Over the past two years, more than $23 billion in new investments have poured into the Mexican automotive and auto parts industries. Manufacturers like BMW, Kia, Daimler AG and Renault-Nissan have all announced plans for new facilities in Mexico.
Why are these automakers choosing Mexico?
Mexico is the seventh-largest vehicle manufacturer in the world, and the sixth-biggest manufacturer of auto parts, with an estimated $81.5 billion in sales in 2014. Mexico’s auto production will rise to more than a quarter of the entire North American market in the next six years.
Currently, 40 percent of North American auto manufacturing jobs are in Mexico. A recent report from IHS SupplierBusiness noted that automakers are choosing to assemble vehicles in Mexico because of the lower labor costs and “the willingness of the Mexican government to do what it takes to attract global manufacturers.” That along with favorable trade agreements—Mexico has the most in the world at 44—are a critical factor in the rise of Mexico as a competitive and strategic manufacturing location.
In addition to growth prospects Mexico offers for OEMs and suppliers alike, several other factors work in Mexico’s favor for foreign manufacturers. Mexico is ideally located between the lucrative U.S. market and the growing Latin American sector. In fact, 80 percent of the cars built in Mexico are exported to other countries, with nearly two-thirds going to the U.S. Mexico’s proximity to the U.S. market provides lower freight and fuel costs. Mexico offers access to raw materials and finishing supplies, which further reduces freight costs and supports return on invested capital.
The auto sector globally continues to move to a regional production model, with production generally occurring as close as possible to final consumer markets to minimize supply chain costs. That makes Mexico desirable as a cost-effective production location for North and South America. Mexico’s strategic location midway between Asia and Europe benefits manufacturers that still have to rely on long-distance supply chains.
Mexico’s manufacturing growth also has prompted significant transportation infrastructure investment, resulting in a robust network of new roads, railway systems and shipping links. Mexico’s transportation investments—including airports, highways, railways and ports—are expected to exceed $100 billion through 2018.
Mexico’s growth in manufacturing foreign direct investment has brought with it greater needs for workers and land available for manufacturing. In key central Mexico markets, this has led to substantial increases in both labor and real estate costs. Hourly labor rates for direct labor in Mexico may be as low as $1.50 but as high as $8.00 to $9.00 per hour for trained labor. Eventually the price of labor in Mexico will settle and still be far lower than labor costs in the U.S. But some instability of wages will remain in Mexico for the near future.
The Mexican government has also made a strong commitment to ongoing training and workforce development. Foreign employers in the country are getting a stable, youthful, educated and motivated workforce in addition to overall affordability compared to the U.S or Europe.
The outlook for Mexican-based auto suppliers is also strong, as the country becomes a favored destination for foreign suppliers that want to locate near their OEM customers. This adds to the growth of auto manufacturing in Mexico as more suppliers establish a presence in the country. BMW already has more than 100 suppliers in Mexico and growing.
The benefits that Mexico offers to auto manufacturers are clear: competitive wages, growth prospects thanks to an open-trade philosophy, reliable infrastructure, proximity to the U.S, an educated workforce, and a growing supplier base. These factors combine to make Mexico a location any growing auto manufacturer has to consider for expansion.
Doug Donahue is Vice President of Business Development with Entrada Group, which guides manufacturers in establishing and running their own cost-effective Mexican operations in order to enhance global competitiveness.