Dan Emerson (Q3 2015)
Just over a decade ago, when Quebec-based Bombardier Recreational Products Inc. (BRP) decided to try Mexico as a manufacturing market, the off-road vehicle manufacturer took a measured approach. In 2003, BRP tested the waters by leasing a facility in Ciudad Juarez, Chihuahua, to assemble outboard engines for export. Two years later, the Canadian firm decided to transfer all of its ATV assembly and engine manufacturing operations to Juarez.
Building on its first, successful ventures south of the border, over the last decade BRP has steadily increased its stake in Mexico to more than $190 million worth of manufacturing facilities in the states of Chihuahua and Querétaro, and an extensive distributor network.
Investments Continue to Rise
“Mexico has really burst on the scene as a legitimate player in the global manufacturing sector,” says Bob Cook, president and CEO of the El Paso, Texas-based Cook Strategies Group, LLC. “Every trend I look at indicates that rise is going to continue.”
Mexico – Global Manufacturers
Agreeing with that prediction, the Boston Consulting Group estimated in a 2013 report that Mexican manufacturing exports will increase up to $60 billion annually by 2018.
According to Banco de Mexico data, Mexico has received over $135 billion in foreign direct investment (FDI) over the last five years — almost $86 billion of that within the past three years. The largest share of FDI in Mexico comes from the United States, representing over one third (34 percent) of total FDI over the past three years. Canada has been the source of another 10 percent of FDI in Mexico over the same period.
More than half (58.6 percent) of the FDI coming into Mexico was invested in manufacturing enterprises, with the top five sectors being food and beverages; transportation equipment; chemicals; electronics; and electric equipment. The automotive sector alone added more than 93,000 jobs in 2014, growing nearly 15 percent.
However, the growth trend has also been “pretty diverse,” Cook says. “We’ve seen a lot of growth the across the board,” a trend which bodes well for the country’s economic future. The most pronounced growth has taken place in “high value” categories such as aerospace, automotive, and electronics.
Mexican manufacturing exports are estimated to increase by up to $60 billion annually by 2018. An Automotive Powerhouse
In total, automakers and parts suppliers have earmarked more than $20 billion of new investments, Mexican officials say. The automakers’ presence has also spawned major growth of smaller vendors who supply the auto plants, according to Cushman and Wakefield’s Gonzalo Gutierrez, who is the firm’s senior director of Industrial Brokerage Services for the Northeast Region of Mexico, based in Monterrey. These vendors come from all over the world, but most hail from the U.S., Japan, Germany and, more recently, Korea, Gutierrez says.
Meanwhile, recreational vehicle maker BRP has gradually upped the ante on its Mexican investment. In 2013, BRP opened a $100 million manufacturing facility in Querétaro, which employs 1,100 people. Last year, BRP decided to build a second plant in Juarez, to expand its Can-Am product offering and meet future demand for off-road vehicles. When completed in late 2017, the $55 million facility is expected to employ about 900 workers.
Aerospace, Electronics, and Medical Devices
The aerospace sector in Mexico has also been growing rapidly. Last year, Mexico exported an estimated $1.9 billion worth of aerospace products to the U.S., an amount that has quadrupled since 2009, Cook notes. In that sector, “Mexico is rapidly moving up the global rankings.”
Regarding regional distribution of FDI, just over half accrues to Mexico City and the surrounding state, according to Cook. About a third of the balance goes to the four states of Chihuahua, Jalisco, Puebla, and Nuevo Leon.
In addition to being an automotive center, the border city of Juarez has become a manufacturing center for electronics and medical devices. Its electronics manufacturers include Electrolux, Flextronics, Foxconn, and Lexmark. Its medical device companies include Cardinal Health, GE, and Johnson and Johnson. Other northern states have benefited from the growth of the electronics industry, including Chihuahua, Baja California, and Tamaulipas.
Mexico’s developing manufacturing clusters have also drawn smaller companies. One example is Greatbatch Inc., which plans to move 170 jobs from its Electrochem Solutions Inc. manufacturing facility in Beaverton, Ore., to a new plant in Tijuana (Baja California) by year’s end.
The southern Mexican region has also benefited from lower labor costs, which have helped attract clothing and textile manufacturers to cities including Campeche and Veracruz.
Boosting Mexico’s Natural Advantages
The Mexican government has been proactive in modernizing the country’s business climate to 21st century standards. Mexico’s homegrown business advantages include lower transportation and warehousing costs, an improved ability to respond to customer demands, improved control of intellectual property, the availability of proximate time zones between management and production locales, and the cultural similarities between the U.S. and Mexican markets.
Augmenting Mexico’s expansive, free-trade policies, the government has also been proactive in modernizing the country’s business climate to 21st century standards. Investing in education has been a major thrust to ensure a well-prepared, bilingual workforce.
According to the United States Embassy in Mexico, more Mexicans — almost 100,000 more — earn engineering degrees annually than Canadians and Germans. And during the past decade, Mexico has doubled the number of its public two-year colleges and four-year universities. The government financed 140 new colleges and universities, with 120 of those emphasizing science and engineering.
Another priority has been improving Mexico’s roads, bridges, and utility infrastructure to help expedite the flow of materials and manufactured goods. Revisions in the country’s energy policy have encouraged private-sector investment in new natural gas pipelines and power lines. Additionally, earlier this year, AT&T announced plans to invest $3 billion to extend its high-speed mobile Internet service to Mexico and cover 100 million consumers and businesses by year-end 2018.
