Foot on the Gas: Behind the Mexican Auto Boom

Automobile assembly line in manufacturing plant. "Geely assembly line" by Siyuwj CC BYSA 2.0, accessed via Wikimedia Commons.

Automobile assembly line in manufacturing plant. “Geely assembly line” by Siyuwj CC BYSA 2.0, accessed via Wikimedia Commons.

For nearly ten years now, Mexico has been depicted as a place of anarchy in international media outlets. Headlines highlight insecurity stemming from drug cartels, mass disappearances, gang violence, rampant corruption, and massive waves of illegal immigration flocking to the United States. To put it simply, Mexico’s inability to successfully counter drug trafficking within its borders has led several news outlets and world leaders to call it a failed state.

Yet a country that has managed to instill robust democratic institutions despite years of authoritarian rule, and that has the world’s 15th largest economy today, cannot be categorized as such. The international community has bound itself to a one-sided depiction of a war-torn country, ignoring Mexico’s ample achievements and failing to give it the credit it deserves. Unarguably, Mexico’s fight against the narcotics economy has been far from clean. Yet while media outlets have been obsessed with reporting on the widespread violence stemming from the crackdown of the country’s multiple drug cartels, an interesting phenomenon has arisen in the country, largely unnoticed.

Roughly at the same time that the drug wars exploded in the country, Mexico experienced a second, more positive boom. In the past few years, Mexico’s automobile industry has boomed as companies such as Honda, Mazda, Audi, Toyota, and BMW have outsourced production to Mexico, joining the long list of automobile giants, including Chrysler, General Motors, Fiat, Ford, Nissan, and Volkswagen, already producing in the country.

Manufacturers are scattered all throughout the country, with Ford concentrated in northern states of Chihuahua and Sonora, General Motors situated in Guanajuato and Coahuila, and Kia soon opening a factory in Nuevo León, just to name a few. Nissan, which is based in Aguascalientes, recently announced that Mexico is now the world’s largest exporter of its vehicles. With assembly plants in almost every state, the lucrative automobile industry is spreading its benefits to all regions of the country, helping it modernize and develop. Today, the automobile industry is the country’s number one foreign currency generator, surpassing that generated by the oil and tourism industries. Moreover, unlike other plants in Latin America, Mexico’s automobile industry, which specializes on luxury vehicles, is more than a production hub; it focuses on research and development as well.

The automobile industry, which accounts for 17.6% of Mexico’s manufacturing sector, has driven Mexico’s economic growth and recovery over the past 3 years, helping the country get back on its feet after two years of economic stagnation. The auto industry now employs roughly 675,000 people in Mexico, accounting for 40% of all automobile sector jobs in North America, and providing some of the most generous worker benefits in the industry, including insurance and company subsidized healthcare. Furthermore, manufacturers such as Nissan prioritize worker well-being, teaching their employees on subjects spanning from business fundamentals to Japanese customs to hygiene and health.

According to Forbes, in the past 5 years alone, vehicle production in Mexico has doubled, bringing in over US$ 19 billion in foreign direct investment. With production totaling 3.2 million automobiles in 2014, Mexico today is the world’s 4th largest automobile exporter, tagging behind Germany, Japan, and South Korea. Data from the Mexican Automobile Industry Association shows that in the first 4 months of 2015 70.2% of vehicle exports went to the Unites States. Exporting 1.69 million automobiles to its northern neighbor this year, Mexico is now the United States’ 2nd largest vehicle supplier, toppling Japan who had occupied the spot since 1970.

Mexico has become Latin America’s largest vehicle supplier, surpassing Brazil, and the world’s 7th largest, following closely behind production giants like China, India, Japan, Germany, South Korea and the United States. If similar trends continue, Forbes estimates that Mexico will become the world’s 6th largest vehicle producer by 2020, annually producing over 4.7 million cars, a 50% increase from current production rates.

