In Mexico, Auto Plants Hit the Gas
Mexico is taking center-stage in the production of cars, where lower costs and skilled workers are reordering the global auto market. Six years ago, Mexico was the world’s ninth largest exporter of cars. Today the country is ranked fourth—behind Germany, Japan and South Korea—with exports expected to total more than 2.14 million vehicles this year.
One in 10 cars sold last year in the U.S. was made in Mexico. Next year, every new taxi in New York’s fleet—made by Nissan Motor Co. will carry the “Hecho en Mexico” label. Mexico is now exporting vehicles to China, and even helped Japan keep up with orders after last year’s tsunami.
Mexico’s Economy Minister Bruno Ferrari boasted that a batch of new factories planned by car makers will help Mexico surpass South Korea in a few years. Volkswagen AG, Honda Motor Co., General Motors Co., Mazda Motor Corp., Fiat SpA, Daimler AG and Nissan have all announced expansions in the past year. Volkswagen’s Audi unit plans a new $1.3 billion plant.
For decades, the free world drove cars made primarily in the U.S., Germany and Japan. But a global shift toward smaller cars has put pressure on profit margins, forcing car companies to find lower-cost manufacturing elsewhere.
“Mexico is extremely competitive,” Carlos Ghosn, Nissan’s chief executive, said in an interview. Plants in Mexico operate more hours a year than other Nissan facilities world-wide. “You can run your plants with practically no limits if you want,” he said.
Also bolstering Mexico’s appeal, he said, are currency advantages and the high productivity of Mexican employees.
Labor was a smaller portion of the total cost of a vehicle when SUVs and light trucks soared in popularity. But the financial crisis has spurred consumers to shop for smaller, cheaper cars—which have slimmer profit margins.
Also fueling demand for smaller cars was the decision by the Obama administration this year to nearly double new car mileage requirements, with targets of nearly 55 miles per gallon by 2025.
The new regulations will drive more orders for subcompact vehicles, said Guido Vildozo, an analyst at IHS Automotive, an industry research group. “The first place that pops up is Mexico, because of labor.”
Wages for Mexican assembly-line workers begin at $40 a day, experts said. That is far below minimum wage requirements in the U.S. or Europe and approaching the average manufacturing wage in China, which is $3 per hour.
Cost advantages helped persuade Honda to open its next factory in Mexico, where 3,200 new employees will produce the subcompact model Fit, starting in 2014, said Jesus Báez, its executive director. The country has a surplus of talent, he said, including engineers from state-sponsored programs tailored to the car industry.
Car companies also are drawn to Mexico’s proximity to the U.S. market. Factories in the central highlands, where Mexico’s auto industry is clustered, can deliver new cars to the U.S. within days. Trans-Pacific and trans-Atlantic shipments can take weeks.
Mexico’s trade deals over the past two decades have helped propel the auto expansion. Since the North American Free Trade Agreement came into force in 1994, Mexico has signed trade agreements with 44 countries, including the European Union, Japan and Israel.
In contrast, Brazil, Latin America’s other car titan, has kept its door mainly shut to free trade.
Mr. Ferrari, Mexico’s economic minister, said his country’s car industry success has hampered expansion of free trade agreements with Brazil. During a meeting in Davos last year scheduled to discuss possibilities for opening trade, he said, Brazilians instead complained that Mexico was exporting too many cars to their country and demanded an export cap.
Mexico agreed to a three-year cap, essentially freezing car exports at current levels of around $1.55 billion. In June, Argentina, which had a similar tariff-free deal with Mexico, followed suit and imposed a similar cap to Brazil’s.
“The problem we have with South America is that we are more competitive,” said Mexico’s economy minister, Mr. Ferrari. Brazil’s trade ministry declined to comment.
The agreement disappointed car makers setting up new factories in Mexico, plants that might have carved deeper into the Brazilian market. “The situation with Brazil is not so nice,” said Andreas Hinrichs, the chief executive of Volkswagen’s Mexico operation.
Volkswagen AG’s plant in Puebla is now the company’s biggest factory in North America, with capacity to produce 2,500 cars a day. For decades, the earlier model of the Beetle was Mexico’s most popular car, known by its Mexican nickname “Vocho.”
Today, the cars welded here are primarily for export to the U.S., Europe and China, where 2,800 Beetles were shipped last year. Volkswagen is spending another $550 million to open a new plant in the city of Silao to supply engines to its operation in Chattanooga, Tenn.
Mexico’s trade deal with Brazil and Argentina allows Volkswagen to avoid a 35% duty by shipping Mexican-made cars to Brazil. Volkswagen’s European-made trucks face a 25% duty coming into the U.S., but none if the vehicles are made in Mexico.