Mexico also continues to benefit from the near-shoring trend among some American companies — i.e., moving manufacturing operations to Mexico from China and other low-cost countries. Average manufacturing labor costs in Mexico are now almost 20 percent lower than in China — a sea change from 15 years ago, when Mexico’s labor costs were 58 percent more expensive than China’s, according to Forbes.com.
Are there other supply chain issues in Mexico companies need to be aware of? “There are no critical issues related to transportation inside Mexico,” Gutierrez says. “Since the last five years, the 3PL companies, such as the companies with distribution centers in multiple (Mexican) states, have handled their operations with no inconvenient events, while they have significantly increased their operations, every year.”
Some Challenges Ahead
Yet, with such a rapid economic expansion, some growing pains are to be expected. There are several challenges facing the country, which the current Mexican administration is working to address, according to Cook, in order to help promote continued economic growth.
To capitalize on Mexico’s abundant energy resources, the country will need new capital investment and technology upgrades in the processing and distribution of energy. “That’s opening up as we speak,” Cook says. This year, Mexico opened its oil industry to foreign investment for the first time since the 1930s, offering for auction exploration rights to 14 shallow-water fields. And this summer, Mexico’s Federal Electricity Commission began taking bids on 24 projects that will enable the generation of an additional 1,442 megawatts of power, along with adding nearly 1,500 miles of natural gas pipeline and almost 2,000 miles of power lines.
Competition for skilled labor can be expected to heat up, along with the overall economy. “If you need specialized engineers and technology, you will not find them along the border; you need to go closer to Mexico City,” notes Sylvain Blanchette, BRP’s VP of Mexican operations. Generally, the average cost of labor increases moving south from the border to the country’s interior. That may be due to more competition for skilled labor, due to the increased number of auto, aerospace, and other manufacturers, says Blanchette.
To sustain its manufacturing expansion, Mexico is going to need “to have an even greater emphasis on skilled labor,” Cook says. However, in spite of the challenges ahead, Mexico’s ascendance as a global economic power should continue, Cook believes, citing its globally competitive cost structure, young workforce, and friendly trade policies.
Mexico’s richest resource — and the real driving force behind the growth boom — may be its people, says Blanchette, who praises the knowledge, enthusiasm, and initiative of the Mexican workforce. “When we have come to Mexico with projects, the people we work with have been extremely eager to learn and improve what they do,” Blanchette concludes.
By DAMIEN CAVE
GUANAJUATO, Mexico — A decade ago, Ivan Zamora, 23, might have already left for the United States. Instead, he graduated in May from a gleaming new university here, then moved on to an engineering internship at one of the many multinational companies just beyond the campus gates.
His days now begin at dawn inside the new Volkswagen factory a short walk away, and when he leaves at night, he joins a rush of the upwardly mobile — from the cavernous new Pirelli plant next door, an array of Japanese car-parts suppliers and a new Nivea plant on a grassy hillside.
“There’s just a lot more opportunity to study and to succeed,” Mr. Zamora said at the factory, surrounded by robots, steel, glass and young technicians. “Both my parents are teachers. They lived in an entirely different era.”
Education. More sophisticated work. Higher pay. This is the development formula Mexico has been seeking for decades. But after the free-market wave of the 1990s failed to produce much more than low-skilled factory work, Mexico is finally attracting the higher-end industries that experts say could lead to lasting prosperity. Here, in a mostly poor state long known as one of the country’s main sources of illegal immigrants to the United States, a new Mexico has begun to emerge.
Dozens of foreign companies are investing, filling in new industrial parks along the highways. Middle-class housing is popping up in former watermelon fields, and new universities are waving in classes of students eager to study engineering, aeronautics and biotechnology, signaling a growing confidence in Mexico’s economic future and what many see as the imported meritocracy of international business. In a country where connections and corruption are still common tools of enrichment, many people here are beginning to believe they can get ahead through study and hard work.
Mr. Zamora’s new job, for example (he was hired by VW at summer’s end), started with his parents prioritizing education, not emigration, and scrimping to give him a computer and, more recently, German lessons. The state of Guanajuato added to their investment by building the affordable polytechnic — part of a public university system that offers technical degrees as well as undergraduate and graduate degrees — and a sprawling interior port to lure the international companies that hire its graduates. And now Mr. Zamora has a job that pays enough to help his sister pursue her dream of studying marine biology.
This is a Mexico far different from the popular American conception: it is neither the grinding, low-skilled assembly work at maquiladoras, the multinational factories near the border, nor the ugliness of drug cartels. But the question many experts and officials are asking is whether Mexico as a whole can keep up with the rising demand for educated labor — and overcome concerns about crime and corruption — to propel its 112 million people into the club of developed nations.
“We are at something of a turning point,” said Eric Verhoogen, a professor of economics and international affairs at Columbia University. “The maquila strategy has been revealed not to have been successful, so people are looking around for something new.”
