Special Report

2008 Year in Review

Mexico’s automotive industry enjoyed a robust start to 2008, but as the year progressed, the global economic crisis took its toll, particularly on new-vehicle demand.

Sales of light trucks fell 5.9% from 2007 levels to 439,500 units, Ward’s data shows. Car sales plunged 7.2% to 580,992.

Despite the drop in sales, the country’s production remained largely unaffected by the faltering economy. In fact, full-year 2008 output rose 4.0% to 2,178,397 units, according to Ward’s data.

Carlos Ghosn, CEO of Renault SA and Nissan Motor Co. Ltd., said Mexico would continue to be an attractive manufacturing base for auto makers.

“Investment and employment in Mexico will remain stable, and we will not cut down our production capacity for several reasons,” Ghosn said late last year. Mexico exports do “very well due to the rate of exchange against other currencies, and we do not see any threat to investment or production capacity.

“Mexico is one of the best investments (for Renault-Nissan),” he added. “We invest a lot, but we also get a lot back.”

Investment in the region came fast and furious in 2008, with Ford Motor Co. S.A. de C.V. getting the ball rolling in January with a plan to begin production of 4.4L diesel mills at its Chihuahua engine plant for the F-150 pickup and Expedition fullsize SUV.

Shortly after, word spread Nissan Mexicana S.A. de C.V. would build B-segment cars at its Aguascalientes assembly plant for Chrysler LLC, although timing on the actual start of production remained sketchy. In return, Nissan is to get a next-generation Titan fullsize pickup based on the Dodge Ram from Chrysler’s Saltillo plant.

Meanwhile, Chrysler early in the year began churning out its Dodge Journey cross/utility vehicle in Toluca. To accommodate production, the auto maker invested $1 billion in a new flexible body shop for the plant, which is serviced by an adjacent supplier park.

Chrysler assembled 124,709 Journeys in 2008, Ward’s data shows.

Suppliers also ramped up production capacity in the region. In March, transmission manufacturer JATCO Mexico S.A. de C.V. announced it would invest $200 million in its Aguascalientes plant to supply Nissan. German supplier Kolbenschmidt Pierburg Group said it was preparing to open a new plant in Chihuahua to produce pistons, pumps and EGR valves, while Mann+Hummel GmbH said it would begin production of a new plastic oil pan at its plant in Queretaro.

Perhaps Mexico’s biggest automotive windfall occurred in late May, when Ford announced it would expand its Cuautitlan assembly plant to accommodate production of its Fiesta B-car in early 2010.

Ford said its plan to build the Fiesta was just part of what it claimed would be the largest single investment ever by an auto maker in Mexico. Included in that was the plan to build diesels in Chihuahua and additional investment in a new transmission manufacturing facility in Guanajuato.

In all, Ford said the “multi-plant development” represented a $3 billion infusion, including planned outlays by local suppliers.

Prior to designating Cuautitlan, Ford indicated it would build an all-new plant in North America for its B-cars but backed off those plans due to financial constraints. Hermosillo, where the Ford Fusion, Mercury Milan and Lincoln MKZ midsize sedans are made, also once was rumored the future site of Fiesta production.

Cuautitlan opened in 1964 and is one of Ford’s oldest existing plants. It built F-Series pickups and the Ikon and current-generation Fiesta small cars for the Mexican market.

Ford had hinted Cuautitlan would close unless a new product could be found for the plant. Sources in Mexico told Ward’s in 2003 Ford had made a commitment to maintain operations only until 2008. The development of Cuautitlan’s local supply base was viewed as critical to keeping the plant open beyond that date.

Ford CEO Alan Mulally voiced support of the auto maker’s Mexican operations shortly after the investment announcement was made.

“Our investments in these facilities in Mexico are part of our plan to further realign our manufacturing capacity in line with the introduction of more small cars and crossovers,” he said.

The investment did not sit well with the U.S.-based United Auto Workers union, which had experienced massive job losses in 2008.

However, Joe Hinrichs, group vice president-global manufacturing, said Ford had been careful not to blindside the UAW with the Mexican sourcing.

