Photo credit: 2009 Audi Q5 SE TDi Quattro by The Car Spy
Audi has decided to focus its budget on the creation of new models, plants, and technology in the coming years to catch up with its main competitor BMW. Of the $27.46 billion (20 billion euros) it plans to invest on global operations until 2018, the German automobile manufacturer has invested $1.3 billion in a 150,000 car plant in San Jose Chiapa, Mexico. With the plant’s cornerstone laid in May, the factor is bound to be operational soon to start the production of Q5 SUV come 2016.
Mexico has been one of the strongest contenders for Audi’s new assembly plant, mainly due to lower labor costs than the US. In addition, with a Mexican facility, Audi could easily export its vehicles to South America or Europe without being burdened by import and export taxes. That aside, Audi’s U.S. sales will no longer be controlled by European currency shifts while vehicle availability will improve, especially for models like Q5 and Q7 that are widely popular in the North American region.
Now Audi isn’t the first foreign automobile manufacturer to shift its operations to Mexico. Leading a list of top producers is BMW, which is currently deciding whether or not to also start an engine production facility in Mexico. Other companies which have set their roots in the country or plan to do so before 2015 are Nissan, Mercedes, Ford, and Hyundai. Some of these automakers actually re-opened their Mexican factories to enjoy the benefits Audi will reap and due to the high costs of labor and customs in their factories in China.
Due to these changes, Mexico has re-established itself as one of the leaders in automobile production and exports. With 234 bilateral agreements and 122 multilateral agreements, Mexican automotive products can easily access numerous markets across the world. In addition, in the light of upcoming energy reforms and the boom in the solar energy sector, Mexico is going to be able to provide energy to facilities at a fraction of the cost other countries charge.
However, there are a few hurdles that Mexico’s automobile industry faces and prevent it from rising from the eighth position among the world’s car manufacturing countries. The first of these is the never-ending drug war, which is one of the reasons executives are forbidden from visiting plants and facilities in certain parts of Mexico. Though Nissan and others say that they haven’t faced such issues, officials have made sure to tactfully place facilities so as to prevent drug violence and corruption from affecting operations.
Regardless, the Mexican automobile manufacturing sector will boost the country’s economy and even open a domestic market for the vehicles produced in its new plants. However, for the latter to happen, lending practices will need to be reformed and Mexican banks will have to come up with schemes for first-time buyers.
With the help of its new Mexican plant, Audi aims to sell at least two million vehicles and ultimately overtake BMW by the end of the decade.
Photo credit: Old Mercedes Benz by lusikkolbaskin
Mexico is the eighth largest automotive producer in the world. The automobile industry represents 3.6% of the country’s GDP, of which 14% is of manufacturing output. According to a fact sheet published through the US Embassy in Mexico City, production has increased by a record breaking 12.01% in 2012, which comes to around three million cars that year.
Mexico auto manufacturing world-class in sophistication
One of the factors behind this growth is the high quality of these factories. K. Alan Russell, CEO of TECMA Consulting, commented, “These plants are strikingly exceptional. The quality, the technology is really exceptional. You can be in any first-world country anywhere in the world when you walk in these plants and never guess that you are in Mexico.” Another reason is that the country graduates 90,000 engineers and technicians annually, which is more than in countries like Germany and Canada.
While announcing Ford’s $1.3 billion investment in its Hermosillo plant last year, former president Felipe Calderón had boasted about the Mexican laborers saying, “Mexico, besides being good at manual labor, is being very good in intelligence, operations, in our youth’s know-how when applied to work… [The Hermosillo workers] are demonstrating once more that our country has talent, preparation and innovation to generate the best quality and at the level of the best in the world.”
More luxury auto brands choosing Mexico
The Hermosillo plant has expanded since then and moved from manufacturing family cars to producing luxury vehicles. In fact, the latest 2013 Ford Fusion was actually built in the hot Mexican desert city just like its predecessor the Lincoln MKZ. The success of Ford’s Mexican-made luxury cars is driving brands like BMW and Audi to build in Mexico while Alfa Romeo has plans to start assembling some of its sports cars there. With these companies on board, Mexico’s car manufacturing output will grow 38% by 2016.
Renewed interest from US auto industry
Due to the rising labor costs and oil expenses, automobile companies in the US have shifted some of their operations south of the border. Though many companies like GM, Ford and Chrysler had already established their factories in Mexico two decades ago, it is now that they see major potential in their older investments. “Mexican auto factories and Mexican manufacturing offer First World productivity and quality at Third World wages,” commented University of California professor Harley Shaiken. “That is an unusual combination, and right now it is a defining combination.”
New Mexican infrastructure to support auto manufacturing
Mexican president Enrique Peña Nieto has announced that he will be spending $300 billion on developing the country’s infrastructure, of which $7.4 billion will be used for three trains to connect the capital with top Mexican cities in 2014. Through this venture, Mexico’s rail system will receive a necessary boost, allowing it to be more effective in transporting freight cargo around the country and across the border. With enhanced security measured added, rail will become the top transportation method for companies like those in the automobile industry.