Mexico’s impressive rise in the worldwide automobile industry has also dramatically altered the composition of regional production trends in North America, as companies have started shifting production away from Canada and into Mexico. Data from DesRosiers Automotive Consultants shows that since 2008, Mexico has been quickly gaining production ground as Canada’s market share has dwindled. In 2014, Canada’s share of automobile production in the region dropped to 14.1%, a 20 year low. On the other hand, Mexico’s production share rose to 18.9%. Compare this to production in Canada and Mexico in 2000 – 16.8% and 10.9% respectively.

With the establishment of new assembly plants around the country, the automobile industry has triggered an increase in investment in other complementary industries, including auto-parts and tourism. International hotel chains, including Marriott, Hilton, and Starwood will build 52 new business hotels between 2014 and 2018 in the state of Guanajuato alone, bringing in US$ 350 million in investment.

Furthermore, the auto-parts industry has boomed as more and more manufacturers including Pirelli, TE Connectivity, Advanced Motors, JTEKT and Delphi have moved their factories into Mexico. Cities including Monterrey, San Luis Potosí, and Saltillo are now home to companies producing tires, automobile electronics, and engines, among other things. TE Connectivity has announced it will transfer its plant from Minnesota to Sonora, generating 144 new jobs in Mexico and US$ 20 million in investments. Similarly, Delphi will move from Michigan into Chihuahua, bringing in over US$ 109 million and 327 jobs. Today, Delphi is one of Mexico’s largest private sector employers, responsible for over 50,000 jobs.

What is steering massive auto investment away from Canada and into Mexico? How has Mexico managed to attract so much foreign direct investment despite rampant violence and a volatile political environment? Mexico’s multiple comparative advantages, particularly low production costs and extensive free trade agreements, have fueled this impressive economic shift. According to the Center for Automotive Research, Mexican workers at GM, Ford, and Chrysler earn $8 to $10USD an hour, and industry wages in the country can be as low as $3.77USD, while wages in the United States and Canada average between $40 and $60USD. These low wages are accompanied by high-quality production and high-skilled labor, which has dramatically improved as the country has invested in engineering university programs and foreign languages catered to the auto market, such as Japanese and German. But Mexico’s comparatively low production costs are not only attributable to its low wages, but to global macroeconomic trends. Japanese companies including Mazda, Nissan and Honda have attributed their production shift towards Mexico to rising costs in Japan due to the yen’s appreciation against the US dollar.

Furthermore, with 44 free trade agreements, Mexico enables automobile companies to easily export their products duty-free, especially to places that have been less accessible in the past. Mexico’s position bridging North and South America makes it a prime location for expanding automobile sales into new markets such as Latin America, while at the same time feeding the world’s largest market – the United States. With its free trade agreements and strategic geographical placement, Mexico has proved to be an ideal center for expanding sales throughout the world.

Internally, the automobile industry is more than just a source of economic expansion; it is altering the composition of Mexico’s society by contributing to the rapid growth of the middle class. In parts of the country, particularly central states such as Guanajuato and Aguascalientes, the automobile industry has provided new avenues for income stability, fostering education over illegal emigration. These states, who were once breeders of illegal emigrants, are now churning out engineers and biotechnologists. These students enter the legal workforce, earn reputable salaries, and pay taxes, positively contributing to their local economy, while attaining greater opportunities.

This new commitment to education is fostering a new Mexico, beginning to ameliorate the income inequality and nonexistent middle class that has been the norm since independence. According to a study conducted by the Wilson Center, 53.2% of Mexicans are in the middle class today, constituting the majority of the country’s population. Besides alleviating poverty, this transformation of a mostly agrarian society into a middle class society is helping dismantle entrenched practices, such as corruption, and establishing new ideals. People are realizing that upward mobility within the country is possible and that education is essential. Mexico still has a long way to go; only 36% of Mexicans have completed high school. But if current trends continue, that number figures to go up in the near future

