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January 26th, 2016

Originally Published: June 07, 2015 8:00 AM   Modified: June 12, 2015 9:26 AM

Mexico auto boom a boon for local suppliers

Photo by ASSOCIATED PRESS An employee at a Honda Motor Co. plant in Celaya, Mexico, one of the plants that’s part of the $23 billion worth of new auto production either operating or promised since 2012.

Hollingsworth Logistics Group LLC, a Dearborn-based automotive transportation and assembly supplier, plans for sales in Mexico to be a quarter of its business by 2025.

That’s an ambitious target, considering none of the company’s $400 million in revenue in 2014 came from that nation.

But Hollingsworth isn’t alone, as Southeast Michigan’s lower-tiered supply base is again heading south — 20 years after the North American Free Trade Agreementbroke business barriers further open between the U.S. and Mexico.

In what local experts are calling the new automotive gold rush, automakers such asNissan Motor Co. and Mazda Motor Corp. are producing a record number of vehicles in Mexico, most of them destined for export.

Since 2012, carmakers have invested or promised nearly $23 billion in new production in Mexico. In April, Toyota Motor Corp. announced it would spend about $1 billion on its first car factory in Mexico, with the capacity to assemble about 200,000 Corolla compact cars annually, Bloomberg News reported.

The result is a need for a more cohesive supply chain that extends farther down the tiered system, including assemblers and distributors such as Hollingsworth.

“Mexico is booming, and what we see trending is phenomenal opportunities for us,” said Greg Martinez Jr., director of international sales for Hollingsworth. “It’s key for our sustainability. If we, and others, don’t make those business expansions down there, the marketplace will become much smaller.”

Rapid expansion

Hollingsworth — minority-owned and controlled by Stephen Barr, who is of American Indian decent — is bidding on four programs in Mexico for distribution services and commodity management for FCA US LLC, Ford Motor Co. and Bombardier Inc., Martinez said.

Mike Wall, director of automotive analysis for Southfield-based IHS Automotive Inc., said that the tier structure in Mexico is “vastly underdeveloped” but that the projected volume coming out of the country is forcing automakers and suppliers to ensure their chain is more robust.

“The volumes are there, and as more automakers go down to Mexico, an infrastructure is being created that can support more suppliers down the line,” Wall said. “New plants are coming on board in the next few years, and they are already quoting that business.

“The reality is, if you want that business, you’ve got to be down there because automakers aren’t looking for parts to be shipped in anymore.”

Automakers in Mexico produced 3.2 million vehicles in 2014, surpassing Brazil’s 3.1 million to become the seventh-largest producer of vehicles. China and the U.S. remain the largest producers of cars in the world.

Production in Mexico is projected to top 4 million in 2017, according to IHS, as it gets closer to the country’s plans to reach 5 million units by 2020. This would move them ahead of India and South Korea in production.

Labor costs

Low labor costs and favorable trade agreements with more than 45 countries make Mexico an attractive location for Southeast Michigan suppliers looking for global expansion.

An average unskilled laborer in Mexico costs $8 an hour, including wages and benefits, according to data from the Ann Arbor-basedCenter for Automotive Research. Comparatively, similar workers for General Motors Co. cost $58 an hour.

Although cheap labor is a benefit, Wall said, labor rates will rise.

“I don’t think the move to Mexico is just a labor solution; it’s not the endgame,” he said. “Just as labor cost is rising in China, the whole labor cost benefit in Mexico will turn on its head eventually.”

Alejandro Rodriguez, country manager for Southfield-based Plante & Moran PLLC in Monterrey, Mexico, said constraints on the labor force will occur as the need for skilled workers and engineers rises.

“There’s already more demand than supply for the highly skilled workers,” Rodriguez said. “It’s a complete misconception that labor is inexpensive overall. … There’s a huge gap between skilled and unskilled labor.”

For instance, suppliers and automakers are likely to pay more for a plant manager in Mexico than in the U.S., Rodriguez said, because fewer people are qualified for those positions in Mexico. That creates demand that raises pay.

The next labor challenge in Mexico will be retaining talent — a familiar challenge to Southeast Michigan suppliers, Rodriquez said.

