Rising tide lifts Mexico carmaking

Free trade has helped stimulate Mexican auto industry

By: Eric Kulisch
Photo: Decha Somparn/Shutterstock
   Mexico has rocketed into sixth place globally among nations that manufacture automobiles and trucks thanks to a combination of industrial policies, location, trade conditions and a suitable labor market.
   In a summer 2016 report, the Center for Automotive Research in Ann Arbor, Mich., analyzed the factors that make Mexico an attractive investment location for auto manufacturers as well as suppliers.
   The report forecasts Mexican vehicle production may more than double, to more than 5 million units per year, during the decade from 2010 to 2020. Continued growth is expected, despite potential drawbacks, such as lack of a well-developed port system, relatively high utility costs, and the country’s notoriously high crime rate.
   Soon production will be half that of the United States, which set a record of 17.4 million vehicles sold in 2015.
   Since the beginning of 2010, automakers, including BMW, Fiat-Chrysler, Ford, General Motors, Honda, Hyundai, Mazda, Nissan, Volkswagen and Audi, have announced a collective $24.2 billion in Mexican investments. Many of the announced investments were for expansion or retooling of existing facilities, but a large portion of the investment was for new factories.
   Mexico now produces 20 percent of light vehicles made in North America, according to the report, “The Growing Role of Mexico in the North American Automotive Industry.”
   Meanwhile, the U.S. share of vehicle production in North America is predicted to drop below 60 percent by the end of the decade. Much of the reduction in U.S. share is due to new production coming online in Mexico rather than shuttering and moving current U.S. production capacity out of the country. The United States is not yet losing substantial existing production to Mexico, but rather it is missing the incremental growth and investment from automakers and suppliers as these companies choose to locate their new investments in Mexico, the automotive think tank said.
   One industry trend is for automakers to build smaller cars in Mexico, while keeping production of big cars, pick-up trucks and SUVs in the United States. Smaller cars have lower margins and Mexico’s lower labor costs make production more viable. That’s what Ford intended to do until President-elect Donald Trump put pressure on the company to change course.
   Ford had planned to shift production of its Lincoln MCK crossover sport-utility vehicle from its Louisville, Ky., plant to Mexico in 2019 (because it’s a low-volume vehicle) and ramp up production of its popular Ford Escape model without any job losses in Louisville. But Ford officials said they wouldn’t make the move after Trump accused them of harming U.S. workers.
   Ford also changed plans last week to build a new assembly plant in San Luis Potosi, with market dynamics seemingly the major factor.
   Automakers are also increasingly choosing Mexico as a place to locate research and development (R&D) centers. Companies such as Fiat-Chrysler, GM, Nissan, Volkswagen, Continental Tire, and Delphi have automotive research and engineering facilities located in Mexico.    Mexican authorities are working to improve the education and legal systems, infrastructure and combat crime, which will improve the business climate.    “The ceiling for Mexican automotive manufacturing capacity has no bounds,” the report said. “If Mexico’s federal initiatives succeed, particularly at expanding port capacity and improving the skills of the labor force, the shift of North American automotive manufacturing to Mexico will continue.
   “Automakers will draw their supply base to Mexico, and given the tendency of automakers to locate research and development facilities near assembly plants, Mexico may also capture an increasing share of engineering, provided continuing improvements in Mexican education systems.”