Insight: Mexico drives North American auto investment, challenges China

DETROIT Sun Oct 20, 2013 10:11am EDT

A Nissan Leaf electric car is presented to the media at the Nissan plant on the outskirts of Toluca near Mexico City June 24, 2011. REUTERS/Carlos Jasso

A Nissan Leaf electric car is presented to the media at the Nissan plant on the outskirts of Toluca near Mexico City June 24, 2011.

Credit: Reuters/Carlos Jasso

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DETROIT (Reuters) - The Mexican auto industry is about to go on a $10 billion factory building spree, illustrating the nation's rising economic challenge to rivals from the United States to China.

Japanese and German auto manufacturers are spearheading the drive, say parts suppliers and researchers who see more auto factories built south of the border than in the United States between now and the end of the decade.

The United States will consume the vast majority of the new cars, but Mexico's domestic market has rebounded from a long slump, and in a sign of Mexico's growing global role, auto exports outside of North America will rise faster than those to the United States.

BMW AG, Toyota Motor Corp and Daimler AG's Mercedes-Benz are expected to announce at least $2 billion of deals in the next year or two, according to supplier and other industry sources. That's on top of nearly $6 billion in announced plants by Nissan Motor Co, Honda Motor Co, Mazda Motor Corp and Volkswagen AG.

U.S. automakers, all of whom have been building cars in Mexico since before World War II, will spend another $1 billion or more to upgrade Mexican plants. And Nissan and VW also are considering expansions at existing factories that could total $1 billion or more, according to sources familiar with their plans.

Mexico "is quickly turning into the China of the West," said Joseph Langley, a senior analyst at Michigan-based research firm IHS Automotive, pointing to Mexico's low wages, a strong supply base and a global web of free-trade agreements.

Mexican auto exports beyond North America are growing even faster than those within, according to the Federal Reserve Bank of Chicago. They accounted for nearly 30 percent of the 2.4 million exported last year. Altogether Mexico built 3.0 million cars and trucks, according to Automotive News, compared with 10.4 million in the United States and 2.5 million in Canada.

By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.

The investment shift has implications for auto jobs and labor unions north of the border, particularly in Canada, which will see a 20 percent decline in production, IHS projects. Output will soar 62 percent in Mexico.

U.S. auto production will rise 12 percent, and Detroit-based automakers are expanding domestic production by ramping up the pace at existing factories to as many as three shifts running six days a week, said IHS. By those calculations, Mexico is building more auto plants than in the United States or Canada through 2020.

"It's all about lower production costs and lower export costs," said Michael Tracy, principal at the Agile Group, a Michigan-based auto consultancy. "That's what Canada used to be — the place for low-cost manufacturing and shipping. Now, everybody is targeting Mexico."

Mexico's economy is seen growing faster than Brazil's next year, underscoring the success of Mexico's export-driven model versus regional economic powerhouse Brazil's more protectionist policies. The promised auto investment could help Mexico challenge regional dominance by Brazil. Analysts are warning of excess Brazilian auto production capacity within five years.

Suppliers say the Detroit auto makers, with more than half the production capacity in Mexico, have not signaled any plans to expand vehicle output there. But General Motors and Chrysler this year have said they will install additional engine and transmission production capacity in Mexico.

EMPLOYMENT BOOM

In the competition for jobs with the United States and Canada, "Mexico's momentum, combined with its increasingly dense and capable supply chain, its persistent cost advantage and its trading relationships may give it a leg up," said Brookings Institution researchers in a report released last week.

Auto employment in the U.S. South, where Japanese, German and Korean automakers all operate non-union plants, is holding relatively steady at 18 percent of North American auto workers, according to Brookings.

Pay ranges as low as $12 per hour for temporary workers at plants in the U.S. Southeast, compared with about $35 an hour for skilled union veterans at U.S.-owned plants. Union workers in Canada on average are paid even more; a year ago, GM Chief Executive Dan Akerson described Canada as "the most expensive place to build a car in the world."

But at around $2.50 an hour, manufacturing wages in Mexico are nearly 20 percent cheaper than in China, according to a mid-year Bank of America study. That study put U.S. manufacturing wages at just under $20 an hour, on average.

A shortage of trained engineers and concerns about crime and security may hold back Mexico, according to research firm PwC Autofacts.

Energy costs also are considerably higher than in the United States, but they are lower than in China, according to Boston Consulting Group. And because of Mexico's proximity to the United States and Canada, transportation and logistics costs are lower than for parts coming from China.

LARGEST FOOTPRINT

The largest producer in Mexico, Nissan, opens its third factory next month, the $2-billion Aguascalientes No.2. Nissan built 683,520 cars in Mexico last year, and the new plant will add capacity for 250,000 more, mostly compact models such as the Nissan Sentra for North America and other markets, company officials said.