“You can’t manage your operations in Mexico with just expats; you must build a culture there,” Rodriquez said. “Not everything is about money for Mexicans. They want to feel part of something larger, just like their American counterparts.”

While issues with labor are bound to crop up, it’s Mexico’s expansive trade agreements with more than 40 countries that have driven the global auto industry into the country, experts said.

Mexico’s strong agreements allow exporters duty-free access to markets that contain 60 percent of the world’s economic output,The Wall Street Journal reported this year.

Automotive exports from Mexico this year are projected to rise to a record 2.9 million vehicles, more than 87 percent of its projected production, according to the Mexican Automobile Industry Association. As much as 70 percent of those exports are projected to be going to the U.S.

For Hollingsworth, exporting isn’t one of its options, but the increased exports from Mexico are a welcome catalyst to its own growth.

“Customers are looking for suppliers that can deliver their services on an international level,” Martinez said. “If we’re not down there as soon as possible, we’re not going to be able to compete long term.”

Mexico’s Bright Economic Future

January 25th, 2016

Stratfor

Mexico's Bright Economic Future

Mexico has long had a privileged position in Latin America. Its proximity to the United States — the largest consumer economy in the world — has contributed to the growth of a robust domestic manufacturing industry, which has become the bedrock of the Mexican economy. Manufacturing has made Mexico the third-largest U.S. trading partner and has propelled its economy to the rank of second-largest in Latin America. Still, as in all oil-producing countries, the drop in global oil prices will hurt the country’s financial position, possibly jeopardizing its security reforms. But overall, the country will manage the price drop relatively well.

Despite low growth compared with previous years, Mexico will continue to make economic progress and will lead in regional manufacturing for the foreseeable future, largely because of its close economic ties to the United States. Nearly 80 percent of Mexican exports are destined for U.S. markets, and almost half of these exports are higher-value products, such as vehicles and electronic goods. Manufacturing growth is sustained by rising natural gas flows from the United States, which have propelled the rapid expansion of Mexico’s electric grid by making energy availability more reliable.

Unsurprisingly, the commercial linkages created between the two countries over the decades, particularly since the passage of the North American Free Trade Agreement in 1994, have also accelerated capital flows into the country. Mexico received about $28.5 billion in foreign direct investment in 2015. The same year, remittances from Mexican nationals working in the United States totaled nearly $22 billion — the most since 2009. During the current Mexican president’s term, the country has also opened additional avenues for foreign investment into sectors formerly closed to large inflows of foreign capital, and it has made major changes to its regulatory regime in the hydrocarbons and electricity sectors to break state monopolies, many of which have become costly and uncompetitive.

Overall, Mexico’s next few years will be quite bright. Its economy will continue benefiting from foreign investment to fund manufacturing initiatives to supply the U.S. domestic market. The growing energy trade between the United States and Mexico will also ensure secure electricity supply that will further drive manufacturing growth. Still, security concerns will persist as funding for anti-crime measures becomes less reliable.

Tracing the Rise of the Global EMS Supply Chain

October 5th, 2015
10/2/2015

Analyzing reshoring’s impact on the market

August 3rd, 2015

In the past three to four years, one of the commonly observed trends in North America manufacturing has been reshoring or repatriation of the manufacturing industry.

Nexant defines repatriation or reshoring as bringing back of manufacturing from overseas to North America, resulting in the displacement of process imports into the region.

Nexant conducted a survey of the plastics industry, in collaboration with Plastics News, to understand reshoring trends and the effect on the North American market. Nexant received about 200 survey responses from compounders, fabricators, equipment suppliers and toolers.

About 70 percent of the survey responses mentioned that they had either reshored or were planning to reshore in the near future.

One of the major reasons quoted for reshoring is the rising labor costs overseas, particularly in China. Wages in China have almost doubled in the past decade, while U.S. wages have stayed relatively flat.

Low cost natural gas and the diminishing price gap between the U.S. and Southeast Asian polyethylene prices is making North America more cost competitive for manufacturing. However, about one third of the fabricators mentioned that they would not consider reshoring to North America as they supply Asian markets and the logistic costs would not make sense if manufacturing was moved back to North America. Also, it is not critical to reshore in cases where the product quality is not crucial, which has been identified as another driver to reshoring.

