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Detroit - The Mexican auto industry is about to go on a $10bn factory building spree, illustrating the nation's rising economic challenge to rivals from the United States to China.
Japanese and German auto manufacturers are spearheading the drive, say parts suppliers and researchers who see more auto factories built south of the border than in the United States between now and the end of the decade.
The United States will consume the vast majority of the new cars, but Mexico's domestic market has rebounded from a long slump, and in a sign of Mexico's growing global role, auto exports outside of North America will rise faster than those to the United States.
BMW AG, Toyota Motor Corp and Daimler AG's Mercedes-Benz are expected to announce at least $2bn of deals in the next year or two, according to supplier and other industry sources. That's on top of nearly $6 billion in announced plants by Nissan Motor Co, Honda Motor Co, Mazda Motor Corp and Volkswagen AG .
US automakers, all of whom have been building cars in Mexico since before World War II, will spend another $1bn or more to upgrade Mexican plants. And Nissan and VW also are considering expansions at existing factories that could total $1bn or more, according to sources familiar with their plans.
Mexico "is quickly turning into the China of the West," said Joseph Langley, a senior analyst at Michigan-based research firm IHS Automotive, pointing to Mexico's low wages, a strong supply base and a global web of free-trade agreements.
Mexican auto exports beyond North America are growing even faster than those within, according to the Federal Reserve Bank of Chicago. They accounted for nearly 30 percent of the 2.4 million exported last year. Altogether Mexico built 3.0 million cars and trucks, according to Automotive News, compared with 10.4 million in the United States and 2.5 million in Canada.
By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.
The investment shift has implications for auto jobs and labor unions north of the border, particularly in Canada, which will see a 20 percent decline in production, IHS projects. Output will soar 62% in Mexico.
US auto production will rise 12 percent, and Detroit-based automakers are expanding domestic production by ramping up the pace at existing factories to as many as three shifts running six days a week, said IHS. By those calculations, Mexico is building more auto plants than in the United States or Canada through 2020.
"It's all about lower production costs and lower export costs," said Michael Tracy, principal at the Agile Group, a Michigan-based auto consultancy. "That's what Canada used to be - the place for low-cost manufacturing and shipping. Now, everybody is targeting Mexico."
Mexico's economy is seen growing faster than Brazil's next year, underscoring the success of Mexico's export-driven model versus regional economic powerhouse Brazil's more protectionist policies. The promised auto investment could help Mexico challenge regional dominance by Brazil. Analysts are warning of excess Brazilian auto production capacity within five years.
Suppliers say the Detroit auto makers, with more than half the production capacity in Mexico, have not signaled any plans to expand vehicle output there. But General Motors and Chrysler this year have said they will install additional engine and transmission production capacity in Mexico.
Employment boom
In the competition for jobs with the United States and Canada, "Mexico's momentum, combined with its increasingly dense and capable supply chain, its persistent cost advantage and its trading relationships may give it a leg up," said Brookings Institution researchers in a report released last week.
Auto employment in the U.S. South, where Japanese, German and Korean automakers all operate non-union plants, is holding relatively steady at 18 percent of North American auto workers, according to Brookings.
Pay ranges as low as $12 per hour for temporary workers at plants in the U.S. Southeast, compared with about $35 an hour for skilled union veterans at US-owned plants. Union workers in Canada on average are paid even more; a year ago, GM Chief Executive Dan Akerson described Canada as "the most expensive place to build a car in the world."
But at around $2.50 an hour, manufacturing wages in Mexico are nearly 20 percent cheaper than in China, according to a mid-year Bank of America study. That study put U.S. manufacturing wages at just under $20 an hour, on average.
A shortage of trained engineers and concerns about crime and security may hold back Mexico, according to research firm PwC Autofacts.
Energy costs also are considerably higher than in the United States, but they are lower than in China, according to Boston Consulting Group. And because of Mexico's proximity to the United States and Canada, transportation and logistics costs are lower than for parts coming from China.
