Special Report

2007 Year in Review

Mexico’s automotive industry fared well in 2007, despite struggles by the Detroit Three auto makers.

Production in 2007 increased to 2,095,245 vehicles, up 2.4% vs. 2006, according to Ward’s data. Except for a slight downturn in 2004, last year’s performance maintained more than a decade of uninterrupted production growth in the country, as auto makers continued to be lured by Mexico’s low-cost labor and proximity to the U.S. market.

By 2014, Mexico will produce 2.7 million cars and trucks per year, positioning itself as the fifth-largest vehicle producer in the world, says InfoAmericas, a market research and strategic consulting services firm specializing in Latin and Central America.

Nearly all major auto makers on the ground in Mexico announced plans last year to expand their operations, with Chrysler de Mexico LLC leading the pack with a planned $1.57 billion expansion of the Saltillo Engine Plant in Ramos Arizpe and its Toluca assembly plant.

Chrysler in 2007 also celebrated the opening of a supplier park adjacent to its Toluca facility. Dubbed Chrysler Park, the project represented a $1 billion collaboration between the privately held auto maker and its supplier partners, which are providing parts for the Chrysler PT Cruiser and Dodge Journey cross/utility vehicle.

Chrysler Park houses eight suppliers – TRW Automotive Holdings Corp., Magna Intier, IPO Rear Closures, Seglo S.A. de C.V., Hella Behr Plastic Omnium, Android Industries, Brose Group and Gestamp Automotive. The park resulted in the creation of 1,600 new jobs.

A Ward’s forecast also points to capacity increases in Mexico. General Motors de Mexico S.A. de C.V. will open a new 250,000-unit plant in San Luis Potosi in 2009 that will produce two small cars. The auto maker said production will be allocated to the domestic market.

Toyota Motor Mfg. de Baja California reportedly is eying Aguascalientes as a site for a possible new assembly plant. The facility would have capacity for 210,000 cars by 2012 and potentially could produce Toyota’s Yaris small car, reports indicated.

Nissan in 2007 announced it would look to increase substantially the percentage of parts it buys from low-cost countries, targeting Mexico to play a prominent role in the new purchasing strategy.

John Miller, Nissan’s vice president-purchasing, said while the auto maker made 17% of its purchases from what it described as “leading competitive countries” in 2006, it hoped to increase that to 24% in 2007.

“Mexico would be the No.1 portion of that increase,” Miller told Ward’s in June.

Honda de Mexico S.A. de C.V. in 2007 boosted capacity at its El Salto plant from 30,000 units annually to 50,000 as it prepared to shift production from the Accord midsize sedan to its high-selling CR-V midsize cross/utility vehicle.

Ford Motor Co. S.A. de C.V. designated its Chihuahua plant as the home of a new diesel engine expected to be available in the ’10 F-150 pickup.

Despite all the new investment, Mexico continues to face increased competition from China when it comes to attracting auto industry dollars.

Wages in the two countries, although far below those in the U.S., favor China, Scott Sneckenberger, a Mexico and Latin America specialist with consultant Plante & Moran, told an industry conference in late 2007.

A “semi-skilled” plant worker in Mexico earned an average of $2.60 an hour in 2007, Plante & Moran said, while his Chinese counterpart was paid $1.20 or less. Including benefits, the payouts neared $2.00-$2.50 an hour in China and about $4 per hour in Mexico.

However, it was a different story when it came to higher-ranking positions, such as plant managers. In both countries, the annual wage of managerial workers was about $60,000 annually, Sneckenberger said.

“You aren’t going to go in and hire an experienced, bilingual plant manager that you’re going to be comfortable with reviewing and controlling your facility for $12 an hour. It’s just not going to happen,” he said, noting global demand was so great for managers, they could relocate just about anywhere, including the U.S., for twice the salary.

Despite the labor discrepancies, Mexico offered several advantages China did not match, including its proximity to the U.S., Sneckenberger said.

The difference especially was important to producers of larger, more complicated products, such as automobiles.

“When a product is going to sit on a boat for four to six weeks, there could be multiple engineering changes that occur over that time period,” Sneckenberger said. “That could be a concern if you have to remanufacture or rework a part once it gets here. The cost savings you might have enjoyed manufacturing in China vs. a place like Mexico (could) be lost.”

