Why Mexico Is Driving North American Auto Investment

Commentary by Doug Donahue

Investments in the automotive industry in Mexico continue briskly, with news outlets like Reuters reporting on a $10 billion factory building spree about to begin. Reuters cites input from parts suppliers and researchers, who indicate that much of the growth in Mexico is coming from Japanese and German manufacturers, and that more auto factories will be built in Mexico than in the US before 2020.

Implicit in this article is the belief that this growth in investment in Mexico is coming at a cost to the Chinese auto industry. The author cites research showing that wages in Mexico are nearly 20% cheaper than in China, with costs of energy and transport in Mexico also cheaper. It spells doom and gloom for China, right?

This viewpoint seems to oversimplify the big picture. While the investment numbers the author cites are correct and the Mexican automotive manufacturing market is booming, this has less to do with the Mexican wage structure in comparison to China and more to do with the current state of regionalization in the auto industry.

The automotive industry is booming in China too. The main point here isn’t that OEMs are moving production from China to Mexico. Why? Because today’s auto manufacturing market is all about regionalization.

The OEMs in Europe and Japan are setting up manufacturing in Mexico so that they can qualify for NAFTA rule of origin specifications. That is the answer for them in the western hemisphere. But they aren’t going to close up shop in Asia. The issues Japanese companies are having with supply chain in Asia may be frustrating, but they won’t result in an exodus from the market there entirely. Japanese OEMs will fix those issues because they have to retain Asia-based production.

Automotive manufacturing in both Mexico and in China will continue to grow. Manufacturers may opt for production in Mexico versus US or Canada. But the choice of Mexico versus China is not a realistic one that OEMs are forced to make – they need to produce in both markets. Today’s auto production market is all about localization. Companies have to produce where they sell in order to succeed in that local market and cut down on supply chain inefficiencies.

Source: Reuters

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