Cost competitive

Nexant compared the cost of production plus logistics cost for delivering polyethylene blown films and polypropylene injection molded items in the U.S. market in 2014 and 2019 for manufacturing in the U.S. Gulf Coast, Mexico and China. Repatriation activities are being observed in blown films and injection molding segments particularly.

In 2014, for polypropylene injection molded utensils, even though the cost of production was the lowest in China, when transportation cost was added, Gulf Coast becomes more attractive as a manufacturing location for supplying the domestic U.S. market.

By 2019, the Gulf Coast and Mexico is expected to become more cost competitive for manufacturing, as a result of rising labor costs in China and declining price gap between the Gulf Coast and China polypropylene prices.

U.S. propylene markets have tightened appreciably in recent years aggravated by the rush towards lighter feedstock at crackers and reduced availability of supplies from the refinery. New investments in propane dehydrogenation units by companies such as Ascend Performance Materials, Enterprise Products, Dow Chemical and Formosa in the U.S. are set to lengthen supplies by 2020, restoring markets to a more balanced position and bringing U.S. prices on par with Asian polypropylene prices.

Demand growth?

The impact of reshoring on domestic polyolefin demand in North America will not be significant; with about 10 percent of the total 4 million tons demand growth from 2014 to 2020 driven by reshoring activities.

Polyethylene accounts for the lion’s share of polyolefin reshoring. The majority of the growth will be in the injection molding segment as it is an automated process, and requires less labor; providing manufacturing advantage to the United States. Repatriation is occurring in the automotive, packaging and appliances sectors of injection molding.

NexantThinking’s recently published report “Impact of Reshoring on North American Polyolefin Demand” provides an in-depth analysis into Nexant’s reshoring survey results, reshoring drivers and challenges, reshoring measurement indices, North America’s manufacturing cost competitiveness and impact on polyolefin applications growth.

Mexico transitions to high-value manufacturing location

August 3rd, 2015

Mexico is no longer the low-wage sourcing location for low-value consumer products for the U.S. market that it was two decades ago when the North American Free Trade Agreement with the U.S. and Canada was implemented. True, average wages have risen higher in coastal China, where so much export production is based, than in Mexico. But with an increasingly skilled Mexican workforce and a rapidly growing middle class, many international companies are investing in facilities that manufacture higher-value products for the U.S. and Mexico’s domestic market, and still more are planning to invest in sourcing there.

The near-sourcing trend is fueled by the desire to reduce turnaround time from order to delivery, cut transportation costs, and, increasingly, to avoid any repetition of the West Coast port congestion and delays that plagued so many supply chains in late 2014 and early this year.

One U.S. importer, for example, responded to a JOC.com survey about shippers’ supply chain plans in the wake of the West Coast longshore labor agreement in May by saying he wanted to shift as much production as possible away from China to Mexico.

“The whole near-shoring trend is based on ‘How do I make sure I don’t have my supply chain cut off because of lack of capacity or longshoremen’ and all of the issues you have when you’re bringing in product by boat from around the world,” said Troy Ryley, managing director of Frisco, Texas-based third-party logistics provider Transplace Mexico. “In Mexico, you’ve got multiple points to enter the U.S. via truck, and trucks are a lot more consistent on the highway than vessels on the open ocean. It’s a matter of days by truck, rather than weeks at sea.”

Over the past several years, there has been a continuous move of production to Mexico for the North American market. Some of that has come at the expense of Asia, but more often the investment in Mexican production may be in addition to Asia. “Investment going forward may be in Mexico, which doesn’t mean it’s being relocated from Asia,” said Foster Finley, a managing director of logistics consulting firm AlixPartners who specializes in supply chain performance. “Plants that in years gone by may have gone to Asia are going to Mexico now.”

In a survey last year of the near-sourcing plans of 143 senior manufacturing and distribution executives, AlixPartners found that 86 percent plan to increase their foreign manufacturing capacity closer to the U.S. in the next two or three years. The chief reasons behind these plans were the desire to cut the landed cost of imports, lower freight costs, improved speed to market and improved customer service.

The survey, conducted before the severe congestion that began to clog West Coast ports last fall, also found that 30 percent of those surveyed said near-sourcing of production would result in fewer supply chain disruptions.