The automotive industry has been Mexico’s brightest spot so far. In many ways, central Mexico has already surpassed Detroit. There are now more auto-industry jobs in Mexico than in the entire American Midwest. At least 100,000 jobs have been added in Mexico since 2010, according to a recent Brookings Institution report, and General Motors, Ford, Chrysler, Honda, Mazda, Nissan, Audi and Volkswagen have all announced expansion plans, with nearly $10 billion to be invested over the next several years, mainly in a 400-mile corridor from Puebla to Aguascalientes.
The work tends to be better paid than what could be found in the area before the companies arrived. It is still a fraction of the salaries of American workers — many employees on the factory floors in the interior port make around $3.65 an hour — but higher-paid professionals make up about 30 percent of the employees at many auto plants here, roughly twice as much as in the maquiladoras near the border.
And although robotics and other changes have kept overall employment in the industry somewhat limited, more of the industry has moved to Mexico as the car business has recovered. Around 40 percent of all auto-industry jobs in North America are in Mexico, up from 27 percent in 2000 (the Midwest has about 30 percent), and experts say the growth is accelerating, especially in Guanajuato, where state officials have been increasing incentives.
The 2,600-acre interior port, for example, has become a draw because, in addition to the polytechnic, the state built customs facilities, a railroad depot and a link to the local airport. Guanajuato also helps find candidates for companies to hire and, in some cases, gives them free classes to help them pass standardized tests required for employment. At Volkswagen, many of the young men and women flowing in and out of test-taking sessions said they benefited from the assistance.
Guanajuato even pays companies a small bonus for sending workers abroad for training. Mauricio Martínez, 29, an engineer at the Italian tiremaker Pirelli, which was one of the first companies to take up residence in the port, said he and his wife, Mariana, still saw their trip to Prague after his training in Romania as a fairy tale.
“I’m a small-town guy,” he said one day after work, in his kitchen with a beer. “But there I was; an Italian company from Milan hired a small-town guy from Mexico.”
He said he now makes $2,250 a month ($27,000 a year), far more than at his old job at a tow-truck company and roughly double the median household income nationwide. That’s more than enough for a middle-class life here. Both husband and wife drive to work, and this year they bought a three-bedroom townhouse in a new development for about $80,000. On a recent visit, “The Big Bang Theory” played on their flat-screen TV as a neighbor watered her patch of lawn no bigger than a beach towel.
While cooking dinner, Mrs. Martínez said that her husband’s job had given them the credit and stability they needed to start her own business — a gourmet salad shop in a colonial village nearby. And as is common in other countries with an expanding middle class, such as Brazil, their economic rise has led to demands for better government.
When someone recently stole Mrs. Martínez’s cellphone, she said she went straight to the police over the objections of her father, who warned her nothing would be done. “He was right,” she said. “But next time it happens, I want my complaint to be there. I’m trying to make a living here, and I want a legal life.”
“My generation, we’re more prepared,” she added. “My parents, they never even finished school; we know if something is going to change, it has to start with us.”
Many young, middle-class Mexicans are coming to similar realizations, propelled by 13 years of democracy and the Internet. But their ranks are small. As the auto industry rebounds and wage inflation in China makes Mexico more attractive for global manufacturers, many foreign employers say that skilled employees are harder to find and keep, while the mass of Mexican workers do not measure up to what many companies need.
Only 36 percent of Mexicans between 25 and 64 have earned the equivalent of a high school degree, according to the Organization for Economic Cooperation and Development. Despite a rapid rise in foreign investment, with 2013 shaping up to be Mexico’s best year on record, the country is still struggling.
The Mexican economy has slowed significantly this year, and even when it was doing better, the nation’s poverty rate fell only 0.6 percent to 53.3 million people — roughly 45 percent of the population — between 2010 and 2012. Crime and a notoriously weak justice system continue to undermine the economy, with Mexico’s minister of health recently estimating that it costs 8 to 15 percent of the country’s annual gross domestic product. “It’s all the stuff we hear about again and again: Mexico has an education system that is not on par with its peers; a banking system that’s not lending; it has rule-of-law issues and public-security issues and corruption being a huge issue,” said Christopher Wilson, an economics scholar at the Woodrow Wilson International Center for Scholars in Washington. “The list goes on and on.”
Many economists and business consultants are keeping a close watch on President Enrique Peña Nieto’s efforts to improve education, open the energy sector to private investment and overhaul taxes.
Kevin P. Gallagher, an economist at Boston University, said Mexico also needed to prioritize innovation. “South Korea and Taiwan spend over 2 percent of G.D.P. on research and development; China spends almost 2 percent,” he said. “Mexico spends 0.4 percent.”
But on a smaller scale in Guanajuato, individual success is creating a sense of possibility. Some of Mr. Zamora’s friends are studying German, too, hoping to land work at Volkswagen, and a similar sense of momentum pervades the polytechnic, where students in pristine industrial labs, like Javier Eduardo Luna Zapata, 24, have begun to dream of more than work at an auto plant.
He and a few classmates won a prestigious design award this year for a scanner that would check airport runways for debris. “We want to start a company,” he said, displaying a video of the project on his cellphone. “We’re going to look for investors when we graduate.”
His classmates, representing a new generation of Mexicans — mostly geeks in jeans carrying smartphones — all nodded with approval.
Most people outside of Mexico have never heard of Aguascalientes. But in the auto industry, this city of 1 million residents is known as ground zero for Nissan‘s expansion plans in the Americas.
This week the Japanese automaker is opening its second final assembly plant in Aguascalientes, giving Nissan as many final assembly plants in Mexico as it has in the U.S.
