GM's Mexico plants work on - for now - with low costs

MEXICO CITY (Reuters) - General Motors' plants in Mexico will keep churning out cars and trucks, unaffected by GM's bankruptcy across the border, but Mexico's lower labor costs might work against it as the U.S. government tries to hold onto jobs.

While lower costs at plants in countries like Mexico are considered important for GM's return to profitability, analysts said GM executives could feel pressure to favor U.S. workers.

"I don't think they see it as politically correct to accept more production in Mexico," said auto analyst Pascual Francisco at IHS Global Insight in Lexington, Massachusetts.

GM filed for bankruptcy protection on Monday. The U.S. government will own 60.8 percent of the company once GM has completed its restructuring.

The United Auto Workers union (UAW), which represents tens of thousands of U.S. auto workers, will also be a stake holder and opposes moving production outside the country.

Most of the world's leading automakers have plants in Mexico, where unions are docile and wages are low. GM produced about 500,000 vehicles in Mexico last year, of which about three-quarters were exported.

A senior U.S. official said on Sunday that the government would not allow any of the billions of dollars it was pouring into GM to be used on foreign operations.

"(U.S. government ownership) is going to be a factor limiting moves to put operations in other parts of the world," said Armando Soto, head of Mexico City consultancy Kaso y Asociados, which tracks the Mexican auto industry.

Mexico's auto industry accounts for about 20 percent of the country's exports, but output collapsed this year as the U.S. plunged into recession.

Car plants across Mexico, including GM's four factories, have periodically idled as inventories piled up.

MADE IN MEXICO ... OR NOT

Some GM product lines made in Mexico like the Saturn will be sold by the company to trim unprofitable businesses. Still, GM has said it was too soon to talk about permanently losing any production.

"In the short term we don't see a significant decrease" in planned output, said Mauricio Kuri, GM's spokesman in Mexico.

He said production in Mexico would only be cut if U.S. consumer demand kept falling.

Several analysts said they thought that Mexico would continue to play an important role in GM's North American operations.

"Mexico is certainly well positioned to continue to take advantage of production within the region," said Mike Jackson, an analyst as CSM Worldwide in Detroit, Michigan.

But, he added, "some of that advantage may have been offset" by ownership moving to the U.S. government and UAW.

GM's production in Mexico, where it is the biggest player in the car sector, declined 42 percent in the January-April period of 2009 compared to a year earlier. Total U.S. auto sales also eroded during the period.

In the central Mexican city of Silao, where GM builds trucks and employs over 3,000 people, workers were relieved that there were no plans to close GM's plant there.

That plant is the heart of an industrial complex that employs another 7,000 people in auto parts factories.

"After all the temporary shutdowns, it's good news," said Alejandro Rangel, a senior official in the region's auto parts workers union.

Producing vehicles in a lower cost environment could also mean good news for GM. "If the company really wants to save itself and emerge well from the Chapter 11 process, it will have to do this," said Soto.

(Reporting by Jason Lange; Editing by Toni Reinhold)