“After NAFTA was implemented in 2004, many companies located in Mexico to take advantage of low wages and duty-free access to the U.S., but when China joined the WTO, they moved there to get even lower wages,” said Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson Center in Washington. “Over time, companies have become more sophisticated about the way they make site-selection decisions and are looking at a much wider range of factors. What that has done is push Mexico into its proper niche into areas where it has important competitive advantages vis-à-vis other countries.”

AlixPartners uses local wage costs as one of seven factors in measuring the competitiveness of global supply locations. The other six factors include availability of raw materials and cost, regulatory overhead, inbound transportation costs, inventory cost tied up in product flow, exchange rates, and tariffs or duties.

“Although Chinese wages are on average lower than Mexico’s, wages have risen rapidly up and down the coast of China that has historically been the factory of China, and they continue to go up,” Finley said. “China has made a concerted effort to tap into lower wages in inland China, but the problems are the lack of infrastructure to get product to and from the coast. The number of qualified workers also is still well behind the coast.”

The Mexican government is moving to enhance its competitive position by investing heavily in road, rail and aviation infrastructure improvements and by streamlining its customs procedures. As a result, it has become a major source for U.S. imports of bulky products such as automobiles, aerospace products and components and appliances that don’t fit easily into a container, but can be shipped by road or rail to the U.S.

Mexico is also the second-largest source of high-value, high-tech products such as cell phones, gaming consoles and computers, after China.

In the past, the Mexican government spurred the growth of these industries by providing incentives for them to group in clusters around cities that have an abundance of skilled engineers graduating from universities and the infrastructure to support shipments to and from the plants. It has since ended those incentives for all but the aerospace industry.

“Mexico has a very well-educated workforce that has the expertise to produce more technical products, like the aerospace industry,” said Derrick Johnson, vice president of segment marketing for UPS. “It is graduating 230,000 engineers every year.”

UPS is working with the Mexican government to identify the areas that have the infrastructure to support the transportation needs of industry clusters. “We look for good roads and rail infrastructure, but also the people with the skills to support these clusters,” Johnson said.

The aerospace industry is clustered around Chihuahua, which boasts plants by Hawker Beechcraft, Honeywell, Pratt & Whitney and Zodiac Aerospace. Bombardier, Eurocopter and Messier-Bugatti-Dowti have plants around Queretaro.

Although the government has scaled back on incentives to other industries, the incentives it provided in the 1980s and 1990s resulted in a cluster of more than 600 high-tech plants in the state of Jalisco around Guadalajara, which is known as Mexico’s Silicon Valley. Foxconn, Jabil Circuit and Flextronics assemble products there with components imported from Asia for the local and the U.S. market. Other plants are clustered around Chihuahua, Monterey and Mexico City.

“One of the big concerns for these highly technical products is intellectual property,” Johnson said. “Mexico’s IP protection is as strong as or stronger than other areas of the world, such as China.”

The automotive industry is far more spread out. Ford Motor Co. has plants in Chihuahua and Sonora in the north and Toluca in the south. Audi and Volkswagen have plants in Puebla near Mexico City. Honda has a number of plants. Chrysler, General Motors and Mercedes Benz have plants in Saltillo. BMW plans to build a plant in San Luis Potosi by 2019.

Approximately 1,100 top-tier parts makers also have opened production facilities in Mexico to supply these plants. Mexican automotive plants export about 80 percent of their production and account for 11 percent of all new car sales in the U.S.

Some cars are transported by rail to the U.S., and others by ocean. “Over the last two years, we’ve been seeing an increase in the traffic of car carriers transporting cars from Lazaro Cardenas through the canal to the U.S. East Coast,” Panama Canal Administrator Jorge Quijano said. “That may change if Mexico improves the roads and rail transport to Veracruz so cars can be shipped directly from there to the East Coast.” He said car carriers have told him they are building post-Panamax vessels that can carry 8,000 to 8,500 cars, compared with the current maximum capacity of 5,000 to 5,500 cars. “So for the next three years, we see strong performances for cars moving from Mexico through the canal to the U.S. East Coast.”

