When the last original Beetle rolled down the assembly line in 2003 and they cued the band in celebration, it was a mariachi band. Volkswagen was still building its Bug in Mexico decades after emissions and safety regulations had rendered the car obsolete elsewhere, saying a lot about the Type 1’s enduring charm. But it also made a less flattering statement, one that cast the Mexican auto industry as a dumping ground for antiquated car designs.
-The situation today couldn’t be more different. Automakers have announced $24.2 billion worth of investment in Mexico since 2010, nearly a third of all new spending on North American factories according to the nonprofit Center for Automotive Research (CAR) in Ann Arbor, Michigan. Five new Mexican assembly plants have opened in that time, producing Ford Fiestas, Honda Fits, Mazda 2s and 3s, Nissan Sentras, and Ram ProMaster vans.
-Another five plants are slated for Job One in the next five years, some of them producing—gasp!—German luxury vehicles. Volkswagen Group, for example, will spend $1.3 billion on an Audi plant, for which it is sending some Mexican employees to Ingolstadt for apprenticeships of up to two years. BMW has announced its own billion-dollar assembly plant that will go online in 2019. The Daimler and Renault-Nissan joint venture is constructing a plant with a similar price tag, where it will start building Infinitis in 2017 and Mercedes models in 2018.
-Predictably, manufacturers have been drawn to Mexico for its low wages. Mexican autoworkers’ compensation is only about 20 percent that of their U.S. counterparts. This means a Chevrolet Sonic manufactured at GM’s Ramos Arizpe plant costs the corporation $674 less than it does to build the same car in Michigan, according to CAR. That advantage is greater than the typical profit margin on a subcompact.
-But Mexico’s appeal goes beyond cheap labor. Carmakers say that Mexican workers are capable of building vehicles to a standard that meets or exceeds that of their best plants elsewhere. No less than Toyota, the world’s most manufacturing-obsessed car company, chose Mexico for its first new factory in North America since 2011. It will start building Corollas in 2019 at a site northwest of Mexico City in Celaya, Guanajuato, that is being described as a new model for the company.
-“Mexican plants have been some of the best in North America,” says Ron Harbour, a manufacturing expert and partner at the consulting group Oliver Wyman. Harbour says the German carmakers will undoubtedly build their luxury vehicles in Mexico “to the same standards as they do in their own country.”
-But competitive build quality and a few hundred dollars of labor savings are not primarily what makes our southern neighbor so attractive to the luxury brands. Mexico has free-trade agreements with more than 40 countries, including both the United States and European Union members, making it a favorable production site for so-called “global models” sold in multiple markets, such as Audi’s Q5. When the Volkswagen Group begins production of the popular crossover in San José Chiapa next year, not only will it be possible to supply the United States with its bestseller tariff-free, but it can also ship Mexican Q5s to Germany (where they are built today) without paying the EU import tax. The math is compelling: On a $45,000 vehicle, Volkswagen could pocket an additional $1125 on U.S.-bound vehicles that would otherwise be subject to a 2.5-percent duty, and it might save $4500 on those models that go to Europe, which has a 10-percent levy.
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Whether Mexico continues to attract more German investment will depend on how these initial efforts fare. Potential hurdles lie in developing a deeper supplier infrastructure in Mexico, as well as combating public perception of German cars not built in Germany. And with the United States currently negotiating two separate trade agreements that could eliminate or reduce motor-vehicle tariffs with countries in Europe and 11 other nations, Mexico might lose its trump card. The Trans-Pacific Partnership could be headed to Congress soon, according to reports, with the Transatlantic Trade and Investment Partnership to follow next year.
-“Every trade agreement we sign lessens Mexico’s advantage,” says Sean McAlinden, executive vice president of research and chief economist at CAR. “But the window is closing. You don’t build these plants twice.”
-Wall Busters
- -Carmakers have been building assembly plants in Mexico for decades. But from 2008 to 2019, they’ll have built more than they did in the previous 40 years.
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Paying in Pesos
- -Autoworkers in Mexico earn far less per hour than those in Europe or the rest of North America but are still well ahead of workers in China and India.
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