#500. Mexico is in the News A Lot Recently

Mexico is in the News A Lot Recently

Over the past couple of months we have seen a marked increase in the number of articles posted about new manufacturing plants being built in Mexico. The following excerpts from an LA Times news story (Kia to open $1-billion auto factory in Mexico) on September 2, 2014, and from a WallStCheatSheet.com article (Why Are Auto Manufacturers Moving to Mexico?)  on August 31, 2014, spell out what is happening and why.

LA Times (Jerry Hirsch, David Undercoffler):

South Korean automaker Kia Motors Corp. will open a $1-billion auto plant in northern Mexico, President Enrique Peña Nieto announced Wednesday. Kia will join other automakers rushing to build cars in Mexico, where low labor costs and extensive free trade agreements have turned the nation into a manufacturing powerhouse despite its high crime rate.

BMW revealed plans for a $1-billion plant in San Luis Potosi in July, a month after Mercedes-Benz and Nissan announced plans for a joint, $1.4-billion plant in Aguascalientes. Last year, Audi broke ground on a $1.3-billion factory near Puebla. Honda, Mazda, Volkswagen, General Motors and Ford already assemble vehicles in Mexico.

Mexico is already the world’s eighth-largest producer of automobiles, said Mike Jackson, an analyst at IHS Automotive. With the new factories it would move into sixth place, ahead of Brazil and South Korea, by 2020.

“The carmakers are using Mexico to hedge their bets on global sourcing,” said James Rubenstein, an auto industry analyst and geography professor at Miami University in Oxford, Ohio. “Mexico has gone from being a closed, high-tariff country to the top of the league for trade. You can ship your products in any direction.”

The spending isn’t all headed south. Automakers are still investing heavily in the U.S., expanding and updating existing factories. General Motors on Wednesday said it would pour more than $200 million into two existing U.S. factories, and would move assembly of the next-generation Cadillac SRX from Mexico to Spring Hill, Tenn.
Mexico now accounts for more than 18% of North American auto production. That’s expected to jump to 25% or more by 2019 as automakers pour billions of dollars into factories, Jackson said.

Mexico offers a workforce with good engineering and manufacturing skills at a lower price than the U.S., Japan and Europe, said Mark Muro, a policy analyst at the Brookings Institution.

“We could hit a time when more than half of North American auto jobs are in Mexico,” Muro said.

But such a milestone would be partly symbolic because auto factories are far less labor intensive than in years past, he said. High-paying white-collar jobs are likely to remain north of the border, Muro said.

“The high-value design, engineering and innovation technology jobs remain in the U.S. and are clustering even more in places like Detroit and California,” Muro said.

Wallstcheatcheet.com (Sam Becker):

It seems that Mexico is destined to become the world’s new auto manufacturing hub. So what makes Mexico so attractive to auto companies? According to an article from Forbes, it’s the fact that the Mexican government has been hard at work creating a hospitable business environment over the past 10 to 15 years, while the United States has been focusing their efforts on exhaustive military campaigns. The Mexicans have been able to secure some of the more liberal trade agreements in the world, and their total number of agreements totals 44. As for the United States, we only have 20, and haven’t worked out a new deal since 2012.

Forbes reports that $19 billion in new investment has come to Mexico from foreign automakers over the past few years, and production is set to hit 3.2 million vehicles in 2014. That number is expected to hit 4.7 million by 2020.

The advantages of moving to Mexico are painfully obvious. It makes for a perfect production and exporting grounds for European and Asian car companies, and also allows for cheaper parts and labor than they could probably find in the United States. While a lot of American companies export jobs to countries with cheaper labor like China or India, seeing America’s automakers shift production to Mexico has to sting a little big.

But this is all coming after years of hard work from the Mexicans, and it’s due to change the country’s economy in a big way.

Things sure are exciting from the perspective of the Mexicans, who are due to cash in big time by attracting so much foreign investment. But the car companies themselves have plenty of reason to be giddy as well, as they have found a safe, cost-effective launching pad from which to attack North and South American markets.

So what does this all mean for American consumers? It could mean lower prices down the line, as transportation and production costs will be cut down for many car companies. But there’s also the chance that the shifting paradigm could have a negative impact on manufacturing jobs that are being shifted south of the border. As for the full range of effects, we’ll have to wait and see. But if America wants to give its economy a shot in the arm by attracting more foreign investment, working out some trade deals and creating a more hospitable environment — as Mexico has — would be a great way to start.

We will continue to monitor the activity in Mexico.