Mexico Held Its Own in Global Auto Industry in 2006

Special Report

2006 Year in Review

Mexico, once the land of cheap labor for auto makers looking to save a buck, found itself in fierce competition against the likes of India and China in 2006, both of which had undercut Mexico in wages.

A study conducted by The Boston Consulting Group, the Economic Intelligence Unit, The Euromonitor, S&P DRI and the U.S. Dept. of Labor, charted the projected growth in automotive wages in Mexico, India and China through 2009.

In China, wages were expected to rise from $0.80 and hour in 2003 to $1.27 in 2009. During that same time span, wages in India were expected to rise from $0.56 an hour to $1.68 an hour, the study said, while in Mexico, automotive wages were projected to rise from $0.83 in 2003 to $2.45 in 2009.

“If you’re chasing inexpensive labor, China is the better deal,” according to Bruce Belzowski, assistant research scientist-University of Michigan’s Transportation Research Institute. “But what you have to do when you talk about going to different countries is look at the total cost of doing business,” he said. “If you’re going to China to export around the world, you have the higher added cost of logistics and transportation than you have in Mexico.

“So U.S. companies have to look at total costs of transporting vehicles and components from there and China,” he added. “If companies are just exporting back into the U.S., Mexico has the edge. Labor costs are higher (than in China). However, it’s still tremendously less expensive than in Canada or the U.S.”

10-Year Production Gain Continued

Although Mexican workers earned higher wages than their Chinese counterparts, production was not affected.

For 10 years, Mexico vehicle production steadily increased, from 1,355,659 units in 1997 to 2,047,451 in 2006, according to Ward’s data.

Higher wages weren’t necessarily a bad thing for auto makers that both produced and sold vehicles in Mexico because those wages translated into potential customers with some money in their pockets.

In 1976, Mexican vehicle sales were just 303,368, including cars, trucks and buses. By 2006, that number was 1,178,959 units, up from 1,164,048 the previous year.

Ironically, most Mexicans opted for small vehicles produced in South America rather than domestically produced products, Belzowski pointed out.

“Most Mexicans buy vehicles (produced) in South America,” he said. “They do smaller cars down there. Most of the things (Mexico) builds are midsize and larger, and most are shipped to the U.S.,” he added. “So most of the vehicles sold in Mexico are not built in Mexico. Vehicles they buy are imported and vehicles they build are exported.”

Meanwhile, Asian auto makers continued to infiltrate the Mexican automotive landscape, with Nissan Mexicana, S.A. de C.V. leading the pack with a 22.2% market share in 2006, second only to GM.

Toyota de Mexico S.A. de C.V. and Honda de Mexico S.A. de C.V. continued to play catch-up to Nissan, which established a presence in Mexico in 1959 when the first Datsuns, predecessor to the Nissan marque, appeared. Toyota commands only 3.9% of the market, while Honda, in Mexico since 1985, holds a 3.9% share.

The U.S. Big Three remained dominant players in Mexico, with General Motors de Mexico S.A. de C.V., Ford Motor S.A. de C.V. and DaimlerChrysler de Mexico S.A. de C.V.’s Chrysler Group controlling 22.4%, 9.1% and 8.2% of the Mexican market in 2006, respectively.

However, the Detroit Three were not among those companies posting gains in 2006.

Growth rates among Mexico’s auto makers for the year showed Fiat Mexico, up 9%; Volkswagen de Mexico S.A. de C.V. (8%); Toyota (7%); Hyundai Mexico S.A. (6%); Honda (4%); Peugeot Mexico (2%); and BMW (2%).

Conversely, Ford’s pace of growth was off 0.5%; GM was down 3% and Renault slid (0.9%), while DC and Nissan were off 3% and 0.2%, respectively.

Despite some downturns here and there, Mexico’s growing prominence as a global automotive producer could not be overstated.

According to the U.S. Dept. of Commerce, in 2001 Mexico was the ninth-largest producer of autos in the world, manufacturing 1.92 million units (including trucks and buses). In 2002, production decreased slightly to 1.5 million vehicles due to an economic downturn. In 2006, however, that total rose to nearly 2.1 million units.

Mexico Seen No.5 by 2011

By 2011, Mexico was expected to rank fifth in world automotive production, competing with stronger economies such as India, the U.S., China and Slovakia, according to the Commerce Dept. study.

A report compiled by PricewaterhouseCoopers, indicated that to sustain that pace of growth, U.S. companies would need better efficiency, the suppliers, trade agreements, geography and customs benefits provided by the Mexican government.

Operating plants in Mexico, like all regions of the world, was unique in that foreign manufacturers could operate as either a maquiladora or a Pitex corporation.

The maquiladora decree was issued by the Mexican government in 1965 to stimulate the economy and produce jobs. Initially only open to the border region, the maquiladora decree invited foreign companies to set up shop for export purposes, essentially allowing them to import materials to produce the export-bound goods duty free.

