Dean Barber

A Masterpiece of Economic Development

In Site Selection on July 8, 2014 at 3:11 pm

Over the past couple of years, I’ve been watching with great interest events play out in Mexico, and I have written several blogs on the burgeoning automotive industry there.

(See Why Mexico Works for Automotive published earlier this year and A Defining Combination in Mexico, which I wrote in 2013.)

In the “Why Mexico Works” blog, I wrote about some of the recent “greatest hits” of auto industry expansion in central Mexico including:

• Audi’s new $1.5 billion central Mexico assembly plant, now under construction
• Nissan’s $2 billion plant in Aguascalientes
• GM’s $691 million expansion in Mexican operations
• Mazda’s new $650 million plant in Salamanca
• Honda’s new $ 800 million plant in Celaya, Mexico, adjacent to a new $470 million transmission plant.
• Chrysler’s $1.23 billion expansion its Saltillo plant

And Now Two More Mega Projects

That trend is continuing in hyper drive with the announcement last week that luxury carmaker BMW AG will spend $1 billion to build a 150,000-unit-capacity plant in San Luis Potosi in central Mexico. The plant will begin production in 2019 and will employ about 1,500.

The BMW announcement came less than a week after Daimler AG, and technology partner Renault-Nissan said they will spend $1.36 billion to construct a factory for compact luxury cars in Aguascalientes. The planned joint venture facility — adjacent to the newly opened Nissan plant — will build 300,000 Mercedes and Infiniti vehicles.

Mexico, not long ago a backwater for automotive, is now on pace to become the world’s No. 1 auto exporting country to the United States as early as next year, eclipsing both Japan and Canada. Auto production in Mexico advanced 7.2 percent to 1.31 million vehicles during the first five months of 2014 following last year’s record output of 2.93 million, according to the Mexican Automobile Industry Association.

Plants in Mexico will probably build about 3.1 million vehicles this year following factory openings during the last eight months by Nissan, Honda Motor Co. and Mazda Motor Corp., which between them will turn out an additional 600,000 units.

And now the Germans are following suit with announced plants by Audi, BMW and Mercedes. I predict that in the coming months, the Koreans, either Hyundai or Kia, will unveil plans for a Mexican assembly plant. It’s bound to happen.

There are a couple of driving factors as to why Mexico has become an automotive hotspot, one of which should be obvious and the other maybe not so obvious. Let’s take a shot at the obvious one first.

Fat City

Anyone with any business acumen should know that Mexican workers are paid substantially lower than their U.S. counterparts. Indeed, the average Mexican worker assembling vehicles or making parts earns $7.79 per hour including benefits, according to the Center for Automotive Research. Compare that to $37.38 in the U.S. and $39.04 in Canada.

“When you look at the cost of labor and quality coming out of Mexico, it is hard to beat the proposition that Mexico can deliver to corporations,” Fred Diaz, Nissan senior vice president of sales and marketing told the Detroit Free Press earlier this year.
Lower operating costs typically translate into fatter margins. Welcome to business 101.
Blame It on NAFTA

Maybe a not so obvious reason why Mexico is winning automotive investment is the current trade scenario that now exists. Not only can automakers export vehicles into the U.S. (the second largest auto market in the world) duty free ala NAFTA, but they also have an advantageous launch pad for exports to Latin America and Europe.

In making its announcement last week, BMW said Mexico’s “large number of international free trade agreements — within the NAFTA area, with the European Union and the MERCOSUR [South American trade bloc] member states, for example — was a decisive factor in the choice of location.”

Audi Chairman Rupert Stadler said the very same thing last year. He cited Mexico’s free trade agreements with 44 countries (compared to the U.S. comparable agreements with 20 countries) as a primary reason why his company chose to build a $1.3 billion plant near San Jose Chiapa.

The Dominator

The Audi plant is slated to open in 2016 and is not far from parent company Volkswagen’s plant in the state of Puebla. The Audi announcement in 2013 should have been the big wake-up call to economic developers in the Southeast that not only is Mexico a formidable player, but it is currently in a dominating position.