“Mexico is quickly becoming the fastest export hub in terms of vehicle production virtually anywhere in the planet,” said Michael Robinet, a director with IHS Automotive.
Nissan is not the only automaker expanding production in Mexico.
Honda, Mazda and Audi are adding assembly lines in the country, which has shot past Canada to become the second-largest auto producer in North America.
Mexico is on pace to build 3.15 million vehicles this year, which represents 19 percent of all cars and trucks made in North America.
Ford‘s assembly plant in Hermosillo is among the company’s most productive in the world.
“Mexico has proven for a long time [that] … it’s a fantastic world-class-quality operation,” said James Farley, Ford’s executive vice president of global marketing, sales and service.
Lower costs fuel Mexican auto boom
Mexico is one of the fastest-growing locations anywhere for auto assembly and parts production.
Calsonic Kansei, which supplies control panels and exhaust systems for Nissan, Mazda and General Motors, has just expanded its operations in Aguascalientes. The Japanese company is increasing to 3,100 workers from 1,400 to keep up with demand from Mexico’s auto production.
“The growth here reminds me of China in the early ’90s,” said Bharat Vennapusa, chief operating officer at Calsonic.
Why the surge?
A combination of low costs, a perfect location and a slew of free trade agreements make it advantageous to build and ship in Mexico.
“Mexico over the next decade will likely control more than half of the North American auto employment base,” said Mark Muro, senior fellow at the Brookings Institution. “It is an extremely desirable place for labor-intensive assembly, with …. enough engineers and trained workers. And it’s got … superior trade connectivity to the rest of the hemisphere.”
For example, Mexico is one of the few countries with a trade agreement that allows automakers to ship vehicles to Brazil at a cost lower than from plants in the U.S. or Europe.
Meanwhile, Mexican auto workers’ wages are much lower than those in the U.S.
“Somebody in northern Mexico might be making $3 or $4 an hour at an auto plant. An autoworker in Ohio might be making five to eight times that,” said Harley Shaiken, a labor relations professor at the University of California at Berkeley. “It is a very large disparity, which is critical, since the productivity and quality is the same or even higher in Mexico.”
Mexico limiting U.S. auto expansion?
More production of cars and trucks in Mexico raises the question: How will it impact plants elsewhere in North America?
“Mexico very clearly is going to press down on production in the U.S., and in particular in Canada,” Shaiken said. “So far we have seen a much larger hit in Canada, but it is truly affecting both countries.”
Given that most U.S. plants are close to capacity, the location of expanded production will become an urgent question over the next four to five years.
However, Robinet said, the U.S. auto industry can still be competitive with that of Mexico.
“If the U.S. is able to gain an EU trade agreement and some other trade agreements, and continue to work through the process of reducing costs … there is no doubt that the southeastern United States and Mexico can be really competitive on an equal basis,” he said.
‘Level of activity in Mexico is insane’
|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.
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.
$12 an hour
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 CEO 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.
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.”
Nissan Mexicana in July celebrated building 4 million vehicles at its plant in in Aguascalientes, Mexico. The plant started operations Nov. 13, 1982.
2013 Getty Images
Quickly becoming one of the world’s automotive manufacturing powerhouses, Mexico may get another boost if Germany’s BMW and Korea’s Hyundai decide to open plants in Latin America’s second-largest economy.
Both automakers have held talks with the Mexican government, and while still in the nascent stages, at least one of the manufacturers could announce plans for new plant as soon as next year, Mexican Economy Minister Ildefonso Guajardo told Bloomberg.
“With both of them, there have been conversations for future plants,” he said. “I cannot talk for them, but I think that starting 2014 we’ll have new announcements. At least for one.”
Neither BMW nor Hyundai responded to a request for comment from Bloomberg on Guajardo’s statements.
Moves by BMW and Hyundai into Mexico would further boost a burgeoning auto industry in the U.S.’s southern neighbor, even as Detroit progresses in its rebound from the 2009 bailout and BMW’s Spartanburg, South Carolina plant continues to be one of the German car’s top producers.
Both Ford and General Motors are bumping up their investments in Mexico and Asian car giants Nissan, Honda and Mazda have all broke ground on plants there as well.
Volkswagen has also made deep inroads in Mexican auto manufacturing, with an announcement earlier this year of plans to build its popular Golf model at its plant in the city of Puebla. Golfs built at the Mexican plant will be sold in South and North America, where the company has fallen behind its competitors in a packed compact car market.
The Mexico move is part of a larger three-year, $5 billion plan to make Volkswagen the largest automobile manufacturer in the world. Mexico, with its low labor costs and shielded from the unfavorable currency fluctuations between the dollar and euro, is part of Volkswagen’s strategy in the Western Hemisphere.
“With its existing infrastructure, competitive cost structures and free-trade agreements, Mexico is the ideal location to produce the Golf for the American market,” Hubert Waltl, the head of production at VW’s passenger car brand, said in a statement.
Auto output in Mexico rose 4.4 percent in the first eight months of this year from a year earlier to 1.99 million vehicles, according to the Mexican Automobile Industry Association. Production last year climbed 13 percent to a record 2.88 million.
“Investors are confident of Mexico’s future, regardless of the slowdown in the first semester,” Waltl said. “There is a lot of trust in the future of the Mexican economy.”