The right legal framework
During last two decades, Mexico has been shaping its legal framework to push the growth of manufacturing industry, in specifics, automotive, aerospace and consumer electronics. Execution of the NAFTA was only the beginning. After that, Mexico has been polishing several legal provisions, liberalising the import of materials, tools and machinery for supporting the export market. As a result of that, many automotive, aerospace and consumer electronics companies have succeeded in Mexico under IMMEX, which is an incentive program for exports reducing import duties. One of the provisions for the new Customs Law is to make optional the assistance of a customs broker for imports and exports, which could bring on fastest operations for IMMEX operations, as long as they have sharp-trained people in foreign trade. Will Mexico keep that furious pace and enter into the top 5 automakers?
The interest in Mexico manufacturing is continuing to grow with additional automotive plants looking set to be built in the near future. Since announcement from Audi for creating their first plant for assembly and production in Mexico, automakers have found Mexico very likable for expanding automotive operations.
Audi confirmed plans for a $1.3 billion plant which is set to open in the next three years in San José Chiapa, Puebla. Plans have already been made for this new Mexican plant to be the sole global source for the Q5 model of SUV when it opens in 2016. Mexico has been highlighted as an ideal base for exports because of its geographical location between South and North America. Mexico also has a number of free trade agreements, a well-educated labor force and a close proximity to a lucrative market in the United States and the growing market in South America. These attributes have had a number of automotive brands queuing up to set up operations in Mexico, bolstering the Mexican economy.
The Audi announcement came shortly after Japanese brand Honda had committed to plans to construct a $470 million plant in Guanajuato. These major automotive brands are following in the footsteps of Mazda, Nissan, General Motors and Ford who have all announced plans for new plants.
This love of Mexico from the automotive industry has given the Mexican economy a huge boost, with it looking set to surpass Brazil as the largest economy in South America in the very near future. In the last year alone Mexico had attracted almost $4 billion in investments just from the automotive industry.
Since the year 2000 Mexico vehicle production has risen by almost three percent per year, while the United States and Canada are experiencing declines. This growth trend looks set to continue through to 2018 when the production forecast for Mexico is estimated at five percent annually. Mexico is currently the eighth largest manufacturer of automotive products in the world, but according to these estimates, this figure should only grow.
The Audi executive team has praised the competitive costs, free trade agreements and good infrastructure of Mexico as their reason for their chosen new plant site. The new plant looks set to be the size area of almost 400 soccer fields and will be located near to the Volkswagen plant in Puebla City. Since Volkswagen has announced that it intends to boost vehicle sales in the United States to a million vehicles over the next five years, with 200,000 of these vehicles from the Audi branch of the company, the new manufacturing facility could be a key factor.
The new production plant in Mexico is also included in plans for Audi to hit global annual sales of two million by 2020 and allow them to challenge luxury rivals such as BMW, Mercedes-Benz. With Mexico’s free trade agreements expanded to 44 countries, the new production plant will also help to achieve this goal. All these factors will soon have even more major auto plants being built to allow Mexico to develop into a serious car manufacturing industrial power.
IHS analyst Guido Vildozo, declared a couple of weeks ago, that two more plants were on sight. Now, several news on the internet point to BMW to be the next Plant to hit Mexico to produce Series 3. Apparently, BMW is already discussing terms with local authorities of the north and centre of the country. State of Queretaro appears to be the top contender. The Plant could start from 40,000 units, growing up to 150,000 units annually.
Other news point to Mercedes Benz considering a joint venture with Nissan for manufacturing either the A-Class hatch or the CLA four-door coupe in Mexico. Mercedes is also scouting for locations of the new plant and considering all other factors.
As Audi is setting the pace and luring BMW and Mercedes Benz into the Mexican Auto Cluster, several news over the internet remarked the interest of Tata, Infinity (Nissan) and Ferrari in Mexico.
Audi is luring the German luxury automakers to fight over the North America market. Will Mexico be charming enough to lure the others? It certainly has the infrastructure, regulation, export incentive benefits (IMMEX), the free trade agreements, qualified workers, great location and many other features. And when that happens, companies need to be prepared for an open season for resources and talent.
Despite the global recession, Mexico is actively seeking out investment from Chinese companies. One of the major investment sectors being targeted is the automotive industry. With this in mind Mexico is participating in the Auto Shanghai annual event for the first time, to showcase Mexico’s suitability and meet with potential investors.
There have already been several commitments from Chinese companies looking to invest but many other companies have already begun researching and feasibility studies to determine whether setting up factories in Mexico would be a sound investment. The Shanghai event has allowed Mexico to begin talks with some of the largest Chinese automakers who attended a ProMexico seminar at the event.
Mexico has a number of advantages which would provide opportunities for Chinese companies, including the proximity to the United States. The U.S is the largest consumer of vehicles worldwide, which represents a huge market share. While Mexico also has a number of trade deals which allow privileged access for Mexican exports to over forty nations. Investment in Mexico for operations and infrastructure would save on logistical costs and delays to facilitate more efficient export to the United States and Canada.
