Car plants are popping up across Mexico as OEMs recognise the benefits of manufacturing in the country, but this may put pressure on the labour supply. AMS looks at the latest projects – and potential pitfallsGiven the scale of investment made in Mexico by vehicle manufacturers in recent times – with consequent increases in production – and the sums committed for future investment, it may seem odd to point out some weaknesses in the Mexican automotive industry. Certainly, while the short term offers optimism, akin to a boom time, for vehicle production, there are clouds on the horizon. Specifically, there have been reports of rising labour costs and labour shortages. Moreover, there are concerns that Mexico could soon lose one of its recent major advantages over the US, namely a greater number of free-trade agreements around the world. Progress has seemed glacial, but the US could be nearing completion of free-trade agreements with Europe and the Asia-Pacific region which will be to Mexico’s distinct disadvantage.
The significance and scale of these potential threats will become clear in the next few years, and while this is happening, the substantial recent investment in Mexican vehicle production and the attendant supply base will have come to fruition. These investments are embedding Mexico firmly in the top league of global vehicle production. Between 2010 and 2015, vehicle companies invested close to $25 billion in existing and new facilities in the country, and between 2016 and 2019 six new vehicle plants will come on stream: Kia (2016), Audi (2016), Renault-Nissan (2017, but Mercedes models also in 2018), Ford (2018), BMW (2019) and Toyota (2019). Expansion at others, notably Volkswagen, will also take place and Mexico will continue to receive production allocations transferred south from the US and Canada as North American vehicle-makers optimise their production footprints; on occasion, this will see some production – for example, GM pick-up trucks – move north, but this is very much the exception to the rule.
Between 2010 and 2015, OEMs invested almost $25 billion in production facilities in Mexico. Between 2016 and 2019, six new plants will be opened
Low wages have certainly been one serious pull factor, with base wages in Mexico being around one-fifth of those in the US. For vehicles like the Chevrolet Sonic and many other small and compact models made in Mexico, the cost advantage over a US manufacturing location is around $700 per vehicle. But there is more to Mexico than cheap labour.
The country’s free-trade agreements with over 40 nations – more than either the EU or the US – mean that Mexico is an attractive production location for global models, which can be sold in most if not all major markets worldwide. This was one of the key reasons behind Audi’s decision to make the second-generation Q5 SUV in Mexico. Audi can save around $1,100 on import duty in the US on a $45,000 vehicle, while for Europe the saving is around $4,500.
Although the US may soon have similar free-trade agreements in place, reducing Mexico’s advantage in this area, such agreements have yet to be concluded. Since the Audi plant is already in place, and others are on the way, the existence of these factories will sustain the country’s advantage. Having built its new plant, Audi will retain Q5 production there for the foreseeable future, as will BMW at its forthcoming factory for the 3-Series sedan.
Furthermore, domestic vehicle demand is rising and therefore adding to the attraction of Mexico as a production location. In the first five months of this year, car demand rose almost 14% year-on-year to nearly 377,000 units, while light truck demand rose almost 23% to nearly 210,000 over the same period. However, imported car and light vehicle demand rose faster than demand for domestically produced models.
Growing demand brings labour problemsRising vehicle production has brought with it increased demand for skilled labour, and with new investments coming on stream, retaining such personnel has proven challenging; vehicle companies have been unable to avoid paying higher wages. While Mexican component plants can still get away with paying as little as under $1 an hour, car factories are now paying $3 an hour – admittedly minuscule by comparison with wages in Michigan, but literally ‘top dollar’ in Mexico. In addition, skilled and experienced workers can move jobs much more easily than in the past, with improved pay.
Light vehicle production in Mexico is predicted to rise to more than 5m units by 2020 – an increase of 50% over the previous six years
The Mexican government has recognised this problem and has channelled funds into the public universities and technical collegiate system to produce more engineers at all levels. A $37m, state-funded training facility built on the grounds of Audi’s new plant symbolises this government commitment. The car companies are also opening their own training facilities. For example, BMW is training its own machinists, electricians and other skilled trades from scratch, such have been the problems it has faced with recruiting skilled labour near to its upcoming plant at San Luis Potosí. With a Ford plant also planned for this area, the problem will only intensify.
The investments discussed in this review – and elsewhere in AMS' special Mexico 2016 edition – will likely result in more than 30,000 jobs being created over the coming years. A recent report in The Wall Street Journal looked at both existing plants that are being expanded and new plants soon to come on stream (for which recruitment has started but has not necessarily been completed) and calculated that future job creation by carmakers in Mexico may be as follows: Audi: 4,200; BMW: 1,500; Daimler-Renault-Nissan: 5,700; Ford: 6,600; GM: 5,600; Kia: 3,000; Toyota: 2,000; Volkswagen: 2,000. These recruits, plus the existing workforces, will help to raise light vehicle production to over 5m units by 2020 – an increase of 50% over the 3.4m in 2014, which was itself a record.
Despite the recent investment rush, there are some potential complications. Ford’s announcement of expansion in Mexico, summarised below and detailed here, caused a political storm and has been opposed not only by the United Automobile Workers and the (failed) Democrat presidential candidate Bernie Sanders, but by the official Republican candidate, Donald Trump. While Ford and other vehicle companies have been moving to Mexico for many years, and plan to continue to do so, the possible installation of Trump in the White House could cause significant disruption to the industry. It may seem unlikely, but a Trump presidency could see an end to, or the gradual erosion of, the free-trade deal with Mexico, the implications of which would need to be addressed in the near future.