Even in the midst of violence and political instability, the automobile industry has helped small rural towns develop into thriving metropolises. Witnessing the benefits stemming from the thriving automobile industry has triggered adjustments in the ways politicians approach international trade and investment. Local governments have begun taking measures to attract more multinational corporations, and connect them to locals. The state of Guanajuato helps automobile companies recruit workers and even trains potential candidates for the standardized tests that they must pass to get employed. It also pays auto companies bonuses for training Mexican workers abroad. Other state governments offer tax reductions, land, or infrastructure to lure potential investors. The challenge now is transferring these innovative marketing and governing strategies to develop other sectors of the economy as well.

Undoubtedly, Mexico’s automobile industry has been booming in recent years, and this rise is making miracles: stabilizing society, generating jobs, and bolstering development. Due to its increasingly appealing economic environment, among other things, Bloomberg has ranked Mexico as number 18 in its rankings of the 25 Most-Promising Emerging and Frontier Markets to invest in. Yet the automobile industry is still far from perfect and Mexico’s government has plenty of work ahead, especially in the areas of infrastructure and labor conditions. Improving infrastructure, particularly near ports, is a main concern for industry executives as ports currently lack the capacity to handle the large sums of vehicles that are expected to be exported if upward production trends continue. Although the government has allocated US$ 4.6 billion to improve port infrastructure by 2018, there are still concerns about possible delays, which would hamper business. With this investment, the government plans to increase operational capacity in all national ports by 50%.

In the port city of Veracruz, located in the Gulf of Mexico, plans to build 4 new terminals by 2018 are underway and the government has invested in tripling the port’s capacity by 2024. Other logistical improvements and transportation adjustments also need to be executed to strengthen investor confidence. President Enrique Peña Nieto has vowed to make national infrastructure development a priority. The government must fulfill this promise in order to retain its comparative edge in the industry and consolidate its success in the long run.

Furthermore, automobile workers are increasingly dissatisfied with their wages, which limit their domestic consumption, hindering economic growth. According to Bank of America, since 2005 productivity in the country has increased twice as fast as wages, triggering disaffection among a highly- skilled, middle-class workforce which seeks higher living standards. Although Mexico has a functioning, representative civil society and labor unions exist at each automobile company, both have been largely unable to bolster wages or improve worker conditions in factories, which some have described as grueling and exploitative.

The problem is that automobile factory jobs are some of the most sought after jobs in the country, giving little incentive to company executives for improving worker conditions. Knowing they can be easily replaced makes it hard for workers to make pressing demands. Similarly, the government has tended to turn a blind eye on worker-management conflicts in order to avoid meddling with the booming industry. Unfortunately, low wages in the automobile industry are making it difficult to continue middle class growth, threatening to halt the progress that has been made so far. Thus, Mexican officials find themselves at a crossroads; higher wages would help bolster domestic consumption and strengthen the country’s domestic automobile market, yet it is low wages that make Mexico so attractive to foreign investors. At some point, Mexico might have to choose which is more important: continuing its rapid growth or enjoying its benefits.

Mexico has a tough road ahead as it consolidates its rising position in the global economy. The automobile industry has worked miracles in the central states of Aguascalientes and Guanajuato, yet the question remains whether Mexico will be able to emulate these same unparalleled results in other regions of the country, regions with larger obstacles, including corruption and drug violence. But if it can, and its recent success gives plenty of reason to hope, future outcomes will be far from grim. Mexico’s booming automobile industry is more than an economic success story. It shows the complexity of the United States’ southern neighbor as more than just the country plagued with drug-related violence. Mexico’s booming automobile industry highlights its wide strides forwards despite subprime political conditions, its competitiveness in the global economy, and its rapid transformation into a regional powerhouse. There’s no question: Mexico is on the rise.

About Author

María José Sada

María José Sada is a staff writer for the Harvard International Review, contributing primarily to the Global Notebook and World in Review sections of the magazine.