Mexico’s $10 Billion Factory Investment Spree – What it Means for Suppliers

automotiveEU

Commentary by Doug Donahue

Japanese and German OEMs are the leading forces behind an anticipated $10 billion factory building spree in Mexico, according to parts suppliers, industry researchers and as reported by entities like Reuters.

Joseph Langley, a senior analyst at research firm IHS Automotive, described it best, saying “the level of activity in Mexico is insane.”

But if you are a tier supplier without current operations in Mexico (such as those based in Japan or Germany), how do you benefit from the insanity? Due to NAFTA rules of origin, you must have a local presence in the US, Canada or Mexico in order to take advantage of low or zero-tariff scenarios. And if you want to supply the OEMs in Mexico, or those contemplating a future Mexican presence (BMW, Toyota and Daimler are expected to announce $2 Billion in deals in the next two years), you need to be in Mexico.

Industry watchers indicate that more auto factories will be built in Mexico than the US by the end of the decade. While the US will consume the vast majority of the new cars built, 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. When you throw in the added advantage of Mexico as an export base for South America, it becomes even more attractive, with more local content production required.

Local Mexican Presence

It’s also important to keep in mind that there are huge regional differences across Mexico, just as they are in any other country. Unionized workers in Michigan aren’t paid as much as those in Alabama, for instance. What does the data say about Mexico?

A recent Bank of America study pegged manufacturing wages nationwide in Mexico at $2.50 per hour. But if your operations are in expensive locations like Querétaro, wages will be far higher than that. At Entrada’s industrial park in Fresnillo, Zacatecas, for example, fully fringed hourly wages for basic operators can be as low as $1.50 per hour.

Tier suppliers need to be aware of these regional differences when they are asked to bid on OEM contracts. Furthermore, suppliers need to be realistic about where to base their operations, as the new presence of an OEM in the area can be a double-edged sword – OEMs bring new opportunity, for sure. But they also bring higher wages.

Not only will costs go up for everyone when an OEM comes to town but, as OEMs purchase more from Mexican plants, they will become more knowledgeable about true local costs and prevailing labor rates. OEMs will develop their own baseline cost assumptions about the local area. So suppliers need to stay one step ahead with their knowledge of the local and regional market.

Suppliers must consider that costs will not only go up, but that as OEMs will purchase from Mexican plants, they will come to know more about the true labor costs and operating costs in areas where they are located – and use that as baseline.

Source: Reuters

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