#544 – The Acceleration of Mexico’s Car Manufacturing Industry

We have been watching the increasing manufacturing activity in Mexico, and so have many others. Below is a recent report, in part, from worldfinance.com that looks specifically at the car manufacturing industry in Mexico.

The Acceleration of Mexico’s Car Manufacturing Industry

Through a combination of low wages, good geography and free-trade agreements, many car manufacturers have invested in Mexico. The hope is that this will boost the country’s manufacturing base

In recent years, Mexico has seen a boom in its car manufacturing and export industry. In the 1980s, factories often straddled the US-Mexico border; assembling cars from parts produced north of the border and re-exporting the finished product back to America. Yet since the 1990s and 2000s, Mexico has seen an increasing number of investments by automobile manufacturers for the production of increasingly sophisticated car parts and assembly plants, setting it on track to become a major centre of high-value manufacturing.

Toyota Motor Corp announced in April 2015 that it would construct a manufacturing plant in Mexico –costing $1bn – to build Corolla compact cars. Soon after Ford said it would be building and expanding (at the cost of $2.5bn) its engine and transmission factories in the northern and central states of Chihuahua and Guanajuato, and create another 3,800 jobs.

Mexico is a desirable place for car manufacturers to invest for a variety of reasons, perhaps the most glaring being the proximity of the most prosperous nation on earth; the US. According to the Mexican Automobile Industry Association, 70 percent of vehicles produced in Mexico are exported to the US. Also further north is the prosperous consumer market of Canada.

Geography alone, however, is not enough and since the 1990s Mexico has made a concerted effort to liberalize its once closed economy through entering into free trade agreements with other nations. The first major effort to liberalize trade was the 1994 joining of the North American Free Trade Agreement, which has eliminated most import and export tariffs between Canada, the US and Mexico, creating a free market stretching from the Arctic Circle down to the Jungles of Chiapas.

Throughout the 2000s Mexico continued to pursue free trade agreements, and now has a total of 44 with countries around the world, including major economic players such as the EU, Japan and China. “I can export duty free to North America, South America, Europe and Japan”, Thomas Karig, Vice President of Corporate Affairs for Volkswagen of Mexico, tells Forbes. “There’s not another country in the world where you can do that.”

This has given it a comparative edge over the US, both its primary buyer and car-manufacturing competitor in the Western Hemisphere. Mexico’s many free trade agreements allow it to export cars at a much cheaper cost.

Exportability is the basis of Mexico’s car industry, as, for now at least, many Mexicans will never be able to afford the cars made in these factories. Whereas America’s once booming car industry was based on its own internal market, south of the border the car industry is geared towards world exports.

Despite huge investments from car manufacturers, Mexican workers have not seen much of a wage rise. These low wages also make Mexico an attractive place for investment. Chronic low wages have been a constant plague of the Mexican economy, with years of low wage growth.

If wages are low in these factories, one major reason would be the lack of other decent jobs in Mexico’s formal economy. In 2014, over half of Mexico’s non-agricultural workforce was employed by the informal sector, according to The Wall Street Journal. The expansion of the car industry is bringing with it other jobs in the formal sector, hopefully creating more jobs with good pay and raising the wages for those that already exist, as competition between workers for them dampens.

The government’s attempt to position Mexico as a world center for high-value manufacturing seems to be paying off, with increasing numbers of white collar jobs in automobile research coming to the country.

While wages remain low in Mexico and law and order concerns persist in certain states, the car manufacturing industry looks set to remain the backbone of the country’s manufacturing base. Manufacturing in 2014 rose by 3.5 percent and car production rose by a full 10 percent.

As Mexico continues to expand its car manufacturing industry, we will keep a watchful eye on production both in Mexico and here in the United States. Stay tuned…