In Mexico Auto Plants Hit the Gas

While the US has been heavily promoting manufacturing and trying to boost the manufacturing sector of the economy, it is our neighbor to the South that is making waves and building a strong economy from an industry that was born in Detroit, MI.  Just six short years ago Mexico was 9th in the world in auto manufacturing and today they are the 4th largest manufacturer in the world only trailing Germany, Japan and South Korea.  Now Mexico is forecasting that they will pass all of the countries ahead of them within the next few years because more and more automakers are building plants in Mexico.  Volkswagen, GM and Daimler have all announced new plants in the past year putting Mexico on pace for their lofty goal.

The question becomes why is Mexico all of a sudden the most attractive place to build a car versus the traditional powerhouses like Germany,Japan and the US?  The global shift towards smaller more fuel efficient cars has cut small margins even smaller in the auto industry.  Car makers are attracted to Mexico because of the currency advantages, the ability to operate plants 20+ hours per day and the skilled labor force that already exists in Mexico.  At first car makers were concerned quality would suffer in Mexico but they tested cars built in Mexico versus those built in Japan and cars being produced in Mexico are passing with similar scores to those automobiles that are produced in Japan. 

Mexico is forecasting huge growth in the sub compact auto industry not only because of the slumping global economy but also because the US government continues to push efficiencies in mileage and fuel economy.  The higher demand for these smaller cars has forced car makers to adjust how and where they produce their automobiles. In addition to the labor savings and higher demand for subcompact cars Mexico is extremely appealing because of its close proximity to the US.  In addition to ease of delivery Mexico has a number of free trade agreements with over 40 countries. Mexico’s free trade policy is a stark contrast from other countries like Brazil who has mostly shut down free trade.  Car companies can now make cars at a cheaper rate Mexico and have them delivered to the US in a number of days versus the weeks it takes to ship a car across oceans from Asia or Europe. 

The fact that Mexico is rebuilding their economy around the auto industry and that early entrants such as Nissan have seen huge success off of their investment in Mexico,  is a nice reminder that we truly live in a global economy.  Every day companies are faced with tough decisions on where to manufacture their products in order to achieve the highest quality at the most efficient rate.  When improving margins or developing a new product a major business strategies are made on where to manufacture and it is bringing new opportunities to countries all over the world.  The US will have to continue to reinvent our economy and image on the world stage in order to compete with up and coming countries like Mexico.


4 thoughts on “In Mexico Auto Plants Hit the Gas

  1. It’s interesting to see how different car companies use opposite plant-location strategies in order to get ahead in the market. 2 of the 3 companies choosing to shift production to Mexico (and listed in this blog) are American car companies. On the other hand, Toyota continues to engineer and produce more and more vehicles in America. It’s easy to see that Toyota’s plans are not without purpose. Toyota realizes that by creating a more “American” image and providing more Americans jobs they too can get ahead and capture market share even if it’s not initially the most cost effective option. Brand and image can be as powerful and at times more important than the initial bottom line.

    1. Interesting too because most foreign auto companies have started producing vehicles (primarily trucks & SUVs) in the US in the past few decades to avoid import tariffs on high-margin segments of the auto market. To its credit, I believe that Toyota was the first foreign manufacturer to also build passenger cars in the US and partnered with GM in NUMMI – an experiment that ultimately failed but not before proving that American cars could be made to the same standards as Japanese cars without union involvement or higher costs. Inexplicably, not even GM continued what was started at NUMMI. A fascinating account of this is chronicled in “This American Life” on NPR – see the link below to download the audio:

  2. I was surprised to see that GM was opening a plant in Mexico. After the whole bailout fiasco, and knowing the American economy is struggling, they’ve chosen to open a plant or more in another country? Sure it’ll keep costs down which in turn will certainly increase margins, but it’s very hard to say if that will outweigh the loss of customers who won’t want to buy a car unless it’s made in America. On the one hand, the decision might appeal to the emotions of so many hard working Americans and drive them to purchase another brand of auto. However, the board of directors and senior officers at GM understand business strategy, and you would assume they’ve done extensive research on the opportunity cost of producing in Mexico compared to potentially hurting the brand image.

  3. With lower wages, proximity to US and not so low unemployment rate and such proximity to US, Mexico provides many financial and logistical advantages for the car industry when compared to other countries and is definitely capitalizing on it. This will create a lot of new jobs and move the economy but it does not mean the Mexico is going to make any headway…
    Unfortunately, poor distribution of the wealth, high taxation on middle class and government excessive spending and corruption will just make the money flowing in, to drain out as fast making the multinational car and parts industry stronger and wealthier but maintaining the country still poor.
    Hopefully the Mexican government will be pushed by the lack of enough skilled professionals to improve the basic education system and technical/professional training of the workforce and this way allow workers and the middle class to improve from higher salaries and more specialized jobs.

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