U.S. companies that source products in Mexico find it much easier to manage the engineering and quality control processes than in Asia because it is more cost efficient and easier to visit plants south of the border than across the Pacific. “The ability to supervise your engineering at a plant in Mexico is a lot less expensive than in Asia, and companies are starting to realize this,” said Phillip Poland, director of international trade compliance for DHL. “If I was making strategic decisions for a U.S. company, I would seriously consider building a plant in Mexico.”

Mexico has eased its customs procedures on imports of components for assembly in plants by moving all customs transactions onto a single electronic platform of window for export. “Mexico is ahead of the U.S. in that a single window increases compliance, decreasing the arbitrariness of customs from port to port,” Poland said. “It really streamlines and helps the movement of imports through customs.”

Mexico is working closely with the U.S. and Canada to harmonize their customs procedures under NAFTA. It signed on to the Wassenauer Agreement on export controls last year and is implementing an export control system, which together with its single platform on imports creates greater trade compliance.

Security is less of an issue in Mexico today than in the past, when theft of truckloads in transit was not uncommon. “That’s less frequent now, as the government has been cracking down on cartels to improve transportation safety,” Poland said.

The flow of trucks moving across the U.S. border promises to become easier as a result of changes in U.S. regulations introduced this year. For years, Mexican trucking companies with Mexican drivers could haul cargo only into a narrow commercial zone across the U.S. border, despite the provisions of the NAFTA treaty. In response, Mexico imposed retaliatory tariffs on U.S. imports estimated to cost $2 billion annually.

After a three-year pilot program, the U.S. Department of Transportation started allowing Mexican motor carriers to apply for authority this year to conduct long-haul, cross-border trucking services. Under this program, Mexican trucks must be inspected and meet the same safety regulations as those for U.S. motor carriers.

“You’re starting to see Mexican equipment go farther and farther north,” Ryley said. “What’s defining how far north they go is not any restriction by the law, but is more how much deadheading time they can afford to take on or whether they have the complementary southbound loads that allows for a round trip.”

Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors

August 3rd, 2015
Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors
Whether they are manufacturing vehicles, airplanes, electrical cable, or something else, companies are finding the resources they need to compete in Mexico.
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
Business expansions like BRP’s have become “the story” in Mexico, as the country has developed into one of the world’s manufacturing powers.

“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

  1. Bombardier Recreational Products Inc. (BRP), Flextronics Manufacturing, Lexmark Internacional and Johnson & Johnson

    Juárez, Chihuahua

  2. Bombardier Recreational Products Inc. (BRP)

    Querétaro, Mexico

  3. Ford

    Chihuahua City, Chihuahua

  4. BMW

    Goodyear

    San Luis Potosi, Mexico

  5. Toyota

    Guanajuato, Mexico

  6. Mazda

    Guanajuato, Mexico

  7. Hundyai/Kia

    Monterrey, Nuevo León

  8. Nissan/Daimler

    Aguascalientes, Mexico

  9. Honda

    Celaya, Guanajuato

  10. Audi

    San Hosé, Chiapa

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
This tsunami of foreign investment has transformed Mexico into the world’s seventh-largest automotive producer and the fourth-largest exporter after Germany, Japan, and South Korea. Mexico has usurped Japan to become the No. 2 supplier of vehicles to the U.S. market, behind Canada. By 2018, industry analysts predict Mexico’s current annual production of 3.2 million cars and light trucks to increase more than 50 percent to five million vehicles. Earlier this year, The Wall Street Journal reported that seven Asian and European automakers have opened new Mexican assembly plants, or announced plans, in just over a year. Other car companies have bankrolled major expansions in Mexico, including Nissan, General Motors, Ford, Volkswagen, and Fiat Chrysler Automobiles NV.

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
There have been a multitude of reasons for Mexico’s manufacturing boom, including both indigenous advantages, and efforts by the government in recent years to make the country a more desirable trade partner and place to do business. Over the past decade, Mexico “has been pretty aggressive in liberalizing trade with companies around the world,” and has the most free-trade agreements of any country in the world — 44, Cook points out.

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.

BRP facility in Querétaro

BRP facility in Querétaro

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
Of course, crime and violence, much of it related to the illegal drug trade, remain a concern. However, media reports may exaggerate the hazards. Gutierrez notes that companies doing business south of the border have developed effective, operational planning strategies to minimize risk and avoid travel related hazards in problematical regions.

