Mexican car industry in overdrive challenges rivals in US, China

Car industry is set to invest US$10 billion in its factories south of the US border, drawn by low wages and a strong supply base

PUBLISHED : Monday, 21 October, 2013, 1:41pm
UPDATED : Tuesday, 22 October, 2013, 3:39am

The Mexican car industry is about to go on a US$10 billion factory building spree, illustrating the rising economic challenge the country poses to rivals from the United States to China.

Japanese and German carmakers are spearheading the drive, say parts suppliers and researchers, who expect more vehicle factories to be built south of the border than in the US between now and the end of the decade.

The US 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 the country’s growing global role, its vehicle exports outside North America will rise faster than those to the United States.

BMW, Toyota Motor and Daimler’s Mercedes-Benz are expected to announce at least US$2 billion of deals in the next year or two, according to supplier and other industry sources.

That’s on top of nearly US$6 billion in announced plants by Nissan Motor, Honda Motor. Mazda Motor and Volkswagen.

US carmakers, all of which have been building cars in Mexico since before the second world war, will spend a further US$1 billion or more to upgrade their Mexican plants. And Nissan and VW are also considering expansions at existing factories that could total US$1 billion or more, according to sources familiar with their plans.

[Mexico] is quickly turning into the China of the West
IHS Automotive analyst Joseph Langley

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 vehicle exports beyond North America are growing even faster than those within, according to the Federal Reserve Bank of Chicago. They accounted for nearly 30 per cent of the 2.4 million vehicles the country exported last year. Altogether three million cars and trucks were built in Mexico, according to Automotive News, compared with 10.4 million in the US 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 last year, according to IHS.

The investment shift has implications for jobs and labour unions north of the border, particularly in Canada, which will experience a 20 per cent decline in production, IHS projects. Output will soar 62 per cent in Mexico.

US vehicle production will rise 12 per cent, and Detroit-based carmakers 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 vehicle plants than the US or Canada up to 2020.

It’s all about lower production costs and lower export costs
Michael Tracy, Agile Group

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

Pay ranges as low as US$12 per hour for temporary workers at plants in the US Southeast, compared with about US$35 an hour for skilled union veterans at US-owned plants. Union workers in Canada are on average 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 about US$2.50 an hour, manufacturing wages in Mexico are nearly 20 per cent cheaper than in China, according to a mid-year Bank of America study.

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.