That boom coming from North America’s southernmost state isn’t just gunfire
by David Agren on Monday, March 18, 2013 11:50am
A new truck rolls off the assembly line every minute at the GM factory in the conservative Catholic heartland of Mexico’s Guanajuato state. The factory in Silao, set in the shadow of a giant Christ statue considered the geographic centre of the country, produces so many trucks that GM has expanded its workforce by more than 60 per cent since 2008 and has plans to hire even more. The nearby Volkswagen plant just opened a $550-million engine plant and Toyota has announced plans for a facility down the road.
Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year, while factories in border towns like Tijuana and Ciudad Juárez churn out everything from plastic toys to plasma TVs. Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise. “This has nothing to do with Mexico,” Ed Juline, head of Guadalajara-based Mexico Representation, a business consultancy, says of the trend. “It has everything to do with China.”
Ten years ago, wages in Mexico were six times higher than those paid in China, but the gap had narrowed to 40 per cent by 2011, according to an International Monetary Fund report. Geography also works in the country’s favour, as companies take advantage of its easy access to U.S. and Latin American markets, where economies are expanding, demanding Mexico’s autos, appliances and advanced electronics.
But manufacturing is just one part of the picture, as Mexico moves from mess to can’t-miss status, the hottest of the emerging markets. “This is Mexico’s moment,” said new President Enrique Peña Nieto, summing up the sentiment at his December inauguration. Indeed, the Mexican government is projecting growth of 3.5 per cent this year—better than Brazil, which investors are suddenly bearish on after a decade of adulation. In Brazil, a credit bubble appears set to burst and demand for its commodities is diminishing.
The scenario has created a collective giddiness among elites and investors unseen since the early 1990s, when Mexico prepared to enter NAFTA and appeared poised for First World status, only to suffer a calamitous peso crash. Last year, investors poured $80 billion into Mexican securities—five times more than went to Brazil, according to the Banco de México. But external factors also benefit Mexico, especially as the BRIC countries lose their lustre.“Brazil is a mess,” says Manuel Molano, adjunct-director of the Mexican Institute for Competitiveness, a Mexico City think tank, “China is decelerating, India’s growth has been stalled for three years, Russia is nothing special.”
Peña Nieto is pledging structural reforms to the energy, tax and social security systems—measures his party previously opposed. The reforms, he says, will generate six per cent economic growth, tripling the rate of the past dozen years. He’s formed a pact among the three main political parties to pursue his agenda and has already struck deals to overhaul labour laws and an education system that allowed teachers to sell their positions like personal property. “He’s a smart political negotiator,” says Molano. His administration is “resourceful in convincing people.”
The story doesn’t begin with Peña Nieto. For three decades, government policies have been geared to suppressing spending and controlling inflation that had climbed to triple digits. The central bank’s interest rate and inflation both now hover around four per cent, while central government debt is low, amounting to approximately 28 per cent of GDP. (It’s around 36 per cent in Canada.)
Remarkably, the raging drug war has done little to dampen enthusiasm for Mexico. “A pile of 49 headless human bodies on a roadside is apparently less scary than an interest rate cut,” says Ulysses de la Torre, a blogger who focuses on emerging markets.
How much the “boom” benefits average Mexicans remains to be seen. Almost half (46 per cent) say their economic condition actually deteriorated over the previous year, according to a recent poll, and many expect little improvement in the short term, says Federico Berrueto, director general of polling firm Gabinete de Comunicación Estratégica. Fully 59 per cent of Mexicans now work in the informal economy. “The average person sees unemployment, that ends don’t meet, that their salary is low,” says Berrueto. When compared to the perspective of international investors, “it’s two distinct worlds.”
Keywords: Manufacturing, Automation, Discrete, Process, Export, FDI, Mexico, Mexican Market, Market Research Study, Economy, Growth
Mexico is a significant market for manufacturing and automation products. Mexicans are the hardest workers in the industrialized world, China included. The OECD—the Organization for Economic Cooperation and Development, of which the United States is a member—studied working trends in three dozen countries, including paid and unpaid work. Mexicans topped the list, and exceeded the United States in both categories.
In 2011, Mexico received almost 20 billion dollars of Foreign Direct Investment (FDI), consolidating Mexico as one of the top recipients of FDI among emerging economies in the world. Mexico’s manufacturing industry and the financial services sector are top among the most preferred investment targets. Among the manufacturing sectors, the main recipients are automotive, iron & steel, beverages, and chemicals.
“Mexico has signed 11 Free Trade Agreements with 43 countries, including the United States, Canada, the European Union, and Japan, some of the largest and most lucrative markets in the world. Mexico actively participates in world trade. It is the 10th largest exporter and importer worldwide, accounting for 2.5% and 2.6% of the world’s total exports and imports, respectively. Mexico is a land of manufacturing opportunities,” according to Steve Clouther, the principal author of ARC’s “Automation Systems Market Outlook for Mexico”.
In contrast to the widening crisis in the euro zone, Mexico can point to 17 years of macroeconomic stability, low inflation, manageable debt, an open economy, and increasing competitiveness. The gross domestic product expanded 3.9 percent in 2011, and there are forecasts suggesting that by 2050 it could be larger than that of France. Mexican factories are exporting record quantities of televisions, cars, computers, and appliances, replacing some Chinese imports in the United States and fueling a modest expansion.