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.

BRP facility in Juarez

BRP facility in Juarez

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.

Mexico’s maquila boom extends across the border

April 19th, 2014

Kevin Robinson-Avila And Lauren Villagran / Journal Staff Writers

Copyright © 2014 Albuquerque Journal

Seamstresses sew car upholstery at the Tecma Group, which operates 18 of the more than 350 maquilas in the Ciudad Juarez area. (Journal File)

SANTA TERESA — Mexico’s maquila industry has become a raging bull that’s busting up the competition in China and other Asian nations for the first time in decades.

Rapidly rising costs to produce and ship goods from Asia, especially heavy industrial items such as cars and home appliances, are encouraging the world’s major producers to ditch overseas manufacturing and instead set up operations in Mexico, where proximity to U.S. markets helps to lower costs and increase operating efficiencies.

That’s good news for New Mexico, and for all U.S. border states, because the rapid growth of Mexico’s maquilas, or assembly factories, is creating huge business opportunities up and down the 2,000-mile U.S.-Mexico border. And that, in turn, is creating new industrial hot spots in places such as southern New Mexico, where companies are flocking to set up new facilities to supply goods and services to the maquila industry.

A technician repairs computer monitors at Amcor Service Solutions, a part of the Tecma Group. These assembly-for-export plants that crank out everything from brake pads to plasma TVs for U.S. companies are opening new facilities, expanding existing ones and hiring more employees.

“We’re seeing a steady ‘re-shoring’ of industry investment from China to Mexico that’s creating huge opportunities here for everything from manufacturing and transportation to warehousing services and technology-related enterprises,” said New Mexico Economic Development Secretary Jon Barela. “We believe a wide array of businesses can flourish along the border as the maquila industry continues to grow.”

Huge ‘re-shoring’ underway

A technician repairs computer monitors at Amcor Service Solutions, a part of the Tecma Group. These assembly-for-export plants that crank out everything from brake pads to plasma TVs for U.S. companies are opening new facilities, expanding existing ones and hiring more employees. (Journal File)

“Transportation costs have been on the rise since 2003, and they’re still very elevated,” Coronado said. “That’s made it far more expensive to move goods from Asia to the U.S.”

Other pressures include the strengthening of Chinese and some other Asian currencies against the U.S dollar, which makes exports from those countries more expensive, and the length of time it takes to transport goods from those places to North America, Coronado said.

As a result, global producers of everything from cars and auto parts to aviation technology, medical devices and home appliances are establishing maquilas in Mexico to be closer to U.S. markets. It’s an emerging re-shoring strategy that not only reduces transportation expenses, but allows for “just-in-time” manufacturing and delivery of products to increase operating efficiencies, Coronado said.

All of that is providing huge competitive advantages to Mexico.

“It’s a revolution,” Russell said. “For the first time in 50 years, the lines have crossed from a cost standpoint to favor producing in Mexico rather than producing in China.”

Foreign investment is flooding into Mexico’s maquila industry from all over, including the U.S., Europe and Asian countries to better position themselves for sales in North America.

Foreign direct investment in maquilas reached nearly $13 billion last year, up from just $7 billion in 2012 and its highest level since before the recession in 2007, according to Mexico’s national statistics institute. The value of maquila exports has jumped nearly 50 percent from pre-recession levels.

Sophisticated, diverse

Santa Teresa's industrial Park is booming because of trade with Mexico, particularly serving the maquila industry. Here, a shipment of steel is prepared for shipping at the Southwest Steel-Coil facility in Santa Teresa earlier this year. (Journal File)

The maquilas themselves have grown much more sophisticated and diversified in recent years, with Mexico now ranking as the world’s No. 1 exporter of flat screen TVs and refrigerators with freezers, and the fifth-largest auto-parts producer globally.

“Today, Mexico is the second-largest exporter of autos to the U.S.,” Coronado said. “It displaced Japan two months ago, and it will soon displace Canada.”

