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From large manufacturers to small and medium-sized enterprises, carmakers in Mexico are experiencing the kind of boom that comes once in a generation, if at all.

Within two decades of the country having joined the North American Free Trade Agreement (NAFTA), an economic bloc that also includes the United States and Canada, Mexico’s manufacturing industry has witnessed a phoenix-like rise from its economic doldrums.

In the June 2014 special edition—NAFTA at Twenty—of the monthly bilingual publication Negocios, Eduardo Solis, executive president of the Mexican Automotive Industry Association, notes: “When placed on a line graph, you can see that despite the crises of 1995 and 2009, the automotive sector [in Mexico] grew continuously after the 1980s and then exponentially after NAFTA.”

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With the lucrative US car market as their main prize, since 2013 multinational automotive manufacturers have invested some $23 billion in the industry in Mexico, according to Negocios in April 2015.

Japanese carmakers such as Toyota Motor Corporation, Nissan Motor Co., Ltd., Honda Motor Co., Ltd., and Mazda Motor Corporation are all expanding their manufacturing bases in Mexico.

Marques with an American heritage are doing the same. FIAT Chrysler Automobiles N.V. (FCA), Ford Motor Company (Ford), and General Motors Company (GM) are examples.

Not wishing to be left out of the gold rush, German, British, French, South Korean, and Indian car brands have also been beating a path to Mexico’s power base since 2012.

The upshot for its manufacturing growth—which extends beyond cars to include the aerospace industry—is that in 2014, Mexico overtook Japan as the second-largest exporter of cars to the United States.

Globally, Mexico ranks seventh overall among automobile makers and fourth among auto parts manufacturers.

Indeed, between the United States and Mexico, trade in cars and car parts reached $126 billion in 2014.

This was about the same amount as the combined trade in this sector between Mexico and three major trading partners: the European Union, Latin America, and the Caribbean.

On top of this, virtually all the world’s leading original equipment manufacturers have a foothold in Mexico.

CAR ZONES
The hub of Mexican carmaking is the North-Central region of Bajío, an industrial belt that stretches across the states of Guanajuato, Aguascalientes, Jalisco, San Luis Potosí, and Querétaro.

Bajío is home to auto plants of US makers Ford, GM, and FCA; and German multinationals Volkswagen, Audi AG, and BMW.

Ford plans to invest $2.5 billion in expanding one of its plants in Bajío, and is looking to build two other facilities in the region. The company will invest $1.3 billion in one of the new production centers, which will churn out its Fusion sedan as well as the Lincoln MKZ top-end sedan.

Among Japanese brands in the Bajío area, Nissan has three plants, Honda two, and Mazda one. Toyota currently has one facility in the country, although another is to be established in Bajío by 2019, according to a company spokesperson. The second Toyota plant will focus on production of the Corolla sedan—which is also produced in the southern United States, the company added. About 200,000 units a year are expected to roll out of the new base in Mexico.

Meanwhile, the Renault-Nissan Alliance and Daimler AG are planning a joint-venture assembly plant in the manufacturing belt’s Aguascalientes region. By 2017, the facility is expected to produce vehicles for both Nissan’s premium Infiniti brand and Mercedes-Benz.

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PART OF THE WHOLE
It is not only carmakers that have sought a competitive edge in Mexico. Automobile parts manufacturers from around the world have discovered a niche in the country, including Japanese company Hitachi Automotive Systems Mexico.

With an $85 million investment in 2015 in a plant in Lerma City, which stands west of the capital, Mexico City, the company will produce cutting-edge aluminum pistons for the North and South American markets.

The move follows an announcement, made back in 2012 by Volkswagen, that it would build a plant in the country. The news was followed by investments into plants by Mercedes-Benz, Audi, BMW, and Korea’s Hyundai, as well as a new parts plant by Ford, which was announced in 2015.

Furthermore, US multinational Goodyear Tire & Rubber Co. and German electronics giant Robert Bosch GmbH are among the long list of car parts makers that are adding value to the automotive supply chain in Mexico.

NAFTA AND BEYOND

A number of factors have come together to make Mexico the flavor of the decade for automobile manufacturers around the world—from government policies to liberalize the economy to strategic economic agreements and partnerships.

For manufacturers from the United States, NAFTA, which was established in 1994 and has a GDP of some $19 billion (around 25 percent of global GDP), is among the most important.

In the 20 years since the agreement was reached, Mexico’s automotive industry has grown five-fold, and foreign investment has leaped from $8 billion in 1994 to about $43 billion in 2014.

Japanese carmakers, moreover, have benefited from the Japan–Mexico Economic Partnership Agreement (EPA), according to ProMéxico, the government agency responsible for coordinating the country’s participation in the global economy.

Implemented in 2005, the EPA has facilitated trade, investment, and bilateral relations between Japan and Mexico, with Japanese investment in the country having reached $19 billion the year the agreement was signed.

Also, bilateral trade increased 71.2 percent to $20 billion in 2015, further strengthening Mexico’s manufacturing base, according to ProMéxico.

Mexico has free trade agreements with 46 countries, thus linking its markets with over 1.2 billion customers worldwide, ProMéxico added. That reach is set to increase in the Asia–Pacific region with the ratification of the Trans-Pacific Partnership agreement, which is currently up for approval in its nine partner countries, which include Japan, Mexico, and the United States.

This Toyota plant builds pick-up trucks, including Tacoma models.

This Toyota plant builds pick-up trucks, including Tacoma models.

REFORMS AND ASSETS
In addition to entering beneficial economic partnerships, Mexico is enhancing its competitiveness via a comprehensive strategy of structural reform.

This strategy includes financial reforms, with more credit being made available at lower rates through increased competition in the banking sector. The energy sector has likewise been opened up, as competitors are now challenging the government’s longstanding monopoly in the oil and electricity market.

In terms of fiscal policy, changes in the tax system, as well as enhanced international compliance measures and promotion of the formal economy, are also adding value, according to ProMéxico.

Additionally, reinforced antitrust laws—intended to strengthen the institutional framework for creating competitive markets in all sectors—and the promotion of a more flexible labor market via new employment contracts, are supporting the country’s standing as a manufacturing base.

For automakers in particular, the talent pool is rich in Mexico. According to a 2011 UNESCO report, the percentage of engineering graduates was greater in Mexico than in many other countries, including Germany, the United Kingdom, and the United States.

And such graduates come with highly specialized skills, honed in training centers such as CEDUAL (El centro de especialización dual).

The Puebla-based institution utilizes the German approach to training. Moreover, the cost of labor of a Mexican engineer, even taking into account benefits, is about 40 percent that of a US engineer, Bloomberg reported in November 2013.

Such reforms and assets have resulted in Mexico pivoting from a reliance on oil exports to becoming a global competitor in advanced manufacturing.

In 1981, 72 percent of the country’s exports were oil-related goods. In 2014, 85 percent were manufactured and finished products, which contributed some $400 billion to the country’s economy.

The automotive industry currently accounts for some 3 percent of national GDP, 17 percent of manufacturing activity, and 20 percent of foreign direct investment. This is while Japanese and American carmakers continue to account for a growing share of the investment pie.

Toyota’s Tacoma ­an off-road truck is being built in Mexico.

Toyota’s Tacoma ­an off-road truck is being built in Mexico.

John Amari is a writer and editor from the UK who specialises in articles on startups, entrepreneurs, science and tech and business.
In 2015 Mexico was predicted to become the leading supplier of light vehicles to the US, displacing Japan and Canada.