Is Industrial Mexico A Friend Or Foe To The U.S. Auto Sector?

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Over the last 20 years Mexico has emerged as a major automotive exporter. While Detroit has struggled to sustain itself as a world-leading automotive hub, Mexico has quietly become the world’s fourth largest automobile exporter. Chrysler builds HEMI engines and Ram pickup trucks in Saltillo, a city located 350 miles south of San Antonio in the Mexican state of Coahuila. General Motors builds Silverado pickup trucks in the state of Guanajuato, north of Mexico City. Mexico is actually home to North America’s largest car factory, a Volkswagen facility in Puebla that employs more than 16,000 people and produces more than 500,000 cars a year. Audi working on a billion dollar facility in Mexico. BMW and Nissan both have plans for billion dollar plants south of the U.S. border. Eric Farnsworth, the Vice President at the Council of the Americas in Washington D.C., told me “Investors see Mexico as an export platform with access to the United States.” While some observers may see Mexico’s auto industry as a threat to U.S. automobile production, a growing chorus of voices is advocating the concept of North American competitiveness.

As I explained in a recent article for Fox News Latino, “The simplest logic suggests that there is a zero-sum calculation that any new auto plant in Mexico means one less plant in the U.S. and that every job created means one fewer job in the U.S.”

Such analysis, however, misinterprets the benefits of cross-border, integrated production. Companies that coordinate operations on both sides of the border are proving that they can out-compete manufacturers in Europe and Asia.

“Mexico isn’t taking jobs from the U.S.,” Eric Farnsworth told me, “Because of integrated supply chains, up to 40 percent of the content of the products Mexico exports comes from the U.S.”

As I explained in my Fox News Latino article, “since NAFTA came into force in 1994, foreign direct investment (FDI) in North America has increased nearly sixfold from $110 billion per year in 1992 to $650 billion per year in 2010, and today more than $1 billion dollars of goods and services cross the U.S.-Mexico border every day.”

As Mexican President Enrique Peña Nieto explained in an editorial in the Dallas Morning News, the U.S. “sells more of its exports to Mexico than it does to Brazil, Russia, India and China combined. By increasing economic growth in Mexico, we create jobs in the U.S.”

“The North American automobile industry is one of the most compelling cases of economic integration in the world,” Tony Payan, director of the Mexico Center at the Baker Institute for Public Policy at Rice University, told me.

Ongoing Economic Challenges

Although Mexico is increasing its industrial output, the economic model the country has pursued since the mid 1980s has not yet translated into widespread prosperity. As I explained in my Fox News Latino article, “Mexico may be home to 16 billionaires, but more than 11 million of the country’s 120 and some million people live in extreme poverty. In 2013 the country’s economy expanded by only 1.1 percent, and growth in 2014 isn’t expected to top 3 percent.”

While Mexico has emerged as an ally for U.S. automobile producers, the country has not yet become a major market for new cars. In 2013 for instance, consumers in Mexico purchased justo over one million new cars. It was the first time since the outbreak of the global recession in 2008 that Mexico’s car sales exceded one million.

In the U.S., by contrast, consumers purchased 15.6 million vehicles last year. The U.S. population is just over three times as large as Mexico’s but people in the U.S. buy more than fifteen times as many cars as their counterparts in Mexico.

As I explained in my Fox News Latino article, “Fiat, the automaker that owns Chrysler and Jeep, reported 85,000 vehicle sales in Mexico—about three-quarters the amount the company sold in Argentina. Fiat sold nearly 1.9 million cars in the U.S. and 785,000 in Brazil.” Ford by itself sold 2.6 million vehicles in the U.S. last year, almost three times as many as the total number of vehicles sold in Mexico. By contrast, Ford sold only 91,000 vehicles in Mexico. Overall, Mexico exports eight out of every ten cars it produces.

Part of Mexico’s success has to do with labor costs. Workers in Mexico receive about a sixth of U.S. auto worker pay rates. And, within Mexico, automotive workers are a relatively well-payed segment of the economy.

“There’s a tension in Mexico that’s unsustainable. Mexico bills itself as a middle-class country but relies on low wages. You cannot be both a middle class country and a low-income country. Middle class implies consumption,” Tony Payan told me.

Within Mexico, critics such as failed presidential candidate Andres Manuel Lopez Obredor have long argued that Mexico’s export-oriented development model has failed to deliver real benefits to the bulk of the country’s citizens. Over half the country’s population works in the informal sector of the economy, after all. According to a study from Mexico’s national statistics institute, families in Mexico’s fifth wealthiest income decile earns an average of barely $8,800 dollars per year. The households in the second wealthiest income decile in Mexico earns on average less than $19,000. Mexico’s wealthiest income decile, a group that includes billionaires such as Carlos Slim, earn an average of only $40,661 a year. The great range that exists within Mexico as a whole and even within the top bracket is part of the reason why Mexico has the second most unequal income distribution of all OECD countries. The unbalanced nature of the economy also helps explain Mexico’s lackluster domestic car sales. Another hamper on growth that between 2010 and 2012 the bulk of Mexico’s middle class saw it’s income fall. Only the top ten percent of earners reported an increase in earnings during this period.

Signs of Hope

As industry continues to develop in clusters in places such as Puebla, Jalisco [where Honda has a factory], and Guanajuato [where GM has a major plant], the benefits of production and the demand for homegrown engineers will create a boost for Mexico’s domestic consumption. On August 13 President Peña Nieto gave a speech in which he promised that his government’s economic development program “will help unleash the potential of our country and allow us to build a new Mexico: a country with a future [with] bigger opportunities for all Mexicans.”

“You still have a relatively small middle class, but that’s going to grow,” Farnsworth told me.

“Companies no longer look at Mexico as an assembly country, a maquiladora. Mexico has educated a tremendous number of engineers and now design work and engineering takes place on both sides of the border,” he explained.

Mexico now has more engineers than Spain or Germany. As shipping costs rise and labor costs in China continue to inflate, Mexico, with its proximity to the U.S. and its well-established industrial sector, faces favorable prospects.

Furthermore, even if Mexico’s upwardly mobile consumer class is a relatively small percent of the population, the country’s top earners are already on the radar of many major companies, including luxury brands. Mexico’s top 20 percent of earners includes more than twenty-four million people, a market segment that is bigger than the entire population of Chile, Latin America’s most developed economy, and about the same size as the combined populations of Norway, Denmark, Finland and Sweden

Paul Lacy, an automotive industry analyst at IHS Global Insight told me “Mexico’s manufacturing continues to grow, and that will create economic growth.”

“We’re better off working with Mexico than we are without Mexico,” he added.


[readon1 url="http://www.forbes.com/sites/nathanielparishflannery/2014/08/18/is-industrial-mexico-a-friend-or-foe-to-the-u-s-auto-sector/"]Source:www.forbes.com [/readon1]


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