The automotive industry is a very strategic industry for Mexico. In 2011, the automotive sector accounted for approximately 4 percent of the Mexican GDP and 20 percent of Mexico’s manufacturing GDP. According to the ranking of 40 countries by the International Organization of Motor Vehicle Manufacturers (OICA), based on car production, Mexico ranked eighth globally. The aerospace industry is another very strategic industry for Mexico. From an automation perspective, GMC and drives account for the largest investment, followed closely by PLCs, IPCs, and panels.
In 2010, Mexico was the seventh-largest oil producer in the world, and the third-largest in the Western Hemisphere. State-owned Petroleos Mexicanos (Pemex) is one of the largest oil companies in the world. Mexico is consistently one of the top three exporters of oil to the US, along with Canada and Saudi Arabia.
The Distributed Control System (DCS) sector is by far the largest automation technology for the process industries, especially oil & gas. All of the major DCS suppliers have a strong presence in Mexico.
Leading Automation Technologies
The DCS and SCADA sector accounts for more than a third of the revenues, and PLCs, IPCs, and Panels account for another fifth.
If you’ve ever been to Mexico City, chances are you’ve sat in an old Volkswagen Bug taxi, painted in muted red and gold, stuck in Mexico City’s notorious traffic.
“Here we call them ‘Donkeys,’” says Victoriano Luna, a taxi driver who has been driving a Bug for 32 years. “A horse can run fast, but it doesn’t endure. A donkey does endure, just like this car.”
Volkswagen first came to Mexico in 1967, when it opened a plant in Puebla, a few hours drive from Mexico City. For decades, the Bug was the biggest-selling car in the country.
Today, the Peubla plant has expanded to become the largest auto factory in North America, employing 18,000 people. It’s a state-of-the-art facility full of industrial robots and blinking computer equipment. The plant has the capacity to produce 2,500 cars a day, in popular models such as the Jetta and Golf.
After rolling off the line, the cars are packed into trains and shipped off to retailers. Most of them are sold abroad. Mexico is now the eighth biggest auto producer in the world, as well as the world’s fourth biggest exporter, according to the Mexican Automotive Industry Association.
In 2012, the country produced almost 3 million cars, a national record. Experts say those numbers are on track to keep growing.
“Mexico is becoming quite an automotive powerhouse,” says Thomas Karig, a vice president at Volkswagen Mexico. Karig says Mexico is an attractive place for car companies to set up shop for several reasons: a great location for exporting to North and South America, an open trade policy, and experience in the work force.
Last September, Audi, a Volkswagen subsidiary , announced the construction of a new plant nearby. They’ll be assembling the luxury Q5 SUV. Eduardo Solís, president of the Mexican Automotive Industry Association, says it’s a watershed moment for the country.
“There is an important element here where Mexico is, currently in the automotive industry, associated with good quality, with good products,” says Solís. “We have been scaling up in the value chain.”
VW Factory in Puebla, Mexico (Photo: VW Mexico)
Until recently, Mexico’s economy was based on low-paying, labor-intensive industries like textiles. About a decade ago, those industries started fleeing to China or Central America, where it’s even cheaper to operate. But now, Mexico is growing big-time in better-paying industries, like autos, aerospace, and technology, which require better-educated workers.Hector Muñoz, a 48-year-old technician at Volkswagen, is a living example of that change. Muñoz comes from a family of street vendors, and scored a job at Volkswagen after an uncle got him interested in fixing up cars.
After 20 years working on the VW line, he makes 12,000 pesos a month. That comes out to only about $30 US a day, but its six times minimum wage in Mexico, putting him squarely in the country’s middle class. Thanks to this job, he’s been able to put his kids through college. Two of them are now engineers, a fact he’s really proud of.
“Before there weren’t as many opportunities as there are now,” says Muñoz. In my case, being at Volkswagen has really encouraged me to push my kids to learn more, to get better educations.”
There are a lot of others like Muñoz. According to the World Bank, 17 percent of Mexico’s population joined the middle class between 2003 and 2009, now making up almost a quarter of the population.
But there’s a long way to go – half of Mexico still lives below the poverty line. Victor Piz, editor of Mexico’s chief financial newspaper El Financiero, says those people are being left out this high-tech boom.
“I think the main problem in Mexico is the distribution of revenue coming into the country,” says Piz. “None of it goes into the pockets of Mexico’s poor. This wealth doesn’t matter to them because they’re not receiving any benefit from it.”
Piz also warns that Mexico could have a problem sustaining its recent growth – almost 4 percent for two straight years – because it relies too heavily on one trading partner, the US. Mexico has free trade agreements like NAFTA with 44 countries, but still overwhelmingly exports to its neighbor to the North.
“When the United States turns off its engines, inevitably, Mexico also has to turn off its engines as well,” says Piz.
Today, Mexico City traffic is no longer a sea of VW Bugs. There are the gleaming Lexuses of the wealthy, and the Nissans of the country’s middle class – not to mention the mini-buses that transport the working poor. But taxis are still being made in Mexico. New York City’s brand new taxi fleet is currently in production at a Nissan plant in Cuernavaca.
This story was produced in collaboration with reporter Javier Risco and Round Earth Media’s Mexico Reporting Project.
