Out of My Dreams

Auto Sector

Economic data released in July 2014 revealed that Mexico is poised to unseat Brazil from its 10-year reign as Latin America’s largest automobile manufacturer. With production set to hit 3.2 […]

Economic data released in July 2014 revealed that Mexico is poised to unseat Brazil from its 10-year reign as Latin America’s largest automobile manufacturer. With production set to hit 3.2 million vehicles in 2014, Forbes declared Mexico to be America’s “future car capital.” Having established free trade agreements (FTAs) with 44 countries, Mexico is the ideal export base for automakers from Europe, China, Japan, and North America. By 2020, production is expected to hit 4.7 million vehicles annually.

Further burnishing its credentials, Mexico’s automotive labor force is comparatively young, at an average of 24 years old, and works for $40 per day. These simple economics explain why a Toyota Corolla produced in Brazil costs $13,000 more than a Mexican model. These numbers also explain why investment is flooding into automobile manufacturing in Mexico. In the summer of 2014, Infiniti, Mercedes-Benz, and BMW all released plans to build cars in Mexico. South Korean auto giant Kia announced plans to invest $2.5 billion in manufacturing facilities near Nuevo Leon. As well, Audi is nearing completion of a $1.3 billion factory in Mexico that will build luxury SUVs starting in 2016. These investments are spurring further development in related industries such as Ternium, Mexico’s largest supplier of steel to the automotive industry, which recently invested $1.1 billion in the construction of the Pesqueria Industrial Center, to meet the growing demand for steel products within the automobile industry.

In September 2014, Toyota, the last major automaker without a plant in Mexico announced that it was scouting the country for potential manufacturing sites. This news was significant not only because it solidifies the country’s status as a car-manufacturing giant, but also because it is a financial milestone. The Toyota investment would push overall investment by foreign auto manufacturers during Nieto’s tenure to over $10 billion. As many Mexicans remain wary of his reforms, this news gives credence to his claims that deregulation and privatization drive investment dollars and jobs. While September’s news increases Toyota’s Mexican footprint, they already have experience in the country. Toyota has a small manufacturing facility in Tijuana, which has the capacity to make 63,000 pickups annually, however it is not considered a full manufacturing plant.

The rate at which Mexico’s auto manufacturing is taking off belies the careful planning and capitalization on the countries strategic advantages. Mexico’s proximity to the North American and European markets makes it competitive with Chinese manufacturers, who are forced to access European markets through the costly Mediterranean and Red Sea routes. As Mexico streamlines its energy sector, manufacturers can expect their competitive edge to sharpen even further as energy costs fall. Chinese manufacturers pay from 50% to 170% more for industrial natural gas, and are forced to import the majority of their energy needs. As the effects of President Nieto’s energy reforms manifest themselves, Mexico’s advantage will grow. Industry clusters are further enhancing Mexico’s manufacturing capacity, with 89 of the world’s top 100 auto parts makers having production in the country, and manufacturing is concentrated in five states, reducing transportation costs. Mexico also benefits from a privileged export status due to dozens of free trade agreements, including NAFTA, which allows it to manufacture and sell vehicles to the US that would otherwise be hit with heavy taxes. An example is Mexico’s exemption from the “chicken tax” which imposes a 25% surcharge on trucks imported into the US. Mexico’s exemption from this fee makes it an ideal location for companies like Toyota that sell millions of light trucks to the US market. In fact, while Toyota has not yet released details, industry insiders speculate that their impending facilities will be used for the production of its Tundra and Tacoma light trucks.

While manufacturing conditions in Mexico are a bonanza for international car companies, the country stands to benefit as well. In the past, foreign investment was funneled into factories called maquiladoras, which were clustered along the US/Mexico border. Output from these factories was labor intensive, with low value-added. Under these conditions, workers often made less than $5 a day, and plants were criticized for poor labor practices. Now, factories are competing for skilled engineers and technicians, and that is spawning specialized training centers like Queretaro’s aerospace university and Puerto Interior’s National Polytechnic Institute. Graduates can expect to make up to 20 times the minimum wage after only five years in the industry. Moreover, new factories are creating these high paying jobs by the thousands; one new Audi plant nearing construction in Puebla will bring over 13,000 jobs to the region.

With billions of dollars of FDI flowing into car-producing regions of Mexico, and thousands of jobs being created, immense demand for goods and services is making President Nieto’s reforms all the more crucial. In addition to a ready supply of competitively priced energy created by energy reforms, households will require homes, schools, and public spaces. Properly developing this kind of infrastructure will only be possible if banking reforms free up the credit necessary for financing homes, and if educational reforms allow the region to recruit trained and competent teachers. With projections of 1.69 million cars to be exported to the US in 2014, Mexico has surpassed Japan as the number-two car exporter to the US. However, Mexican car dealers face their own challenges. Overall low wages, inadequate and costly financing, and a glut of used cars imported from the US are all crimping domestic demand for new cars. But with the right combination of reform, investment, and pluck, foreign manufacturers will be able to turn their sights on Mexico’s domestic market where their advantages are the strongest.