That’s a sea change from the 1960s, when the maquilas first emerged in Mexico to provide final assembly of simple products destined for U.S. markets using inexpensive Mexican labor. In those early years, the maquilas were often called “draw-back industries.” They were generally located just across the border so that U.S. companies could send things such as shirts and sweaters there for low-wage workers to sew on buttons before shipping the finished product back to markets in the U.S.

The growth and diversification of Mexico’s maquila industry is a boon to the U.S. border economy, and to U.S. manufacturing in general, given its deep-rooted connections to U.S. production and investment. Only about 10 percent of the inputs used in the maquilas – including raw materials, parts and services – are actually produced in Mexico. Most come from U.S. businesses.

U.S. maquila support

The Foxconn maquiladora, which sits just over the New Mexico border across from Santa Teresa, is a major player in the electronics manufacturing industry and is planning a major expansion. (Journal File)

“On the U.S. side, we provide every type of service related to maquila manufacturing and trade,” Coronado said. “That includes transportation, warehousing, logistics, real estate, insurance and staffing.”

It also includes raw materials and semi-processed goods.

The lion’s share of trade with Mexico is based in Texas, especially in Laredo, which accounted for 40 percent of the $500 billion in exports and inputs that crossed the border by land last year. El Paso accounted for another 18 percent, making Texas the number 1 gateway for U.S. trade south of the border.

“More than 50,000 jobs in El Paso are attributed directly to the maquila industry in Juarez,” Russell said. “More than 70 buildings in El Paso are occupied, or exist, because of the maquilas.”

Now, a significant chunk of trade and maquila-related border business is building as well in southern New Mexico, where an industrial boom is underway.

The number of maquila-connected businesses located in Santa Teresa grew by 50 percent in the last two years. And, land trade passing through the Santa Teresa-San Jerónimo border crossing has increased dramatically.

“Santa Teresa accounted for about 5 percent of all U.S.-Mexico land trade last year,” Coronado said. “That’s up from less than one-half a percent seven or eight years ago.”

Good N.M. prospects

A Union Pacific train refuels at Union Pacific's new $400 million intermodal complex near Santa Teresa. The facility was built to support, in part, cross-border trade with Mexico and its booming maquila industry. (Journal File)

As Mexico’s maquilas expand, prospects are good for capturing a lot more business in southern New Mexico. That’s because the New Mexico and Chihuahua state governments are working together to build needed infrastructure to turn the Santa Teresa-San Jerónimo crossing into a major binational land port.

That could attract a lot more supply businesses to Santa Teresa to provide goods and services throughout Chihuahua, where 420 maquila plants currently operate.

It could also bring more maquilas directly to San Jerónimo, providing greater opportunities for Santa Teresa-based businesses. Taiwanese electronics giant Foxconn, for example, which already operates two factories in San Jerónimo, wants to eventually open 14 more plants there.

In fact, private investment in Santa Teresa and San Jerónimo is likely to grow faster than public infrastructure, given the rapid expansion of maquila activity in Mexico.

“Demand for industrial space on both sides of the border is up,” said Octavio Lugo, chief operating officer for Corporación Inmobiliaria, which owns 47,000 acres of land in San Jerónimo. “We can’t sit around and wait for the federal government to finish building border crossings, because real demand is growing by businesses to operate in the area.”

BizO_Maquilas

 

More U.S. companies opening high-tech factories in Mexico

December 5th, 2013

latimes.com

Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.

By Shan Li

4:37 PM PST, November 29, 2013

Manufacturing in Mexico

Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)

TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.

A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.

San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.

It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.

“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”

It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.

From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.

“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”

The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.

Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.

The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.

3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.

But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.

“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.

Instead, the company looked south.

3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.

“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.'”

Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.

The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.

A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.

“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”

For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.

That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.

On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.

Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”

Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.

Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.

Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.

The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.

“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,'” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”

With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.

Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.

“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”

shan.li@latimes.com

Copyright © 2013, Los Angeles Times

In Middle of Mexico, a Middle Class Rises

November 20th, 2013
The New York Times
November 18, 2013
By

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.

Mexico stakes claim as hottest hub for auto production

November 12th, 2013
CNBC.com | Monday, 11 Nov 2013 | 1:17 PM ET

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.

—By CNBC’s Phil LeBeau. Follow him on Twitter @LeBeauCarNews.