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James Bryant

Mexico’s Auto Industry in High Gear

by James Bryant | Dun & Bradstreet Editor

April 22, 2015 | No Comments »

Mexico-Truck_FlickrCC-user-mtungate_990pxLast week Ford announced it would invest $2.5 billion to expand its manufacturing operations in Mexico. Ford’s notice came just days after Toyota said it would spend $1 billion to establish its first passenger car plant in Mexico. In March, Volkswagen revealed a $1 billion additional investment in its existing plant in Mexico’s Puebla state.

Ford’s plans include the building of a new line to manufacture gasoline engines inside its existing diesel engine plant in the northern state of Chihuahua. The gas engines will be exported to the US, Canada, South America, and the Asia/Pacific region. Once complete, Ford’s Chihuahua operation will be the largest engine plant in Mexico. Ford will also build a new transmission plant in Mexico’s central Guanajuato state with German transmission manufacturer Getrag.

The spate of investment news highlights the rapid growth of Mexico’s domestic auto industry since the end of the recession and the rebound of global demand for new cars and trucks. In addition to the Ford, Toyota, and VW deals, GM, Nissan, Fiat Chrysler, Audi, BMW, and Kia are all either building new plants in Mexico or have announced investment plans. Carmakers are being attracted to Mexico by its modern infrastructure, free trade agreements, growing supplier base, and inexpensive labor. Hourly auto-factory labor costs in Mexico are between $8 and $10, compared to $48 to $58 in the US.

Mexico’s economics minister estimates recent and planned investments in Mexico’s automotive industry will add nearly $20 billion to the country’s economy and create 50,000 jobs. In the first quarter of 2015, Mexico hit new records for automobile production, domestic sales, and exports. Light-vehicle production increased nearly 14 percent compared to the first quarter of 2014, reaching nearly 850,000 units. Mexico exports about 80 percent of its production. Most exports are to the US, and to a lesser extent, Canada. The EU only accounts for a fairly small fraction of overall exports.

Not everyone is thrilled about Mexico’s rise as a center for light-vehicle production. The United Auto Workers union is particularly vexed by North American production’s southward migration. Later this year the UAW is set to renegotiate new wage and benefit terms with the Detroit Three automakers. Mexico’s emergence as a reliable center for manufacturing cars and trucks for US and Canadian markets may serve as a bargaining chip in those negotiations. In addition to investments in Mexico, the US auto industry has been generally shifting to the south without actually crossing the Rio Grande. The US South — with its younger and growing populations and largely nonunionized workforce — has been attracting automakers for several years, especially foreign brands selling into the US market.

Industry Impact:

Industry analysts note that despite recent improvements in US light-vehicle demand, the market is mature and not structurally growing. The industry is cyclical, and when the next market-downturn occurs, cuts in production capacity may come at the expense of US and Canadian plants rather than their less expensive counterparts in Mexico.

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Photo by Flickr user Mike Tungate, used here under a Creative Commons license.

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