Arriba, Arriba, The Automotive Industry Speeds Up its Investments in Mexico

When I was growing up, one of my favourite cartoons featured a Mexican mouse called Speedy Gonzales and his adventures with Sylvester the cat. At the time this represented one of my first indirect introductions to Mexico and at about the same time (during the early seventies) the automotive industry in Mexico was relatively small in comparison to today’s industry. So once again and for the purposes of this blog entry I am taking an interest in Mexico, but this time from an automotive industry perspective!

The earthquake in Japan in 2011 has proven to be a turning point for the global automotive industry.  After years of globalisation, the industry is now being more cautious over its global expansion plans.  Due to the significant disruption caused by the earthquake, many automotive companies started to review their global manufacturing strategies.  Some markets such as China will continue to see inward investment due to the increasing wealth of the Chinese consumer, but what about other markets around the world?  In an earlier blog I discussed how the Inovar Auto directive in Brazil was helping to grow the domestic automotive industry in the country but what does the future hold for one of its closest competitors, from an automotive manufacturing perspective, Mexico?

I think it is amazing that one single event such as the Japanese earthquake can have such an effect on the global automotive industry and as a result ‘near shoring’ has started to appear as the key automotive strategy for 2012.  North America has seen significant inward investment over the past twelve months with some saying that Detroit is likely to return to being a profit centre once again. But another growing profit centre is Mexico. So why are automotive companies rushing to build plants in Mexico?, why has the country become such a hotbed of automotive related investments over the past year? Today’s automotive industry seeks manufacturing locations that offer: low labour costs, high quality, good infrastructure, access to markets, reduced shipping time and costs, and an educated, skilled work force.  Mexico actually ticks most of these boxes!

So time for some facts on Mexico’s automotive industry, Mexico is currently the eight largest car producer in the world and is the sixth largest car exporter,nearly 80% of vehicles produced in Mexico are exported to the United States, 11 out of every 100 cars sold in the United States are made in Mexico.  Auto production is expected to reach 2.4 million units by 2014 with a projected growth rate of 5.5% per year and account for 18% of Mexico’s manufacturing GDP, while generating 56,000 jobs.

There are a number of automotive clusters in Mexico and given the relative size of the country when compared to the number of car manufacturers and suppliers in the region you could say that there could be some signs of over-crowding of companies in years to come.  China on the other hand is facing over capacity issues and the Chinese government is instructing companies who are close to being bankrupt to wind up their businesses quickly so as to help reduce the over capacity problem.  In Mexico the companies cannot produce cars quickly enough for export. There are two key reasons why the automotive industry has boomed in recent years, firstly the NAFTA free trade agreement with North America and secondly Mexico’s move towards a zero tax rate (by 2014) on imported parts that will be used for car production. Relations with Mexico’s more southern neighbours such as Brazil, discussed extensively in my earlier blog, are not as good as those with North America with both Mexico and Brazil placing restrictions on the number of cars they can export to each other’s countries.  So from this you can conclude that the primary reason that companies establish a plant in Mexico is to provide a stepping stone into the lucrative North American market.

Mexico’s domestic automotive industry, as with Brazil’s, is virtually non-existent and so the industry is now dominated by foreign owned car manufacturers and suppliers.  The map below gives a fairly good idea of the current spread of plants across Mexico, with four key hubs being established around the country.

With so many passenger and commercial vehicle plants in the region, suppliers, especially the 70% of foreign owned ones, have had to establish a presence in the region in a relatively short space of time.  However despite having the presence of nearly 1300 key suppliers such as Delphi, Johnson Controls, Benteler and ZF for example there is still a shortage of suppliers of plastic resins, automotive sheet metal parts, pneumatic tyres, seat fabrics, headlining fabrics and trunk and floor mats.  So these parts have to be imported into the country.  Now from a financial point of view this is a relatively low cost as import taxes are very low and moving towards zero however given the increasing need to support both future new plants over the coming years and more importantly support their Just-in-time manufacturing processes, suppliers of the afore mentioned imported materials will have to establish a plant in the region sooner rather than later. The current structure of the automotive supply chain in Mexico is shown below.

In terms of vehicle production, BMW, Chrysler, Ford, GM, Honda, Nissan, Toyota, VW and Mazda all have production facilities in the country and commercial vehicle producers such as Daimler, DINA, Hino Motors, Isuzu, MAN, Scania, VW and Volvo have production facilities as well.

So there are in effect two trends occurring at the moment, firstly some U.S manufacturers are pulling production back to their region and increasing production levels at existing plants in North America or setting up brand new plants in Mexico. Secondly Japanese companies are trying to protect their own manufacturing capacity (and minimise production disruption) and at the same time reduce their logistics costs and vehicle delivery times by setting up plants in either Mexico or Brazil. I certainly believe these two countries will become the fastest growing car producing countries after China over the next few years.

Even though Chinese workers are now demanding higher wages, it is the sheer size of the potential car market in China that persuades foreign car companies to continue forming joint ventures in the country.  Boston Consulting Group recently did some analysis of the wages of Chinese and Mexican workers and found that back in 2000, Mexican workers earned more than four times as much as Chinese workers. By 2010, Chinese workers were earning only two thirds as much as their Mexican counterparts.  By 2015, BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25% higher than the cost of using Mexican workers. So if there was ever a reason to think of near shoring then this would be it.

The near shoring trend has partly contributed to a flood of investment in new automotive plants in Mexico with over $5billion investment in new plants expected by the end of 2012, here are some of the more recent significant announcements:

  • Nissan – currently building a new $2billion plant in Aguascalientes, the single largest investment in Mexico this year will help to secure the country as the eight largest car manufacturer and sixth largest car exporter in the world
  • Ford – investing $1.3billion in a new plant in North Mexico, creating 1000 jobs at a new stamping and assembly plant in Hermosillo
  • Honda – investing $800 million in a new production plant in Celaya, Guanajuato and will look to employ 3,200 workers.
  • GM – investing $420 million at its plants in Guanajuato and San Luis Potosi
  • Daimler Trucks – potentially investing $300 million in a new plant to manufacture heavy trucks transmissions
  • Audi – has chosen Mexico as the location for its first North American plant and will invest in the region of $2 billion in its new facility. The location of the new plant in Mexico has yet to be decided but this represents a significant investment by a leading premium car brand.
  • BMW – Not to be out done by Audi, BMW announced this week that they would be looking for a location in Mexico to manufacture their 3 Series range of cars

As I mentioned in an earlier blog entry, global expansion and being closer to end markets or customers is a key driver for expanding a company’s B2B platform.  We have certainly noticed a trend amongst our own automotive customers, particularly Tier 1 suppliers who are being asked to support their customers’ operations in other markets.

The general theme of ‘International Expansion’ is an area that I will be discussing in a webinar in mid-November when I will be discussing how B2B solutions and services can assist manufacturers, automotive, high-tech or otherwise, with extending their supply chains and B2B platforms into a new market.

Global interoperability, supplier on-boarding and collaboration will be key themes of this particular webinar, details of which will be posted nearer the time.  So far this year I have taken a look at the automotive industry in India, Brazil and now Mexico, the next blogs in this series will focus on Russia and finally China.