, with Ford Motor Co. ended in 2012.

The Best Passport

Like all the foreign auto makers based in Mexico, Mazda will be able to cut shipping costs to the U.S. and benefit from Mexico’s web of trade deals covering more than 40 countries.

“Mexico has the best passport in the world for auto manufacturing,” said Joe Langley at IHS Automotive in an interview with CNBC. “It has free trade agreements with all the key countries around the world, and it’s in the backyard of the second-largest auto market in the world.”

It was precisely those trade agreements (Mexico has 12 free trade agreements with 44 countries, while the U.S. has 14 trade deals covering only 20 countries) that was cited by Audi Chairman Rupert Stadler last year when the company announced it would build a $1.3 billion near San Jose Chiapa. Mexico, said Stadler, represented “an ideal export base.”

The Audi plant, not far from parent company Volkswagen’s plant in the state of Puebla, is slated to open in 2016. The announcement by Audi that it would choose Mexico was deflating to economic developers in the Southeast. See my blog from July 2013, A Defining Combination in Mexico.

And like state and local governments in the Southeast, state and local governments in Mexico have been  have been offering tax exemptions, employee training and improved highways, in Mexico’s case to the  U.S. border and Mexican ports.

The U.S. Remains in the Running

But despite our much higher wages in comparison to Mexico, the U.S., the second largest automotive market in the world behind China, will remain in the running for future automotive investment.

I think it is interesting to note that Ford announced plans last week to move production of its commercial F-650 and F-750 medium-duty pickups from a plant in Escobedo, Mexico, to Avon Lake, Ohio.

Ford had operated a Mexican-based joint-venture with Navistar International Corp. known as the Blue Diamond Trucking Co. The automaker is cutting those ties to take full control of production, design and engineering of its top-selling F-series pickups, according to company officials.

My gut tells me the decision is based more on Navistar than Mexico. In short, by pulling out of the joint venture, Ford will no longer have to share profits with Navistar. The Escobedo plant will become a Navistar-only facility where the company will continue to build its own medium-duty and heavy-duty trucks.

Moving the work from Mexico will preserve the jobs of 1,600 workers at the Avon Lake factory, which Ford has operated since 1974, and honors an agreement the company made to the UAW in 2011 contract negotiations. No new jobs will be created by the move.

According to a survey of 143 senior executives conducted in January and February by consultant AlixPartners, the U.S. has surpassed Mexico as the preferred place to relocate manufacturing that had been moved offshore,. It was the first time in the four years of the study’s existence that the U.S. was chosen over Mexico. Forty-two percent of manufacturing executives identified the U.S. as their preferred location, up from 37 percent a year earlier, while Mexico fell to 28 percent from 37 percent.

I suspect there remains and maybe always will be some lingering questions about security and quality in regard to Mexico. Much of the drug cartel violence, which appears to be abating somewhat, has been centered around the border, well away from the automotive cluster that is happening in the central states.

Watch Volkswagen

It will also be interesting to see what Volkswagen does. Thwarted in its plans to have the UAW recognized at its Chattanooga plant so that it could establish its vaunted works council model, which it incorporates in most of its production facilities worldwide, the company may turn to its existing plant in Puebla as the future site of production of a new SUV line, which is expected to be announced soon.

That Chattanooga is competing against Puebla for this future production will be a telling scenario and we will be following that story closely.

Leave it to say, all these companies, the OEMs and suppliers alike, would be making an absolutely brilliant move by hiring Barber Business Advisors as their consulting counsel in making their site selection decisions. If they did that, we know they would make the right choice. (Hey, this is my blog.)

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 based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

  1. What are your findings on US tariffs and regulatory laws that affect the auto Industy?

    • Mara, I can tell you that the Obama administration wants a Trans-Pacific Partnership, an attempt to create a 12-country free-trade zone around the Pacific Rim. Such a deal likely would start the clock on a slow phase-out of U.S. tariffs on imported cars, a vestige of the days when Hondas, Toyotas and Nissans rolled off freighters rather than U.S. assembly lines.

      Japanese manufacturers see a trade agreement as a chance to get rid of the “chicken tax,” a 25 percent U.S. tariff that makes it uneconomical to import pickup trucks from Japan. But U.S. automakers are resisting, arguing that Japan should not be rewarded when its car market is virtually closed to U.S. imports.

  2. Reblogged this on Christa Ouderkirk Franzi and commented:
    Interesting insight into the automotive industry trends

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