“During the (2007 labor) negotiations with the UAW, we were very clear where the Fiesta was going to be built,” Hinrichs said.

Ford’s investment was forecast by Ward’s to push Mexico past Ontario, Canada, as the leading North American vehicle assembly region by 2012, further cementing the country’s importance in the global automotive landscape.

Ford’s decision to build the Fiesta in Mexico was indicative of a fundamental change in the industry that took place in 2008, said Marc N. Scheinman, a professor of marketing at the Lubin School of Business in Pleasantville, NY.

“What I think will make (Mexico) more important to the U.S. and Canada than ever before is what I perceive as a restructuring of the North American automotive markets, which are leaning toward more European tastes,” Scheinman told Ward’s.

North America is going “away from SUVs and going down to B-cars, and clearly those aren’t vehicles that can be manufactured profitably in the U.S. right now,” he said.

Ford of Mexico President and CEO Louise Goeser said the decision to build Fiesta in Mexico was based on simple economics.

“We made that (decision) with a lot of analysis to determine the best solution for the company, and we believe this is the best solution,” Goeser said. “We need to do some retooling and revamping, but it’s a large site and more economic to convert this plant than to build a Greenfield plant.”

In addition to economic advantages, Scheinman says Mexico President Felipe CalderĂłn played a large role helping to attract automotive investments to the country.

Calderón, a Harvard-educated pro-business conservative, considers manufacturing the backbone of the Mexican economy, Scheinman said, noting past presidents didn’t actively support the automotive industry.

“Now (the Mexican government) is working more closely with auto companies and providing infrastructure to support new auto makers,” he said.

Despite the government support, the economic malaise sweeping the globe caught up with Mexico in June, when General Motors de Mexico S.A. de C.V. announced it would shut down its medium-duty pickup operation in Toluca due to a shift in marketplace demand. However, GM did continue production of light-duty pickups for the Mexican market at the Toluca plant.

Mexico also temporarily lost volume when Ford stopped production of pickups at its Cuautitlan plant to retool for the Fiesta.

Labor issues took center stage midyear, when Volkswagen de Mexico S.A. de C.V. workers threatened to strike at the auto maker’s Puebla assembly plant over wage issues.

The 10,000-plus workers at the facility, which builds about 1,800 Bora, Jetta, New Beetle and Golf models daily, readied for an Aug. 21 walkout, but that was avoided when VW agreed to increase wages and benefits 5.4% and provide $1,227 in yearly food coupons and an additional day of holiday bonus pay.

Despite the labor strife at VW, Mexico remained an attractive manufacturing location for most auto makers, said Lorena Isla, Latin America research manager for business research and consulting firm Frost & Sullivan.

“We need to consider that Mexican workers always prefer to keep their jobs. So, at the end, they do their best in negotiation, but they accept what the company has to offer,” Isla told Ward’s. “Salaries in Mexico are still very competitive compared to other manufacturing locations, and most of the vehicle manufacturers are making important investments to increase production in Mexico.”

As the year drew to a close, worsening economic conditions took their toll, and a Frost & Sullivan study predicted there would be no relief for the automotive sector before 2010.

Meanwhile, Nissan continued its reign as the best-selling passenger-car brand in Mexico in 2008, controlling 23.2% of the market, Ward’s data showed.

GM took the No.2 spot with a 20.2% share, up slightly from 21.8% in 2007.

VW was slightly off GM’s pace, with a penetration rate of 21.2%, down from 21.7% prior-year.

Beyond the top three, the Mexican car market had a bevy of smaller players, including Chrysler, which held a 6.5% share, Ford (5.7%); Toyota Motor Corp. (5.5%); and Honda de Mexico S.A. de C.V. (5.1%).

In the light-truck segment, the Detroit Three took the top three spots, with Ford holding 21.7% of the market, followed by GM at 18.1% and Chrysler with 17.8%. Nissan nearly edged out Chrysler in 2008, grabbing 17.5% of the Mexican light-truck market.