Growth in Mexico’s Auto Manufacturing:  Opportunity for Auto Part Suppliers

Growth in Mexico’s Auto Manufacturing: Opportunity for Auto Part Suppliers

Photo credit: Factory in the Mirror by Ruthanne Reid

To anyone who’s been watching Mexico’s economy for the past few years, it will come as no surprise that it’s growing by leaps and bounds compared to other countries in the world that have been effected by the global economic downturn. Because of the Spanish-speaking country’s prowess in automobile manufacturing, both German and Japanese automakers are in a rush to build new factories and plants to take advantage of one of the world’s most efficient and skilled workforces, favorable tax laws and almost innumerable free-trade agreements.

Despite the global downturn in financial affairs, Mexico is doing well thanks to its automobile manufacturing industry. German automaker Audi has recently announced that they will probably be doubling production in their new Puebla plant, which will be operational by 2016. Honda recently invested $800 million in a new plant in Guanajuato, and announced in May of this year that an additional $470 million will be invested in a new transmission plant in the same state.

Mazda and Nissan have also heavily invested in manufacturing plants in Mexico recently, and all major auto firms that are manufacturing in the country are planning on increasing production. All of this means that there are plenty of opportunities for auto parts suppliers.

The opportunities

Honda, as seen above, decided in 2013 to invest $470 million dollars in a new transmission plant in order to meet their own auto manufacturing needs. The plant is expected to produce over 2 million transmissions, more than the 1.92 million they will be needing. The company explained its decision: it was simply more cost effective to manufacture the auto parts in the same country rather than transport them from elsewhere, even if the labor costs abroad were cheaper. Shipping costs are now incredibly high, and in order to save money and guarantee quality, it’s just best to make the parts in Mexico.

“We are establishing a production base with outstanding global competitiveness in CVT production in the same location as our new automobile plant in Celaya,” said COO of Honda North America Regional Operations Tetsuo Iwamura. “As we continue to advance our commitment to build products close to the customer, we appreciate the strong support we have received here in Mexico.”

Japanese auto parts suppliers are in a rush to set up operations in Mexico: along with selling their parts to the big auto manufacturers, they can also take advantage of the same things the auto manufacturers take advantage of: Mexico’s prized geographic location central to all markets in the Americas, free trade agreements with literally dozens of nations and trading blocs, and a business-friendly, tax friendly environment.

With German car makers, American car makers and Japanese car makers rushing to increase production capabilities, they will need car parts. While some suppliers are still relying on shipping to get their product to customers, they’d be much better off setting up shop in the same areas as their main customers in Mexico. The problem of shipping will be completely eliminated, and surplus items can easily be shipped to other markets in North, Central, and South America via Mexico’s excellent and reliable transportation infrastructure.

Audi Could Double Mexico Production to 300,000 Units

Audi Could Double Mexico Production to 300,000 Units

Photo credit: Audi TTS by FotoSleuth

According to Audi CEO Rupert Stadler, Audi is on the path to strengthening already strong sales in the North American market with the laying of the foundation stone of automaker’s new plant in San José Chiapa, Mexico.  [This is] an important future element of the global Audi production network,” he stated recently in an Audi press release.

The new $1.3 billion Audi AG plant, set to become operational in 2016, will create 3,800 new jobs in the state of Puebla, where the plant will be located.   This will be the first factory in the Americas for Audi, and the vehicles manufactured in the plant will be the automaker’s popular Q5 SUV.

While the plant at first was intended to manufacture 150,000 units, executives at Audi have stated publicly that the plant will be large enough for 300,000 units, and there could very well be production of a Q6 SUV along with the Q5 models.

The goal of Audi AG is to make North America one of their top three markets.  Said Stadler at another press conference: “In 2020 every seventh Audi from our worldwide production will go” to North America, Stadler said in a speech at the groundbreaking ceremony in Mexico over the weekend. “Then we have reached our goal and strengthened America as a third pillar of our sales in addition to Asia and Europe.”

He further remarked at the laying of the plant foundation ceremony in Puebla“With the production of one of our most successful models here in Mexico, we will give significant impetus to our global growth and supply the extremely popular Audi Q5 from here to the world market.  By setting up a new car plant in North America, we are establishing a presence on another continent that is very important to us. In this way, we are strengthening our international competitiveness and consistently pursuing the Audi growth strategy.”

The plant will contain a paint shop, body shop, assembly line, and press shop.  The 400-hectare facility will be the Audi’s most modern and technologically advanced, and Mexico presented many benefits to the automobile maker.  The Mexican workforce is highly educated and famed for their strong work ethic, and the country’s well-developed infrastructure along with its numerous international free-trade agreements made it the ideal place for Audi to set up shop.

Furthermore, Mexico offers the best tax and business environment for automakers.  “With Mexico, Audi has made the best choice to help it develop and secure its growth,” emphasised Mexico’s Economics Minister Ildefonso Guajardo Villarreal in the same ceremony celebrating the start of the plant’s construction.

