A few hours before Ford Motor Co announced that it is cancelling plans to set up a $1.6 billion manufacturing plant in Mexico, USA president-elect Donald Trump sent out a tweet critical of General Motors’ manufacturing the Chevrolet Cruze hatchback in Mexico.
Trump’s post read as: “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!”
GM soon responded with its own tweet: “General Motors manufactures the Chevrolet Cruze sedan in Lordstown, Ohio. All Chevrolet sedans sold in the U.S. are built in GM’s assembly plant in Lordstown, Ohio. GM builds the Chevrolet Cruze hatchback for global markets in Mexico, with a small number sold in the US.”
In 2014, GM had announced investment plans to the tune of US$ 3.6 billion in Mexico for manufacturing small cars. This investment was part of a $5 billion programme, designed to double its production capacity as well as modernise manufacturing operations at its four plants in Mexico – in the states of San Luis Potosi, Guanajuato, Coahuila and Mexico State.
Mexico as an auto hub
Mexico, in the recent past, has become an attractive investment destination for foreign automakers thanks to its labour costs, which are said to be a fifth of what they are in the US.
According to a recent report by the Center for Automotive Research, there are a number of other factors which are drawing global automakers to Mexico.
The report says, “In recent years, Mexico has become a key destination for investment from all types of manufacturers, but especially from automakers and their suppliers. The country’s aggressive incentives, which include newly available educational and on-the-job training funding, infrastructure improvements, and competitive tax abatements, are bringing in billions of dollars in investments and creating thousands of Mexican jobs.
Since the beginning of 2010, automakers, including BMW, FCA, Ford, General Motors, Honda, Hyundai, Mazda, Nissan, and Volkswagen, have announced more than $24 billion in Mexican investments. Many of the announced investments were for expansion or retooling of existing facilities, but a large portion of this investment was announcing plans to build new factories by companies such as BMW, Ford, Honda, Hyundai, Mazda, Nissan, and Volkswagen/Audi.
In addition to traditional manufacturing operations, automakers are choosing Mexico as a place to locate research and development (R&D) centres. Companies such as FCA, General Motors, Nissan, Volkswagen, Continental, and Delphi have automotive research and engineering facilities located in Mexico. Both the Mexican government and other private organizations are also focusing on attracting and growing automotive R&D centres, though Mexico recently discontinued its most attractive incentive — a 30 percent tax break for R&D investments.
Growth in Mexico’s automotive manufacturing labour costs has been relatively flat in the last decade, while countries such as China and Brazil have seen automotive labor costs nearly double over the same period. However, Mexico’s success in attracting automotive investments is only partially the result of lower costs of production in Mexico. The country is developing a reputation for high quality production. Mexico is improving its educational systems and now graduates more than 90,000 engineers and technicians annually, meaning that automakers and suppliers can rely on a local labour pool of Mexican-trained engineers to a greater extent than ever before.”
“Perhaps more importantly, the low value of the US dollar vis-à-vis other currencies (e.g. Yen, Euro) has made Mexico the most advantageous auto manufacturing location in the NAFTA region. Low production costs and low tariffs due to the broad reach of Mexico’s free trade agreements (FTAs) made it possible for the country to emerge as a prime export base — not only within NAFTA, but globally as well. Exports from Mexico to 44 countries are exempt from tariffs, including the 10 percent tariff the European Union assigns to imported motor vehicles. Asian and European automakers closed production in their home countries to relocate to Mexico, and while US-based automakers have not relocated production, they have responded by increasing Mexican investment in order to remain globally competitive. US consumer preferences, low fuel prices, and US regulatory mandates have also contributed to increasing the attractiveness of Mexico as a location for passenger car production. Passenger cars overall have a lower margin than larger vehicles — such as pickup trucks, SUVs, and CUVs — and Mexico offers a way due to lower manufacturing costs, and gain access to non-NAFTA markets where many consumers prefer cars over pickup trucks and SUVs.”