Mexico finally starts setting its path towards a strong economy. With many structural reforms to its Constitution, especially the finally-approved energy reforms which benefit both the country and foreign investors, the Latin American country is quickly beating China and becoming the manufacturing base of many companies. Even Chinese companies are looking for opportunities in Mexico. This may come as a surprise considering the fact that many shifted to East Asia due to the higher crime rate among other issues. However, Mexico offers more advantages, all of which can make it the next top manufacturing hub, specially in the automotive sector.
One of the biggest perks of carrying out manufacturing procedures in Mexico is its manufacturing wages. China’s wages have increased immensely and are expected to be 30% higher than Mexico’s come 2015. Unfortunately, companies couldn’t get an equally high labor productivity rate. Mexico, on the other hand, boasts superior worker productivity and quality for less. This is definitely an incentive for companies limping their way out of the last recession period.
Mexico’s large number of free-trade agreements also acts as a catalyst for the country’s evolution into a manufacturing hub. Mexico boasts 44 free-trade agreements, including the profitable North American Free Trade Agreement (NAFTA). This number exceeds its rival China’s agreements (18) and its North American neighbor the United States (20 partners). Through these agreements, Mexico can import raw materials and export deliverable products for fewer to no customs. This helps both the country and foreign manufacturers achieve a unique win-win scenario. The negotiations of Mexico to enter the Trans-Pacific Partnership would come to fruition to increase its market to major global economies.
Also driving the Mexican manufacturing boom is the lower energy costs. This may sound impossible, especially considering the fact that the Mexican manufacturing industry pays comparable or higher rates than that in the United States. However, thanks to Mexico’s green power ventures, companies are taking advantage of their own solar panel arrays and backing them up with windmills. Mexican solar potential is high. As a result, they can produce their own electricity, connect to the Comisión Federal de Electricidad (CFE) grid, and down-load it to others for a low “wheeling” fee. What’s even more tempting is the fact that electricity rates vary by region as well as time of day and type of off-taker. Therefore, factories commonly built in Sonora, Nuevo Leon and Baja California don’t pay much despite running their air conditioners non-stop for six months. Now Energy reform would allow private companies to generate and deliver energy allowing manufacturers to make NAFTA-throughout deals with regional energy suppliers.
U.S. natural gas exports are also being used to fuel the Mexican manufacturing sector. According to Bentek Energy, two billion cubic feet a day have been exported from the U.S. through the southern border and the number could double in the upcoming years once the new pipelines from Texas and Arizona are opened. While Mexico does have its own rich shale resources, its lack of expertise and technology prevent it from tapping into them. “The Mexicans have an incentive to import U.S. gas because it’s basically dirt cheap for them compared to other sources of energy,” commented RBN Energy LLC analyst Sandy Fielden.
The Mexican Minister of Energy also pointed out that choosing U.S. gas over oil and diesel is bound to reduce electricity costs and give the economy a much needed push. This explains why the CFE is currently seeking bids for three natural-gas pipelines from the U.S. Operations through these are expected to start by the end of 2015 according to the vice president of GDF Suez, which is in charge of building the Los Ramones pipeline from Eagle Ford Shale in South Texas to Central Mexico.
With so much to offer, Mexico’s industry clusters will grow and reel in more people. By 2013, it has ready ascertained its position as a major auto manufacturer with 89 out of 100 global auto part makers setting up factories in the country. The appliances market also grew with 70 manufacturers there and busy producing large and small appliances. It won’t be long before other manufacturers follow suit and choose Mexico as their main production hub.
Photo credit: PAACE Automechanika Mexico City 2014 by Alberto Esenaro
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?
Photo credit: General Motors by Michael Kumm
General Motors has outlined plans, which will look to invest over US$600 million for the expansion of their Mexican operations. This investment will facilitate new factories and upgrades to existing premises. The company announced that the investment is intended as a celebration of reaching 78 years working in Mexico. The investment will also provide additional employment opportunities and development within several regions, together with allowing the company to develop more advanced technology, which will be of that benefit to their customers.
While the company is investing heavily in Mexico, it has not neglected their US investments. GM have unveiled additional plans to invest over US$100 million to create an addition to the assembly/stamping plant in Wentzville, Missouri. The construction is estimated to allow third stamping press to become operational in the next two years. This will allow the creation or retention of 55 jobs.