Under the North American Free Trade Agreement, vehicles made in Mexico could be imported duty-free to the U.S., while other free-trade pacts allowed them to be cross-shipped with the European Union, most of Latin America and Japan, enhancing the country’s appeal as a production base.

“U.S. manufacturers are interested in selling their products in Brazil and Argentina,” Sneckenberger said. “But because of high duty rates, they can’t be competitive.”

Other advantages Mexico had over China included strong intellectual property laws, a large skilled-labor force, political stability and better infrastructure.

“Mexico has very strong copyright laws that protect proprietary and confidential information,” David Santoyo-Amador, an associate with consultancy firm Baker & McKenzie, said at a 2007 industry conference.

Despite going head to head with Mexico for automotive investments, FAW Group, one of China’s oldest and largest state-owned auto makers, announced in 2007 it planned to build an assembly plant in Mexico, making it the first Chinese auto maker in the region.

FAW formed an alliance with Grupo Elektra SAB to establish the new plant in Michoacan state. The investment is said to be worth about $150 million spread over three years.

Bruce Belzowski, assistant research scientist-University of Michigan’s Transportation Research Institute, called FAW’s foray into Mexico the biggest news of 2007.

“This is something of an early training ground” for FAW to learn what it takes to become a global manufacturer, he said.

Mexico is not too expensive, “and it won’t kill your reputation if you fail there,” he added. “It’s different if you came to the U.S. and failed and people said your cars were junk.”

Construction of the new plant got under way just as 2007 came to a close. Once completed in 2010, it will have the capacity to assemble 100,000 vehicles annually. The plant will produce FAW’s Xiali-brand vehicles for the Mexican and Central American markets.

Overall production growth last year was driven partly by IMMEX, a customs program launched in 2006 designed to simplify the Mexican tax structure that made it easier to bring in parts for re-export either directly or as part of another finished product.

Under IMMEX, raw materials could be imported duty-free and without being subject to a value-added tax on the goods they were used to produce. In addition, related machinery and equipment also could be imported temporarily free from duties and taxes.

To qualify, exports had to amount to $500,000, or 10% of a company’s total invoicing value.

To import machinery and equipment duty-free or without value-added taxes being applied, 30% of total sales had to be invoiced abroad. Additionally, export goods had to be equal to the value of machinery and equipment previously imported within two years of operation.

But last year wasn’t all smooth sailing for Mexico.

In September, a leftist militant group called the Popular Revolutionary Army bombed state-owned oil company Pemex, blowing holes in six pipelines in the state of Veracruz, which disrupted the flow of oil and natural gas to portions of the country.

Ford, GM and Volkswagen de Mexico S.A. de C.V. were forced to halt production following the bombings. VW suspended output at its Puebla assembly plant – where it assembles the Jetta and New Beetle – for a week, while Ford stopped production at its Cuautitlan assembly plant, idling some 807 hourly workers.

Of all affected auto makers, GM was hit hardest, as it was forced to idle plants in Silao and Toluca, where the Chevrolet Avalanche and GMC Yukon fullsize SUVs are assembled.

Fortunately, the attacks were isolated incidents, and full production was resumed in about a week’s time.

“The government will be able to deal with them,” Baker & McKenzie’s Santoyo-Amador said of the leftist militant group. “They’re making a lot of mess, and they raise trouble, but it will be OK.”

Meanwhile, Nissan continued its reign as the No.1 selling passenger car brand in Mexico in 2007, controlling 22.7% of the market, Ward’s data showed.

GM took the No.2 spot with a 21.8% share, although that marked a slight drop from the 22.4% it controlled in 2006.

VW was slightly off GM’s pace, with its penetration rising to 21.7% in 2007, up from 21.4% prior-year.

Beyond the top three, the Mexican passenger-car market was scattered with “also-rans,” including Ford, which held a 7.6% share; Chrysler (7.0%); Honda (4.5%); and Toyota (4.8%).

In the light-truck segment, the Detroit Three dominated, with Ford holding 21.0% of the market, followed by GM at 18.1% and Chrysler with 16.4%.

Auto makers gaining ground in total vehicle sales in 2007, included Fiat Automobiles SpA (218.5%), Toyota (10.6%), Suzuki Motor de Mexico (29.2%) and Mazda Motor de Mexico (121.5%).

Among those posting declines overall were Ford (16.1%), GM (6.0%), Peugeot de Mexico (15.4%) and VW (3.2%).

bpope@wardsauto.com