Also last week, the German newspaper Stuttgarter Zeitung reported that Robert Bosch, one of the world’s largest car-parts makers, will invest 400 million euros (US$546 million) in Mexico and create 3,000 new jobs there by 2017. The newspaper quoted Bosch Chief Executive Volkmar Denner in its report.

As part of the expansion plan in Mexico, Bosch will build a research and development center.

Yesterday’s Wine

I would expect much of this will be a major topic of discussion at the upcoming Southern Automotive Conference, to be held Oct. 8-10, in Birmingham, Ala., my old stomping grounds.

This is an event sponsored by automotive manufacturing associations in Alabama, Tennessee, Mississippi, Georgia and South Carolina. I find it interesting if not a bit perplexing for the conference organizers to claim that “the southeast United States has the fastest growing automotive industry in North America.”

No doubt that was true not so long ago, but that’s becoming yesterday’s wine. Granted, this is a promotional language for an event, and maybe I should give them a pass simply because of that. Still, it doesn’t convey the whole truth or what has been happening on the ground as of late.

There could be several explanations – either the person who wrote the promo is unaware that Mexico is a part of North America. (Heck, there are people in this country who don’t know that New Mexico is a part of the U.S.) Or maybe that person is just uninformed about the billions of dollars currently being invested by automakers in Mexico.

That is not to say that the Southeast has been forgotten by the automotive industry. BMW’s announced Mexican plant follows the company’s decision in March to invest $1 billion to raise annual production capacity 50 percent at Spartanburg, S.C., by 2016 to 450,000 vehicles.

When the South Carolina plant expansion is complete, more BMWs will roll off the line there than from any other facility in the world.

But despite a substantial track record of success in the Southeast, no new major automotive assembly plant project has been announced in the region since Volkswagen began production in Chattanooga, Tenn., in April 2011. And this comes at a time when Mexico is winning those very projects.

A True Boom

Back in March, the Detroit Free Press reported that its research showed that between 2013 and 2015, Honda, Mazda, Nissan, Chrysler and Volkswagen planned to invest $6.58 billion in Mexico. Those numbers, of course, would not take into account BMW’s $1 billion project and the $1.36 billion to be invested by the Daimler-Nissan partnership.

Add the latest numbers and we’re looking at OEM investment approaching $9 billion in a two-year span. Now assume that there will be untold tens and hundreds of millions of dollars invested by suppliers like Bosch that are either expanding operations or starting new operations to service the new and soon-to-be assembly plants in Mexico.

Take that all into account and have yourself a true industry sector boom, the likes of which is only being rivaled by what is happening in oil and gas in this country.

Sean McAlinden, a senior economist for the Center for Automotive Research, told the Free Press that what is happening with the automotive industry in Mexico is a “masterpiece of economic development.”

I could not agree more, even if I do wish I would have said it first.

They Will Not Be Deterred

Not so long ago, I viewed Mexico with a jaundiced eye, as a corrupt, dangerous narco state that should be avoided. The drug cartels certainly are real and a problem, particularly around the border, which has seen its share of violence.

But it has become increasingly clear that the world’s automakers are not deterred from investing billions in the central part of Mexico, as they have weighed the risks and have decided to go ahead and take the plunge, all the while taking certain security precautions.

Ultimately, this speaks to the core of what corporate site selection is all about – weighing the risks against the advantages. Site selection is part art and part science, and I believe best left to those specialists (which would include Barber Business Advisors) who have the knowledge and experience to make it work.

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.

If you liked what you saw here, invite me to speak at your next meeting.

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

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  1. The foreign auto industry has long had a fondness for Mexico with the US companies not far behind. That industry is very comfortable in the Mexico environment. It will be interesting to see if other industries, aka Chinese manufacturers of footwear and apparel, will soon follow due to the proximity to the US market and reduced transit times and cost to deliver.

  2. Good synopsis of the Mexican automotive scene. I worked quite a bit in the past with companies is Monterrey, Saltillo and Mexico City. Despite the drug war battles, it was a great place to do business. The small time zone difference was always a huge advantage over China as well as such issues as travel cost, quality issues, intellectual property protection,
    and all the concomitant problems associated with maintaining the supply chain over a great distance.

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