Toyota Motor Corp. (7203)’s plan to source cars from Mazda Motor Corp. (7261)’s Mexican plant starting in 2015 highlights global automakers’ growing reliance on the Latin American nation for quality production as well as lower costs.
Mexico’s vehicle output is on pace to reach a record 2.86 million units in 2012, according to researcher LMC Automotive. More is on the way, as Honda Motor Co. (7267) is building its first large Mexico assembly plant, Nissan Motor Co. (7201) adds a third factory, Ford Motor Co. produces midsize sedans and Volkswagen AG (VOW)’s Audi opens the country’s first luxury vehicle plant in 2016.
“Across a range of industries, every single company in America that I’ve talked to will tell you that either their best plant or one of their top plants is in Mexico,” said Jeff Liker, an engineering professor at the University of Michigan. “They can build quality and they can deliver on time.”
From Japanese carmakers seeking relief from the strong yen to German and U.S. rivals eager to expand exports to the rest of Latin America, Mexico is evolving from its traditional role as a source of low-cost labor. Automakers are focusing investment within about 300 miles (483 kilometers) of Mexico City to take advantage of the nation’s newfound reputation for quality.
Mexico’s trade agreements covering 44 countries also make it an attractive export platform to ship cars to South America, Asia and Africa as well as the U.S. and Canada.
“Mexico has more free trade agreements than the U.S.,” said Sean McAlinden, a labor economist with the Center for Automotive Research in Ann Arbor, Michigan. “They have a free trade agreement with the EU that saves them a 10 percent tariff that’s applied to U.S.-built vehicles. If you’re going to build a world car like Q5 or an Infiniti, Mexico is where you’re going to do it.”
Central Mexico “will definitely be the hottest growth area with respect to North American vehicle production this decade,” Michael Robinet, managing director of consultant IHS Automotive, said in a telephone interview from Northville, Michigan. “The shift to Mexico is not only trying to feed the U.S. and Canadian markets, it’s more of a global production play.”
Automakers have announced $7.8 billion in Mexican investments in the past 24 months, McAlinden said.
Mazda agreed to build a Toyota-branded subcompact car based on the Mazda2 hatchback at a $500 million plant the Hiroshima, Japan-based company is building in the central state of Guanajuato. The factory will supply Toyota with 50,000 units of the vehicle annually when production begins in mid-2015.
“As with all other regions where we have manufacturing operations, we’re confident this new vehicle produced in Mexico will be of the highest quality,” said Steve Curtis, a spokesman for Toyota’s North American unit.
Ford (F), seeking to win midsize sedan sales in the U.S. from Toyota’s Camry, this year began building a revamped Fusion sedan in Hermosillo, Mexico. The company has said it will also produce the car with looks evocative of an Aston Martin in Flat Rock, Michigan, next year. Ford in March said it planned $1.3 billion in upgrades for Hermosillo.
Toyota has operated a small Tacoma pickup factory near Tijuana, Mexico, that’s far from the center of the nation’s automotive supplier base.
Along with supplying vehicles for the U.S. and Mexican markets, the plant also helps the Toyota City, Japan-based company comply with a national rule requiring major automakers to have at least 50,000 units of local production capacity or face import tariffs.
Toyota’s manufacturing agreement with Mazda “is just catch-up,” said Liker, who also teaches efficient manufacturing techniques to companies. “They have too little capacity in Mexico, compared with many other competitors,” he said by phone last week from Mexico City.
Toyota “tends to take a very long-term view when it makes a decision like this, so I would expect this plant to eventually become a joint-venture between the two,” Liker said.
Honda has a small factory in El Salto, Mexico, that assembles CR-V compact SUVs for sale in the U.S. and Mexico to comply with the country’s trade rules. While that facility can produce only about 60,000 vehicles annually, the $800 million plant Tokyo-based Honda is building in Celaya is to have capacity to produce 200,000 Fit small cars annually.
The yen’s persistent strength relative to the dollar has forced Japan’s automakers to shift more production outside of their home market to maintain competitive pricing in the U.S., where Toyota and Honda generate most of their profits.
The Japanese currency traded at 79.50 yen to the dollar on Nov. 12, up 3.7 percent from two years earlier and a 27 percent jump from 109.41 yen in 2007.
Toyota has a history of manufacturing tie-ups in North America. The company previously operated a joint-venture factory in California for 25 years with the former General Motors Corp. that ended with the U.S. company’s 2009 bankruptcy.
Since 2007, Fuji Heavy Industries Ltd. (7270)’s Subaru plant in Lafayette, Indiana, has built Camry sedans for Toyota under contract. Toyota has since increased its equity stake in Fuji Heavy to about 16.5 percent.
While Toyota and Mazda haven’t built vehicles together in the past, the two carmakers have had a technology-sharing agreement on hybrid-electric systems, said Jeremy Barnes, a spokesman for Mazda’s North American unit in Irvine, California.
While the two Japanese automakers share no equity ties, Toyota may take a position in Mazda, said Liker, who specializes in research about the largest Asian automaker.
“I wouldn’t be surprised,” he said. “I don’t know that that’s a plan. That certainly has been the pattern in the past.”
Ford formerly held a controlling interest in Mazda. The Dearborn, Michigan-based automaker began selling its Mazda stake in 2008 and now holds about 2.1 percent of Mazda shares, according to data compiled by Bloomberg.
