Trade Research Essay

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INBM 201
GLOBAL SUPPLY CHAIN
Case Study 1

Auto parts and Mexico: the right place, the right price

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Mexican auto parts manufacturers are proclaiming 2012 an “historic” high. Last year they churned out US$74 billon of headlights, tires, air conditioners, shock absorbers, floor mats and other components supplying North America’s burgeoning car and truck manufacturers. “In terms of the value of production, we reached a peak that had never been topped before,” says Manuel Cedillo, head of economics and research for Industria Nacional de Autopartes (INA), Mexico’s trade association of auto part manufacturers.
The industry has benefited from a surge of new foreign investment. Almost US$1.3 billion in 2012 and US$1.17 billion in 2011 poured into Mexico’s industry—both representing huge jumps from previous years, including 2010’s modest US$ 155 million—as manufacturers such as Denso and Tachi-S of Japan, Newmarket, Ontario’s Magna and Valeo of France beefed up Mexican operations and others vied to get in on the action. The car-parts sector in Mexico now employs more than 500,000 workers.
Driving the parts boom has been a stellar expansion of auto manufacturing in Mexico, with car companies—original equipment manufacturers or OEMs—flocking there to take advantage of the country’s membership in NAFTA, relatively cheap labour compared with other car manufacturing locations such as Brazil and proximity to the U.S. market. Mexico has free-trade agreements (FTAs) with 44 countries, more than any other nation, allowing manufacturers privileged access to burgeoning markets in Latin America, including Brazil and Argentina.
The Japanese and Europeans are in Mexico to escape problems associated with the strength of the yen and the euro while taking advantage of Mexico’s proximity to the North and South American markets. U.S. car manufacturers are being challenged by new Corporate Average Fuel Economy (CAFE) guidelines—with a 54-miles-per-gallon standard to go into effect by 2025—and the consequent need to turn out small, fuel-efficient cars profitably.
“It’s something they can’t necessarily do in the U.S. or Canada,” says Guido Vidozo, Latin America manager for IHS Automotive, a research firm that provides automobile industry analysis. “Mexico was the next logical place.”
In recent years, the pace of investment has quickened dramatically. Nissan is building a $2 billion plant in Aguascalientes, its third in Mexico, to manufacture its March hatchback and Versa sedan models, and Mazda is already expanding a plant still under construction in Salamanca, from a planned production capacity of 140,000 vehicles a year to 230,000, making room for the production of the company’s high-efficiency direct-injection SKYACTIV motors, as well as 50,000 Toyotas.
In addition, Honda is about to open a new US$800m plant in Celaya and Audi has confirmed its plans for a US$1.3 billion plant in Puebla. In 2010, Ford began producing sub-compact Fiestas in a factory in Cuautitlán in the state of Mexico, 40 km north of Mexico City.
By the time all the new factories are built, Mexico will be pounding out four million vehicles a year, up from 2.7 million in 2011, according to the International Organization of Motor Vehicle Manufacturers.
All these vehicles will need independently manufactured components. Mexico’s auto-parts industry is also a key supplier of car parts to U.S.-based car manufacturers. Indeed, Mexico now ranks fifth in the world in auto-parts manufacturing, representing about 6% of the world market.
SECURITY PROBLEMS
Not all is rosy in the industry, however. Some European manufacturers have been apprehensive about starting operations in a nation that has been shaken by violent drug wars in the past six years. Because of the well-publicized bloodshed, Audi reportedly considered other locations before settling on its initial plan for a new plant in Puebla.
Old Mexico hands have a more measured understanding of the violence,
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