Thomas White Global Investing
Mexico Stamp
November 12, 2010
A Postcard from the Americas
Mexico: Revving Up After a Recession

A car manufacturing unit

Mexico is reported to be emerging as a global center for small cars, according to the Financial Times.

According to Wikipedia, its most famous exports, are sarapes and tiles. But it’s also equally famous as the “Detroit of Mexico”. When Chrysler announced the opening of its sixth manufacturing plant in Mexico in the northern city of Saltillo, it not only confirmed Saltillo’s status as the country’s premier automotive manufacturing hub, but the $570 million investment, expected to create around 700 jobs, supports Mexico’s spiraling recovery from one of its worst recessions ever.

Mexico produced 1.66 million vehicles in the first nine months of 2010, a staggering 67% more compared to the same period the previous year, according to data released by the Mexican Automobile Industry Association. And despite a moderation in growth in its biggest trading partner, a majority of those vehicles made their way to the U.S. Therein lies a tale.

Ever since the North American Free-Trade Agreement or NAFTA was ratified in 1993, Mexico has enjoyed copious growth in trade with what is still the world’s largest economy. NAFTA makes Mexican export products more competitive than even Chinese products, unbelievable as that sounds. The hefty 8% import tariffs that the U.S. imposes make non-NAFTA countries’ products inevitably more expensive. Despite that hurdle, China’s economic surge over the past decade nullified that advantage to a great deal. It is only now that Mexico is fighting back, in what may turn out to be a fascinating battle for capturing the U.S. market. And Mexico’s auto sector is leading the assault. Although the automobile industry is struggling in the U.S., it is posting attractive gains elsewhere. With Chrysler’s Saltillo plant just the tip of the investment iceberg, the industry is one of Mexico’s biggest employers – and the government anticipates further investment of $4.4 billion coming from the automotive industry over the next four years. Collectively, the automotive industry employs nearly 470,000 workers and accounts for one-fifth of Mexico’s gross domestic product.

Apart from Chrysler’s new investment, other companies like Volkswagen, Nissan and Ford are also committed to Mexico. Volkswagen is producing its sixth generation Jetta at the Puebla plant and Ford’s new 2011 Ford Fiesta, meant for the North American market, is rolling out from its Cuautitlán production unit. Nissan has already confirmed that Mexico will be one of its four global manufacturing centers. While China has always managed to trump rivals with its cheap labor costs, wages there have been rising recently, and Mexico’s long history of automotive manufacturing offers carmakers cheap but highly skilled and experienced workers.

Clearly, Mexico is driving at an advantage here. There is work to be done though. The country is only the 10th largest vehicle producer in the world (Source: U.S. Department of Commerce), and the top spot was predictably occupied by China last year, which produced 13.8 million light vehicles. But as written earlier, Mexico has NAFTA. China doesn’t. Mexico remains a very important player in the U.S. market – the country is the top automotive parts supplier to the U.S. It is that advantage that Mexico is seeking to build on. Saltillo may be the Detroit of Mexico, but Mexico is working to soon be the Detroit of the Americas.

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