Cruising Along: the Mexican automotive industry

Mexico is currently in the middle of a manufacturing boom and the automotive industry is leading the charge (for greater detail, check out Cruising Along: Mexico’s export sector).

The automotive industry is a powerhouse of the Mexican economy. In 2015, Mexico exported US$25.8 billion in vehicles with a gasoline powered engine capacity of fewer than 3 liters, which is 28% of its total exports within the HS-87 category.

In addition to proximity to and a favorable trade environment with the US, companies locate their factories south of the border for several other reasons.

First, the cost to manufacture vehicles in Mexico is much smaller due to lower wages. A 2014 estimate suggests that auto workers in Mexico make roughly US $5.25 an hour, which is about a third of their American counterparts. The lower labor costs allow car manufacturers – for example, the big three in the US – to make a profit their smaller vehicles while keeping production of their larger, more profitable SUVs and trucks in their home country.

Second, just like in the United States, the national and state governments of Mexico have offered foreign car companies generous incentives. However, there has been political pushback against such incentives. The most recent and well-known incident occurred in Nuevo Leon, where the newly elected governor complained loudly about a nearly $100 million incentive package agreed to by his predecessor.

Third, domestic consumption in Mexico has become a driver of growth. In 2015, 1.3 million new units were sold in Mexico, which was a 19% change from the previous year. Furthermore, as reported by the Wall Street Journal, the recent uptick in production in June was due partly to “strong domestic demand for new cars.”

A rising standard of living – US$5,750 GNI per capita in 2000 to nearly US$10,000 in 2015 – has contributed to an increased demand for vehicles in Mexico. A strong domestic market for domestically manufactured vehicles small vehicles protects the auto industry foreign market volatility. This has taken greater significance due to the recent shift in consumer preference in the United States from small cars to large vehicles.

For these reasons, it is unsurprising that several car companies and their subsidiaries announced their intention to heavily invest in Mexico. For example, Kia recently opened a US$1 billion new plant near Monterrey, Nuevo Leon approximately 120 miles from the US border. Their new factory will eventually build 300,000 vehicles per year, primarily for export.

Another recent announcement came from Audi. The subsidiary of Volkswagen will invest €1 billion (US$1.1 billion) to expand its production capacity in the state of Puebla. In addition to traditional gasoline vehicles, Audi plans to eventually build an electric version of the Audi Q5.

Production was low in the first four months of 2016 and production is expected to remain flat relative to last year’s numbers.

However, the next few years look promising. Production capacity will reach new heights as the Kia, Audi, and other companies’ factories fully come online around and after 2020.

Although there have been instances of labor issues in the automotive sector, the benefits from investment in automobile manufacturing in Mexico have been tremendous. A 2015 estimate suggest that auto workers in Mexico earn approximately US$8 and US$10 per hour with benefits; roughly three times the national minimum wage of 73.04 pesos per hour (US$3.84 at the current exchange rate).

As this article and the data in Cruising Along: Mexico’s export sector show vehicle manufacturing has been and will continue to grow in Mexico. Along with this growth will be an expansion of the middle class built upon manufacturing in several industries. Much like in the United States in the mid-20th century, vehicle manufacturing will be at the center of this economic boom and will provide benefits across the economy.

The middle-class dream is within grasp for many Mexicans in no small part due to the growth of manufacturing, especially for the men and women on making cars on the assembly line.

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