The program was a resounding success, but eventually Mexico-based companies began to complain the maquiladoras had an unfair advantage.

To appease Mexican manufacturers, the government launched the Pitex program in the early 1970s. Pitex provided companies with similar breaks as the maquiladora program, but because they were Mexican companies, they were allowed to export to the U.S. as well as sell their products in Mexico.

In the 1980s, U.S.-backed maquiladoras found a way to get the best of both worlds. By registering with the Mexican government, U.S. maquiladora corporations officially became Mexican companies, and switched to Pitex status, which allowed them to export and import with the same benefits and sell their products domestically.

In 2000, the Mexican government began imposing taxes on maquiladoras, similar to those Mexico-based Pitex corporations were paying. The plan backfired and Mexico was faced with a mass exodus of businesses. In response, the government cut taxes on maquiladoras to half the Pitex rate, and over time restrictions on selling within Mexico were also dropped.

As a result, maquiladoras now are the best choice for foreign companies doing business in Mexico, said Jay Jessup, director-worldwide automotive group-Cushman & Wakefield.

“Many companies have changed from Pitex to maquiladora and most others should,” Jessup said. “Still, many auto suppliers are Pitex because they don’t know they should change.”

While growth was occurring at a decent clip across the country, most of it is concentrated in the northern and central regions of the countries rather than in the south, Belzowski noted.

Auto makers were not the only automotive companies to take advantage of the low wages and proximity of Mexico to major North and South American markets. Suppliers, increasingly under pressure to reduce costs, looked to Mexico as a means of survival in the often cutthroat business climate of 2006.

“Suppliers are feeling the pinch so hard up here (U.S.) they’re leaving because it’s (Mexico) nearby and you get a better rate,” Belzowski said. “And suppliers are thinking twice about going overseas compared to going south.”

The U.S. government stepped in and offered assistance to suppliers who wished to establish operation in Mexico. According to the Commerce Dept., “One of the key concentrations for the automotive sector is in Aguascalientes in the State of Aguascalientes and Silao in the State of Guanajuanto, both in the Central Region of Mexico.

“Through our previous supply chain missions in this sector, we’ve helped U.S. suppliers make significant export sales. Original equipment and second tier suppliers are always in the need of new sources of supplies. We believe that this mission will focus on U.S. third tier suppliers to sell to these automotive cluster areas.”

It was not just U.S. suppliers that were seeking cost relief by establishing plants in Mexico.

In September 2006, Preh Automotive, the automotive controls and sensors unit of Germany’s Preh GmbH, added 30,000-sq-ft. (2,787-sq.-m) to its Monterrey, Mexico, facility, which was opened in the beginning of the year.

The plant built sensors and control modules for BMW, DC, VW and Mercedes-Benz U.S. International Inc.

In order to maintain quality levels similar to those in Germany, Preh implemented the identical production and quality systems as it operated in its homeland.

In addition, the supplier chose to locate in Northern Mexico because it had a higher education level than other parts of the country, said Nick Lontscharitsch, senior vice president-sales.

“When we were looking for North American sites, we chose Mexico because of labor costs and Monterrey, specifically, because of its infrastructure,” Lontscharitsch said. “(Monterrey also has a good university where they have mechatronic (the combination of mechanical and electronic engineering) studies. The labor is more expensive than if you go South, but the education is good, and it’s safe to be there.”

A More Educated Workforce

Education leads to highly skilled workers, something Mexico has in increasing numbers. By comparison, other low-wage countries often have few skilled workers, adding an additional wrinkle to plans by auto makers and suppliers wishing to relocate in those areas.

This disparity in education and the amount of skilled workers are factors automotive companies have to weigh in to their decisions as to where to establish future facilities, Belzowski pointed out.

“I think (Mexican workers are) well-trained,” he said. “Manufacturers can set up anywhere, in any emerging market, but you have to ask yourself how good is your training and are you picking the right people?”

Belzowski pointed to Ford’s Hermosillo, Mexico, plant as proof a Mexican workforce could indeed build a quality product.

“Ford has a big plant building Fusion, and I’m not hearing it’s a piece of junk,” he said. “That tells you they can do it.”

Meanwhile, 2006 also saw a presidential change in Mexico, with Felipe Calderon taking office late in the year to succeed former president Vicente Fox (Mexico limited its president to a single eight-year term) in a heated election that lead to a number of street demonstrations to protest Calderon’s slim electorial majority.

Although Calderon was seen in some quarters as a bit of an extremist, at least compared to Fox, it (the change in presidents) had not yet had an effect on auto makers in the country, Belzowski said early in 2007.

“It doesn’t sound like there will be massive changes in the way country is going to be run in that respect,” he added

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