Rafael Moreno Valle, Puebla’s governor, further stated: “Our country and the new Audi location in San José Chiapa in Puebla offer the best conditions for the successful development of the entire American market. We are proud that with Audi México, the first international premium manufacturer in the automotive industry is at home in our federal state.”

On a separate occasion, Stadler mentioned that no jobs at the Ingolstadt factory in Germany would be lost when production of the Q5 shifts to Mexico; the additional demand for production cannot be met at the existing German plants.

United States/Mexico Railroad Transportation Quickly Expanding

United States/Mexico Railroad Transportation Quickly Expanding

Photo credit: 230/365: 08/18/2013. Union Pacific X-18 by peddhapati

Mexico is becoming the darling of the world’s manufacturing industry; along with highly skilled, experienced workers who are famed for their solid work ethic, Mexico has access to cheap energy thanks to its own natural resources and shale gas and oil that are imported through new and projected pipelines from the United States.  Due to the Spanish-speaking country’s geographical location as well, companies that manufacture everything from computers to automobiles are rushing in order to access all of the markets that are available in the Americas from Alaska to the southernmost part of Argentina.

In order to keep the goods flowing and manufacturing at optimized levels, railroad transportation is quickly expanding in Mexico and the United States, with north-south corridors seeing improvements and significant expansions extending from manufacturing bases in Mexico to markets, ports and road hubs in the United States.

Kansas City Southern (KCS), a Missouri-based railroad has recently made what is called an aggressive push into the cross-border intermodal market, having invested a total of $300 million in upgrades to its intermodal network in order to get Mexican goods moving.  The move not only will strengthen this railroad’s position as a major player in one of the world’s busiest commerce corridors; it might also change the way freight is handled.  Partnering up with Canadian Pacific Railway, KCS operates over a vast territory, going from Minneapolis to the Pacific coast port of Lázaro Cárdenas.

What makes KCS a little bit different and a better good transportation option that other companies is the fact that it doesn’t need to interchange traffic at the U.S.- Mexico border and is the only railroad company from the United States that doesn’t have to.

Intermodal shipping, or the shifting of containers in which goods are placed from trucks to trains or trains to ports, is the major area where growth is booming at near exponential rates.   In the past five years alone, cross-border truck and train freight has gone up an astounding 35 per cent, and is expected to grow as trade between the United States and Mexico increases to record levels.  The value of goods expected to flow through the border via railroads and trucking networks will most likely exceed $360 billion.

One of the industries that are relying on improved rail and road infrastructure is Mexico’s automobile sector.  While the sector is currently experiencing double-digit growth in production, it is still expected to leap by another 40 percent in the next 18 months.    Currently, Asian and European manufacturers that are in Mexico are hoping to acquire space close to the Mexican towns and cities KCS services at present.

Right now, Mexico is a hot market for U.S. investors and companies.  Summing up the situation in Mexico is Dahlman Rose analyst Jason Seidl, who says:  “Anybody with an opportunity to position themselves in this marketplace and chooses not to will probably regret it sometime in the next five to 10 years because cross-border market growth is going to outstrip probably any growth in any other (intermodal) transportation.”

Mexico´s Key Role on the US-China Re-shoring War

Mexico´s Key Role on the US-China Re-shoring War

Photo credit: Seagate drives being tested by Robert Scoble

Flavius Vegetius Renatus (Circa 375 AD), writer of Epitoma Rei Militaris (The Military Institutions of the Romans) is often quoted for: “If you want peace, prepare for war”. Business was way more simpler back then, and this kind of advice applied easily to every day trades. Today, globalized and technology-based world has created a more complex and competitive business world with multinationals with no nationalities or boundaries.

As we speak, one trend is challenging business in Mexico … There is a re-shoring war upon us. So, if Vegetius allows me, I would re-quote him for the present time: “Mexico-based operation: If you want profits, prepare for re-shoring war”.

There are several advantages of Mexico that US or China may use for making profit on the current re-shoring trend into America, and eventually will allow Mexico to keep some of that re-shoring inside the country.

1. Location, location, location. As in real estate, in manufacturing, location offers the big advantage of working on-time, reducing delivery times and costs. Plus, Mexico has good infrastructure. Mexico has broad cross borders with the US, as well as 102 Ports and 15 hinterland ports to handle charge and export all over the world. It has 78 airports, 264,000 miles of road and 16,000 miles of railroad. Government has been discussing increase of its railroad infrastructure to meet demand by automakers in the center of the country.

2. Free Trade Agreements and Double Taxation Treaties. Mexico has signed 12 FTAs with 44 countries, 28 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). In addition, Mexico is an active participant in multilateral and regional organisms and forums such as the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) mechanism, the Organization for Economic Cooperation and Development (OECD) and the Latin American Association for the Integration (ALADI). Since 2010, Mexico is negotiating its incorporation to the Trans-Pacific Partnership (TPP) with Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. After this Agreement, Mexico will be a world-class connector with reduced or non-existing trade barriers with almost all countries.