Moreover, an expansion of Aguascalientes No.2 is already in planning, according to two sources familiar with Nissan's plans. Slated to open in 2016, the sources said, it likely will be dedicated to production of compact luxury vehicles for Infiniti and Mercedes-Benz, which has a platform- and engine-sharing agreement with Nissan.

Nissan said it had nothing to announce, while a Mercedes spokeswoman said joint production of compact cars was an option, but that no decision had been made.

Nissan also is expanding a complex in Cuernavaca, which will take the automaker's total capacity in Mexico to 1.1 million vehicles a year by 2020, two supplier sources said.

Nissan's closest rival south of the border is Volkswagen, which opened a complex in Puebla in 1967. A new $550-million engine plant in Silao, as well as a $1.3-billion assembly complex in San Jose Chiapa that is slated to be opened in 2016 by VW's Audi subsidiary, will raise total VW group annual capacity by 100,000 vehicles to 850,000 by 2020, according to IHS.

VW and Toyota are battling for global sales leadership, but the Japanese automaker lags well behind its rivals in Mexico, where it has only a small truck assembly facility in Tijuana.

Now, the automaker is scrambling to catch up with its competitors, according to two supplier sources who say Toyota is actively shopping for a site. Toyota executives in recent months have said the company needs additional production capacity in Mexico, without providing specifics. A Toyota spokeswoman said the company "would not comment on any potential plant announcement" in Mexico.

BMW, which operates a U.S. assembly plant in South Carolina, also is shopping prospective plant sites south of the border, according to Mexican government officials.

Supplier sources said BMW already has mapped out a production timetable for Mexico, with a tentative plan to begin assembly operations in late 2017, ramping up annual capacity to 200,000 by 2020.

A BMW spokesman said he had nothing to confirm.

Other vehicle and parts manufacturers are expected to set up shop or expand existing facilities in Mexico by 2020, said Tracy, of the Michigan-based auto consultancy.

IHS's Langley summed it up: "The level of activity in Mexico is insane."

(Additional reporting by Simon Gardner in Mexico City and Brad Haynes in Sao Paulo; Editing by Peter Henderson and Tim Dobbyn)

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Comments (5)
chekovmerlin wrote:
Well, I guess if you are going to get your parts from out of this country, it is probably better to give the money to the corrupt Mexicans with their Drug Lords than the Chinese with our debt and their army. At least the money pretty well stays in THIS hemisphere.

Oct 20, 2013 12:52pm EDT  --  Report as abuse
MikeBarnett wrote:
This article illustrates the main reason for the USA’s decline. The US sees everything as a zero-sum game: Mexico’s rise will hurt the US and China. China sees the rises of others as opportunities. China sells more to rich countries than to poor nations. When China buys raw materials from other countries, China adds infrastructure projects that will raise living standards and create more potential customers for Chinese products. Schools, clinics, and sports stadia create a healthy, educated workforce. Factories, shops, and shopping centers create places for people to work, earn, and buy. Roads, railroads, airports, and seaports create transportation to move raw materials, finished products, workers, customers, and tourists. China’s trade with developing countries increases by double digits every year and by triple digits every five years. The EU and US are 1st and 2nd in China’s trade, but ASEAN and Africa are 3rd and 4th and growing faster than trade with the EU and the US.

Looking at a related industry, US oil companies take a short-sighted approach with low wages in the third world to keep costs down. Workers who can afford cars will buy gasoline, motor oil, plastic (oil-based) spare parts, and the list goes on. Higher spending levels would need more fuel to transport more manufactured goods from factories to stores regardless of locations, so US oil companies would win again. US oil companies have chosen to lose the long game.

Also, the US has fought two major wars and numerous interventions for 12 years while China has only fought Somali pirates and occasional attacks in Xinjiang. In support of its wars and morality (?), the US has imposed economic sanctions on 50% of the world while China trades with 100% of the world. China does nothing wrong; the US chooses to destroy itself in wars and interventions; and the US chooses to lose the trade competition.

The US should legalize, regulate for quality, and tax drugs. The 1920′s Prohibition of alcohol did not work. The hundreds of billions spent on drug wars don’t work. The recent Debt Crisis proves that the US should collect tens of billions in revenues instead of wasting hundreds of billions in police, prisons, guards, wasted man hours, wasted construction materials, and the list could go on.

Mexico’s development is not a threat; nor is it “insane.” It is an opportunity. Americans should stop being worthless idiots and look at opportunities for new markets, develop those new markets, and compete. The 4 rules of competition are: 1) learn what your competitor is doing; 2) learn how he is doing it; 3) determine how to do it better; and 4) beat him at his own game.

Oct 20, 2013 4:29pm EDT  --  Report as abuse
Americans need to back the worlds labor force or it will never see these jobs at home again. You better ask somebody!

Oct 20, 2013 11:07pm EDT  --  Report as abuse
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