While Mexico’s automobile plants have competitive labor costs and quality levels that are “equal to and in some cases greater than” those of U.S. plants, automakers can incur other costs that cancel out the benefits, said Ron Harbour, a manufacturing analyst and partner at New York-based consulting company Oliver Wyman.
One source of added cost comes from shipping cars to international markets. Another is drug-related violence, which, according to the Mexican newspaper Milenio, has claimed 57,449 lives since President Felipe Calderon took office in December 2006.
“You can wash away a good chunk of that labor savings with the logistics cost, particularly today when fuel costs have gone up, the cost of containers, the cost of security,” Harbour said in a telephone interview from Detroit.
“You now have to protect the trucks and trains, which can be looted,” he said. “There’s all kind of costs that come in addition to the labor savings.”
Violence in central Mexico is lower than in much of northern Mexico. Honda and Mazda both chose the central state of Guanajuato for their plants. Audi chose the state of Puebla, southeast of Mexico City, to assemble its Q5 sport-utility vehicle for the global market. Parent company Volkswagen has produced cars in Mexico since 1967.
Bolstered by the new wave of investment, Mexico’s light- vehicle production probably will rise 34 percent to 3.83 million by 2017, according to LMC. The researcher’s 2.86 million vehicle estimate for this year would make Mexico the world’s eighth- largest auto producer.
“We could easily outpace the numbers we have by 2017 with another new plant or two announced, if that were to be the case,” said Jeff Schuster, an analyst at LMC. “In the past, you saw the Detroit brands moving in there and putting up additional facilities. Now it’s the South Koreans, the Japanese and the Europeans all looking to expand in Mexico.”
While domestic sales in Mexico remain lower than the 2006 peak, auto exports rose 12 percent to a record 1.98 million units in the first 10 months of the year, the Mexican Automobile Industry Association said Nov. 7.
The U.S. accounted for 63 percent of shipments, followed by the rest of Latin America, at 16 percent, and Europe taking 9 percent of Mexican-built autos. Vehicle exports to Africa more than quadrupled to 26,608 while shipments to Asia rose 83 percent to 38,194.
Veracruz, Mexico, was the busiest vehicle port in North America last year, handling 753,685 units for such companies as Ford, Nissan and Volkswagen, according to Finished Vehicle Logistics, a London-based publication specializing in automotive distribution. About 588,000 of the vehicles were exports.
More automakers, including Seoul-based Hyundai Motor Co. (005380) and Munich-based Bayerische Motoren Werke AG, may locate plants in Mexico, Schuster said.
Hyundai doesn’t have current plans for a Mexican vehicle- assembly factory, said Chris Hosford, a spokesman for the company’s U.S. unit in Costa Mesa, California.
BMW hasn’t announced plans for building vehicles in Mexico while analyzing potential production sites globally, said Elizabeth Solis, a spokeswoman in Mexico City. The company said last month it will invest 200 million euros ($254 million) in a factory in Brazil to open in 2014.
“Very recently, there’s been a combination of updating facilities and bringing in new ones to modernize the manufacturing,” Schuster said. “Additional global training has brought the workforce in line from a quality standpoint and a process standpoint. And then obviously because of the cost benefits, now we’re seeing a big push into Mexico once again, from really all directions.”
Foreign manufacturers to make greater use of nation as base to export vehicles
- By NACHA CATTAN AND BRENDAN CASE
- Bloomberg News
Workers assemble a Volkswagen Beetle at the firm’s Puebla, Mexico, plant. Car firms announced $5.3 billion in new investments in Mexico from January through April. (Susana Gonzalez / Bloomberg)
Mexico will boost annual auto output by 1 million vehicles within three years, a 38 percent jump from last year, as foreign manufacturers use the country as an export base, said Carlos Guzman, head of the nation’s investment promotion agency.
Investments already announced by carmakers will allow Mexico, the world’s fourth-largest auto exporter, to increase annual production from last year’s 2.6 million units, Guzman, president of ProMexico, said in an interview. Surging car and aerospace sales will help Mexican exports climb by about 15 percent this year to a record of around $400 billion, he said, surpassing a $350 billion high last year.
Mexico’s economy is proving resilient as its auto industry booms, with both vehicle production and exports reaching their highest levels in the first seven months of the year for any January to July period, the nation’s Automobile Industry Association said. New plants announced by companies such as Mazda Motor Corp., Nissan Motor Co. and Audi AG will help the nation close the gap with Korea, the biggest exporter after Germany and Japan, Guzman said.
“Other companies are exploring the possibility of opening facilities in Mexico,” Guzman said. “We expect a very good period of five to seven years in Mexico in terms of growing exports” for cars, he said.
Manufacturers are opening new plants in Latin America’s second-largest economy as wages in China rise and higher oil prices increase costs for Asian companies looking to tap consumers in the U.S., the world’s largest economy.
Car companies announced $5.3 billion in new investments from January through April and $2.8 billion last year, according to the Economy Ministry. Pirelli & C. SpA and Nippon Steel Corp. have said they plan to open new parts plants focused on the auto industry.
Mexico’s gross domestic product beat economists’ forecasts for growth in the second quarter, expanding 0.9 percent from the first three months of 2012, an annualized rate of 3.5 percent, as exports increased 5.8 percent from a year earlier.