3. Export incentives (IMMEX). Through the years, Mexican Government has implemented several export and manufacturing incentive programs for investors.  Currently, IMMEX is the program that supports manufacturing companies for exporting. The main benefit is that raw materials are imported under 0% VAT rate (instead of 16%) or certain import duties, and could be transfer among IMMEX companies with same 0% rate. Machinery/tools could be temporary without paying VAT or import duties, too. Finally, at the end of supply chain, if this product/part is exported, VAT is not paid and machinery/tools could be re-exported without paying taxes. One of the main unexploited features of the IMMEX is that the same provisions apply to services. Then, outsourcing services of any kind (i.e. call centers, digital media rendering for video production, etc.) could apply for the same IMMEX benefits.

4. Engineers. Mexico is producing more engineers than ever, having a base of 400,000 software engineers and 65,000 graduating every year, Mexico is an “Engineering Powerhouse“. This number is powered by the fact that Mexico has qualified and skilled employees that have helped to success of diverse industries like consumer electronics, automotive/aerospace, textile and home appliances. In fact, Mexico has become a good ecosystem for clusters of auto/aero and consumer electronics to flourish.

5. Reliable legal framework. As labor law was amended to provide a more flexible labor system, and wages are reasonable, Mexico is competing with labor conditions in Asia. Government and politics are pushing amendments to free telecom and energy markets, and promised to set a more fair tax system. This could happen as soon as this year. El Pacto Por Mexico, a political alliance between the three major political parties, has outlined some of these amendments, and has guaranteed a majority in the Congress to pass the bill.

6. Domestic market. Mexico has a big domestic market of over 110 million people, with an average age of 26 years, Mexico has a great potential for growing inner market with products manufactured in the country.

Globalization is about producing in a place where business conditions, quality and price meet. Many companies will re-shore from China to US and/or Mexico forming a kind of North America manufacturing hub. Mexico has potential for landing any type of manufacturing operation, partially or totally, as can harbor either Chinese or US foreign investment.

As this re-shoring war is showing their first signs of hostility with companies moving away from China, it is time to apply some advice from Sun Tzu´s “The Art of War”: “Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted.”

Opportunities for Chinese Companies in Mexico

Opportunities for Chinese Companies in Mexico

Photo credit: chinese_new_year003 by Mark Eslick

Mexico’s economy is growing; in 2012 economic growth was 3.9 percent, and it is expected to continue growing.  Foreign companies are seeing that Mexico is a great place to conduct business for several reasons, and although there is no free trade agreement between Mexico and China as of yet, there are plenty of opportunities for Chinese companies in Mexico.

It’s well known that the Japanese vehicle manufacturing industry is firmly established in Mexico; German automakers Volkswagen have been operating in the country as well for decades and almost all car makers in Mexico are planning on expanding their production facilities or building new plants in the very near future.  Car parts manufacturers are also expanding, with many foreign companies looking to expand their presence in Latin America.  Therefore, there is a large, highly specialized work force with years of experience in car production; Chinese car companies who are wishing to access the North and South American markets should seriously consider factories in Mexico.

Related to the vehicle manufacturing industry is the aerospace industry; Mexico’s highly skilled work force is what has attracted businesses like Bombardier to set up shop in the Spanish-speaking North American country.

What’s also interesting for Chinese companies is that in Mexico, while the wages might not be as low as they are in China, chances are that in the near future wages will go up all over Asia.  This, teamed with the high cost of transport, makes Mexico the smarter option when it comes to manufacturing.

Hi-tech companies may also want to invest in Mexico; many people in the workforce are highly educated, have engineering degrees and many are completely fluent in English.  During the years that the manufacturing jobs went to Asia, Mexico did suffer somewhat economically, but instead of relying on labor-intensive, low-paying industries like textiles, young Mexicans focused on technology and working efficiently.  The result now is that innovation in information technology and cloud-based computing is coming from Mexico.  Chinese companies would be able to access some of the finest minds in high-tech industries.

As mentioned above, while there isn’t a free trade agreement between the two countries, Chinese companies manufacturing in Mexico would be able to take advantage of many of Mexico’s trade agreements with other countries.  In fact, Mexico has free trade agreements with 44 countries, including the United States, Canada, and the European Union.

Finally, as also mentioned above, China would be able to access all markets in the Americas if production facilities were established in Mexico.  Because of the high cost of fuel, transporting items by sea such as vehicles will be incredibly costly, but due to Mexico’s central location, the cost of transport from Asia is completely eliminated, which is good news for a company’s bottom line.

There are many opportunities for Chinese companies in Mexico.  Along with the automotive, aerospace and IT industries, it’s very possible that the government will be opening up the telecommunication and energy sectors, breaking the decades-long monopolies that have, some say, held back Mexico’s economic growth.  China is known to be experts in the field of telecoms and could either establish cell phone networks or consult new national companies.   Furthermore, China could be an ideal investor to update infrastructure in the energy industry.

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