Of course, the current economic climate has had an effect on Chinese investment. The automobile market in North America has halted or delayed a number of investment plans, but many companies look set to establish operations in Mexico should the situation improve. Mexico is currently the tenth largest producer of auto-motives in the world, but this could grow considerably should investment plans become a reality.
However, the Mexico-China relationship is not limited to the automotive industry. Many Chinese manufacturers have begun to establish operations in Mexico over the last ten years. China based firms in the textile, cellular telephone and electronics industries have set up operations. By 2005, there were over twenty Chinese manufacturers operating in several Mexican states. Many of these investments were considered small, but they have created thousands of job opportunities.
Mexico has also signed agreements with Chinese companies to cover equipment, technology and ships to support the Mexican oil industry. The line of credit from the Bank of China allows for the acquisition of equipment and ships needed for offshore activities and includes the possibility for finance for the overhaul of the state owned Permex fleet. These agreements lay the groundwork for potential cooperation for oil pipelines in the future. Since Pemex is the fifth largest oil producer in the world and is one of the only firms to handle all aspects in the production chain, this represents a great opportunity for China.
With rapid rises in costs including transportation and wages occurring in China, Mexico represents a good opportunity for Chinese companies to cut costs and improve productivity. Since many also believe that the Yuan may also be adjusted upwards against the U.S dollar, this could also highlight Mexico’s competitive position.
Many experts believe that we may soon see factory cities being established close to the U.S border which will present great investment opportunities for Chinese companies while boosting Mexico’s economy. It is certainly a development that many will be watching in the future.
Despite the fact that Chinese look for a free trade agreement without restrictions with Mexico, there are a lot of laws, benefits and breaks that Chinese are eligible. For example, Chinese-investment corporations are still eligible for IMMEX (export incentive programs), automotive production benefits, tax breaks from local governments, free-granted land from county governments, and many vast programs that are making Mexico attractive for auto manufacturing, regardless of the nationality.
Photo credit: Honda Civic 1,8 Type-S iShift by Dirk Vorderstraße
One of Mexico’s most strategic economic allies is Japan, and thanks to new rounds of talks and agreements, Japanese companies will be investing heavily in Mexico in the coming months. According to Ildefonso Guajardo, the Mexican Minister of Economy, who met with the Japanese Minister of Foreign Affairs, Japan is especially interested in investing in Mexico’s automotive sector.
“There are several Japanese companies analyzing new projects. Mazda is one of them and recently made an announcement; in addition several other companies in the auto parts industry join the assemblers to invest. Investment dynamics in Mexico is extraordinary”, Guajardo said in an earlier interview.
Guajardo also pointed out that trade exchange between the two nations grew by almost 40% in the past seven years, at a rate of 7% a year since 2005. Due to President Enrique Peña Nieto’s recent visit to Japan, the trade relationship has been re-launched, with Honda being one of the major companies to announce a major investment.
Honda, which was one of the first Japanese auto manufacturers to make cars in the United States decades ago, announced that it will be initially investing $470 million dollars to build a brand new transmission factory in Celaya. Honda also very recently invested in a brand new automobile manufacturing plant in the same city, and cars should be coming off the assembly line as early as 2014.
The transmission facility, the third in North America, will be operating by the second half of 2015, and should produce an average of 700,000 continuously variable transmissions per year. There will be approximately 1,500 people hired to work in the factory, as well.
“This will establish an efficient production structure that will maximize our Mexican and North American content,” Honda Executive Vice President Tetsuo Iwamura said at a press conference in Mexico City earlier this month with Guajuardo.
He further stated: “This will be Honda’s third transmission plant in North America and production will increase to 2 million transmissions per year, to support production capacity of 1.92 million automobiles in the region”. The transmissions made at the plant will therefore not only be for the cars manufactured in the adjacent factory; many will be exported to Honda’s other plants in North America and overseas.
Honda’s Celaya $800 million auto plant had been announced in 2011 and as mentioned above, production on the Fit subcompact models will start in 2014. Other major Japanese auto makers who’ve recently made large investments in Mexico include Mazda who is building a $650 million factory and Nissan who is building a $2 billion plant alongside their existing manufacturing facilities.
Honda and Japanese auto manufacturers aren’t the only foreign car firms looking to start or increase production in Mexico. Audi announced back in 2012 that it will be building its first North American plant in Mexico with an investment of approximately $2 billion. Volkswagen, which has long been established in Mexico, will also be investing a further $1 billion over the next three years.
It’s no secret that automakers like Mexico; there’s a hard-working, highly skilled labor force, an astounding lack of red tape, a business-friendly government, plenty of free-trade agreements with dozens of countries and trading blocs, and great transportation infrastructure to get products to market quickly and effectively. Japan’s interest in investing in Mexico shows absolutely no signs of slowing down and is only expected to grow for a long time to come.