Why Mexico is winning the auto-jobs war

DETROIT — Mexico is the auto-industry darling, Canada is struggling to retain a manufacturing footprint and the U.S. is a house divided with most of the new automotive investment and jobs headed south of the Mason-Dixon Line.

The three countries are a united trading block under the North American Free Trade Agreement, or NAFTA, but they’re fierce rivals in the boardrooms where auto executives decide where to invest in the latest equipment and additional jobs.

The relative fortunes of the three countries have changed over the years, but right now, and for the foreseeable future, the farther south you are located, the better.

Of the vehicles built in North America last year, Mexico produced about 1 in 5, or double the rate from 2004. WardsAuto, which tracks production data, expects the rate to increase to 1 in 4 by 2020.

“The U.S. South and Mexico are winning the battle,” said Dennis DesRosiers, president of DesRosiers Automotive Consultants near Toronto. “Over half the capacity and 80 percent to 90 percent of investment dollars are going to the U.S. South or Mexico.”

Conversely, he sees the Canadian auto industry dwindling to five automakers with a single assembly plant each over the next decade or two — or about half its current manufacturing footprint.

The auto industry is global, but increasingly companies want to build in the region where they sell. Which means chances are your new vehicle will continue to be built in North America but may not be made in the U.S.A.

Back in 2004, 11.6 million vehicles were built in the U.S., or 74 percent of the 15.8 million industry total. Canada built 2.7 million, or 17 percent of the capacity; and Mexico contributed only 1.4 million vehicles, or 9 percent, according to WardsAuto.

In 2014, signs were evident the tide had turned.

Mexico’s production had more than doubled to 3.2 million units, or 19 percent of the 16.9 million industry total. It came at the expense of the U.S., which dipped to 11.4 million units, or 67 percent; and Canada, which was down to 2.4 million, or 14 percent.

And the trend will continue. Wards forecasts new plants will add 1.2 million units of capacity in North America by 2020 and it is not evenly split.

Southern migration

Virtually every automaker is adding capacity in Mexico. The country is a “massive untapped market” that could grow by another 1 million to 2 million vehicles a year, DesRosiers said.

By 2020, Mexico is expected to build 1 in 4 vehicles in a North American industry of 18.6 million units. The U.S. will hold its own at two-thirds of the output, or 12.2 million vehicles. Canada is the big loser, down to 1.6 million vehicles and 9 percent of the output.

In 2014, automakers announced $18.25 billion in additional investments in North America. The breakdown: almost $10.5 billion for the U.S., $7 billion in new projects for Mexico, and a single $750-million project for Canada, according to the Center for Automotive Research in Ann Arbor, Mich.

That is on top of the 18 plants already in Mexico, and there are at least five more planned or under construction. Mexico has seen a 40 percent increase in auto jobs since 2008 to 675,000 last year, while the U.S. saw only a 15 percent increase in the same period to more than 900,000.

The supply base also has improved its quality, said Haig Stoddard, industry analyst for WardsAuto. “The litmus test was when Toyota said it would build there,” a reference to the company’s strict standards.

The domestic market continues to grow, and Mexico’s ports and its trade agreements with 45 counties have helped establish it as a strong export hub to Europe and South America as well as the rest of North America. By contrast, the U.S. has about 20 trade agreements, and Canada also has but a fraction of Mexico’s pacts.

“Mexico bested us on trade agreements,” said Sandra Pupatello, a former Canadian politician who now oversees business development for PwC Canada in Toronto as well as the Windsor-Essex Economic Development Corp. “They quietly have been negotiating trade agreements with the world.”

In the U.S., Northern states are gaining third shifts at existing plants while the South is getting investment in new plants and the thousands of jobs that come with them.

By 2019, the U.S. South will have about 5 million units of capacity, almost catching up to the North, where the Midwest is not expected to grow much beyond the more than 6 million now, said Michael Robinet, managing director of IHS Automotive Consulting.

That is astounding given the history of how the auto industry developed.

The U.S. auto industry started in Detroit more than a century ago and the predominance of General Motors, Ford and Chrysler were such that they became known as the “Big Three.”

Production was centered in the Midwest and Michigan in particular — spilling over into neighboring Canada. It wasn’t until foreign automakers decided to build in the U.S. that a new manufacturing base was established in the South. States such as Alabama, Tennessee and Georgia used incentives and a nonunionized workforce to attract automakers seeking a manufacturing toehold in the U.S.

“The U.S. will be fine, at least over the next five years,” said Stoddard. “Production will stay here, especially of larger vehicles. There will be a lot of new capacity in the South, and it is needed. The North will hum along at current levels for the next five years.”

Changing economics

The pros and cons of each country keep changing.

Everyone wanted to build in Canada until a few decades ago, when Mexico emerged as the attractive low-cost region. Then Mexico lost some of its edge in 2000 because its costs were about 11 times more than China, said Peter Hall, chief economist with Export Development Canada.

But wages have been rising about 19 percent a year in China’s coastal regions while costs have remained flat in Mexico. The end result is that Mexico’s labor costs are only slightly higher than China and in some instances they approach parity.

Within North America, labor costs in northern U.S. states are close to $60 an hour; the South is closer to $40 an hour, and Mexico is less than $10. Canada is even higher, said Hall. The average Mexican will work up to 450 hours more than an American every year, earning less than a fifth of the pay, according to the Organization for Economic Co-Operation and Development.

But labor is only one of the factors in play when automakers are deciding where to invest. They must be balanced against the productivity and product quality of a trained workforce. There are logistics such as roads, ports, rail access, crime rates, security issues and trade pacts.

It used to be simple: The U.S. had higher labor costs but quality made up for it. Canada offset some of its costs with universal health care, a weaker dollar, productivity and quality. Mexico had problems with quality and productivity, but wages were much lower.

Fast forward to today. With new entry-level wages in the U.S., union-run health-care trusts and the Affordable Care Act, labor costs have come down. Canada has become a higher-cost nation. Mexico continues to mature, increasing its quality and output to meet greater demand at home and abroad.

Ford’s Stephen Odell, head of global sales and marketing, adds a cautionary note. “Mexico has a lot of capacity going in. At some point, labor rates will go up as a result.”

Mexico’s political landscape also has to be weighed, Stoddard says. It is still not the safest of countries and there is corruption.

Honda experienced growing pains in Mexico, where it has built a new plant to manufacture the subcompact Fit and new HR-V crossover.

“Looking back, we were probably a little more optimistic than we should have been in Mexico,” said John Mendel, Honda executive vice president of Automobile Operations. “Primarily because new plant, new site, new workforce with an average age of 22 and 60 percent don’t have driver’s licenses, new supply base, new transportation system and we expected it all to go like we had just built a new plant in Marysville (Ohio). So we were probably a little bit too optimistic.”