“If I can sell this car in Japan, the U.S. and South America, then Mexico is the right place to produce this car,” said Mr. Hinrichs at Volkswagen.
Nissan was disappointed with the news of Brazil’s export quotas, which prevent Nissan from leveraging its Mexico plant to ramp up exports to South America’s biggest market. But the company said its Mexico-made vehicles could be sold elsewhere in the world, including Mexico.
In 1966, Nissan opened its first plant outside of Japan in Cuernavaca, focusing first on the Mexican market, and then ramping up exports to the U.S. and elsewhere. Another plant in the central city of Aguascalientes opened in 1982.
The company began to diversify its export strategy in 2009, when Mexico’s economy contracted 6% in the wake of the global financial crisis. New car sales in the U.S. and Mexico plummeted. Nissan Mexico dismissed workers, and cut salaries and working hours of those left.
José Muñoz, then president of the Mexico operation, made a pitch to his Nissan bosses to keep the factories running. “Let’s try to produce in Mexico vehicles that were being produced in Japan,” he recalled saying. Executives also pointed out Mexico’s proximity to a growing Latin American market.
The company agreed. The workmanship of Mexican vehicles compared well with its Japan-made cars and they cost less to build. Nissan has since tripled the number of Mexico’s export markets to about 100 world-wide. Nissan Mexico produces more than 600,000 vehicles a year, built by 15,000 workers.
The country’s productivity has set new industry benchmarks. Nissan’s Aguascalientes plant, for example, experimented with a new production scheme that allowed the plant to operate 23 hours a day, six days a week. Studies conducted by Nissan of its Mexican-made compact car Versa showed a quality level equal to cars from its plant in Oppama, Japan.
Nissan Mexico was started with investments of foreign money and expertise. Now, a factory in Brazil is headed by a former engineer at a Mexican plant, said Armando Ávila, who heads manufacturing in Mexico.
Nissan’s Mexico plant used to play second fiddle to U.S. factories, with Mexico picking up production of a model only after the U.S. plant had reached capacity.
But for its new Sentra, a $16,000 compact, the Mexican plant in Aguascalientes will operate as the first producer—and a U.S. facility will pick up the slack. “Production used to have a second life in Mexico,” said Bill Krueger, Nissan’s head of manufacturing in North America. “In this case, the U.S. is now a follower.”
The rise of Mexico’s car industry is a bright spot for a country notorious for illegal drug trafficking. During the past six years, a conflict among rival drug gangs has claimed at least 60,000 lives, making many companies think twice about investing in Mexico.
Mr. Ferrari, the economy minister, said he has fielded calls from worried executives. Honda Motor’s Mexico operation is near Guadalajara, one of Mexico’s most violent cities. Mr. Báez, Honda’s chief in Mexico, said neither the plant nor its workers have been bothered by drug-smuggling gangs.
Still, he said, Honda was building its next plant in the central Mexican city of Celaya, which has one of the country’s lowest crime rates. Most car makers avoid the U.S.-Mexico border, where such industrial cities as Reynosa and Ciudad Juárez have suffered disproportionately in the drug war.
Mexico has invested in new rail lines, in part, to keep valuable cargo off highways and clear of bandits. In northern Mexico, cartels have set up their own road blocks and in some cities have closed highways to taunt the government. Car companies haven’t yet reported losing any vehicles to criminals.
The country’s growing auto industry has grown a well-developed base of suppliers. In August, auto-parts maker Delphi Automotive PLC opened a new wire-harness plant in the state of Durango. In May, Italy’s Pirelli & C. SpA opened a $400 million tire plant for luxury cars—the company’s first in North America—in the town of Silao, about 220 miles northwest of Mexico City.
“It’s a bit like a snowball in Mexico,” said Paolo Ferrari, chairman and chief executive of Pirelli’s North American division. Mr. Ferrari said part of the appeal was the Guanajuato state government’s decision to cluster Pirelli with a number of other auto industry plants in an industrial park connected with a rail line. Another lure was Audi’s decision to build a plant in Mexico for its Q5 SUV.
“We see Mexico as an integral part of our U.S. operations,” said Hisataka Nobumoto, the chief executive of Japan-based Akebono Brake Industry Co.
The company consolidated North American operations it took over from Robert Bosch GmbH in Mexico instead of the U.S., he said, largely because of Nissan’s plans to boost production there.
Akebono is one of more than 50 auto parts companies from Japan that have opened operations in Mexico. Another Japanese company, Nippon Steel & Sumitomo Metal Corp. announced this summer it would build a steel plant near the new Volkswagen and Honda plants.
Source: Wall Street Journal