These new investments support the earlier announced plans of GM to provide a renewed focus on the standards of quality. The company is also looking to strengthen their manufacturing production within Mexico. Mexico, which is ranked as the eighth largest producer of vehicles worldwide, is quickly establishing itself as a regional supply base for the automotive industry.
This is largely due to the numerous free trade agreements in place within Mexico and the well-educated and cheap labor force available, in addition to the proximity to the vast and lucrative market within the United States. GM currently employees 15,000 people in their four facilities and headquarters in Mexico City. It is the second biggest producer of vehicles in Mexico, second only to Nissan.
GM is looking to expand and update their facilities, together with a shakeup within the design team. This is a commitment by the company to work harder to establish a greater synergy between Buick and Opel. It is also looking to obtain better leverage for the costly resources for engineering in Germany, where many designs for Buick and Opel are developed.
The desired effect for the reshuffle within the company is to allow sorting out effective strategies for the Buick and Opel brands. These are currently marketed within the three largest markets in the world-Europe, China and North America. These shared platforms that utilize different designs have created complicated issues that GM is hoping to optimize.
Many experts are watching the Mexico auto manufacturing industry with great interest. The industry has seen vast sums committed from former foreign investors, a trend which looks set to continue into the future.
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.
Photo credit: Copenhagen Takeoff by Julien Menichini
The aerospace manufacturing industry in Mexico has been building momentum over the last decade. The national government has been focused on developing domestic industry to build the Mexican economy. This focus of priorities has encouraged the growth of the aerospace industry from $146 million of exports in 2004 through to $3.5 billion in 2010.
The Aerospace Summit taking place in Mexico September 2013 will showcase this growth and is aimed at building further growth. The summit will allow visitors to appreciate the competitive advantages which can be enjoyed by manufacturers operating in Mexico. It also looks set to detail the logistics and business dynamics of aerospace manufacture in Mexico, with tours of plants and facilities, exhibitions and seminars from experts within the industry.
This can only strengthen the position of Mexican estimates that the aerospace industry is forecast to achieve consistent growth of up to twenty percent per year through to 2016. This would boost the economy considerably and be responsible for the creation of approximately 37,000 jobs across 350 companies.
There are numerous benefits for companies looking to establish operations in Mexico, including significant cost savings. Recent research conducted documented savings of approximately thirty percent when compared to operational costs in other countries. Mexico manufacturers currently produce engine parts, turbines, landing gear, fuselages and other components. However, there is a great effort to coordinate the resources of state and federal government together with private industry to allow the further and strengthened development of the infrastructure including education to facilitate and support further industry growth.
Mexico has been keen to welcome businesses within a number of industries including the aerospace field to encourage establishing operations. Many companies have been attracted by the lower structure of wages in Mexico which allows manufacturers to pay a fraction of the assembly wage costs in the United States. Expert analysis estimate the job costs of Mexico manufacturing is approximately ten percent of U.S costs and almost thirty percent of European costs. This could be explained as different levels of skill but Mexico on state and national levels is aggressively pursuing aerospace investment and jobs to broaden their industrial base beyond current expectations of electronics and auto-motives. This approach appears to be extremely effective as two hundred and seventy aerospace companies now have factories within various regions of Mexico.
In fact, the World Bank now reports that ninety percent of Mexico’s exports are now industrial products and their economy is now classified as the thirteenth largest in nominal terms with a ranking of eleventh for purchasing power. This explains why the label of made in Mexico is becoming more familiar and commonplace.
The geography of Mexico, free trade attitude and adoption of new legal processes are also huge factors in this industry growth. These measures have removed a great deal of the bureaucracy and red tape for foreign owned companies looking to establish production operations. It has also allowed for efficient and speedy establishment of factories which far outstrip factory creation in the European or U.S market.
All these factors combine to confirm that aviation manufacturing has certainly found a home in Mexico, where it looks set to stay in years to come. Now, you may add that automotive industry has established a blooming industry that share IMMEX (export incentive program) with aerospace manufacturing. With IMMEX program, operations reduce and sometimes, eliminate duties and taxes. Mexico is building “the” automotive/aerospace cluster.