Check out this spiffy graphic from Automotive News on the evolution of auto assembly in Mexico (Japanese automakers march into Mexico, set up export base, Mar 10).
That expansion has to a large extent come at the expense of the rest of the North American industry as this graph from the Chicago Federal Reserve demonstrates.
Note that overall assembly capacity has declined. That’s not too surprising. The industry was generally seen as being overcapacitated, and the Big Three took the never-let-a-crisis-go-to-waste route to reduce the number of factories and resize their business. But Mexico clearly gained and it is forecasted to gain even more. Here’s another graph from the Chicago Fed.
It should be noted that this growth is driven by Japanese brands. GM is the only US or European firm to open a new plant following NAFTA. All the action lately has been due to the likes of Honda, Mazda and Nissan. Given this growth in capacity, it is not too surprising that Mexico is expected to pass Japan this year and Canada next year to become the top source of imported cars in the US. But why has there been such a rush invest there?
Now the obvious answer is that Mexico is cheaper and that clearly plays a part. According to the LA Times, the average Mexican autoworker makes $8 per hour — almost $30 less than the average US worker (Mexico becoming a driving force in auto production, Feb 22). But it is not just about costs. The Automotive News article notes the following about the costs of Mazda’s new plant.
Savings aren’t guaranteed. Mazda estimates that at the current exchange rate of ¥100 to a dollar, it costs as much to make a Mazda3 in Mexico as in Japan. But if the rate reverts to the ¥90 range or below, where it has been much of the past four years, Mexico will have the cost advantage.
So what else is there? There are two additional factors that Mexico a prime base for auto assembly.
The Japanese are not targeting just the United States. Mexico is also a staging point to grab sales from rivals in Mexico, Latin America and even Europe.
Japan’s automakers aim to take advantage of Mexico’s numerous free-trade agreements, which cover 44 countries that collectively account for 35 million to 40 million vehicle sales annually. Those pacts have turned Mexico into a global export hub. Japanese makers have congregated in the middle of the country for easy access to ports on the Atlantic and Pacific seaboards, from which they can ship vehicles globally.
Meanwhile, Mexico’s domestic market is growing quickly.
Vehicle sales have risen more than 7 percent annually since 2010. Mazda forecasts the market will grow 5 percent to 1.11 million units this year and expand 5 percent next year.
And the Japanese brands have been capturing a lot of market share in Mexico from US firms.
A final point is worth mentioning. Auto assembly doesn’t exist on its lonesome. An assembly plant needs a well-run network of suppliers to be up and running. And that can be a challenge. A different Automotive News article (Mazda’s challenges in crucial Mexico plant ramp-up, Mar 10)notes that to export duty-free to the US under NAFTA, the local content has to be north of 62.5%. Simply assembling kits of parts from Japan isn’t going to cut it. Successfully building an export hub in Mexico thus requires developing a network of local suppliers capable of delivering high quality. On the one hand, this puts a limit on how quickly the industry can ramp up. On the other, it becomes self-reinforcing. A larger assembly industry can support a larger, more sophisticated set of suppliers, which in turn makes it easier to expand the number of assembly sites.