Mexico Hot Steam

MEXICO, it seems, is an automotive backwater. The country’s consumers are expected to buy barely 1.06m cars and light trucks this year—down nearly 10% from the already weak 1.15m in 2005. Put another way, this is barely one new vehicle for every 150 Mexican residents, compared to more than one for every 20 citizens in America.

So why did Nissan, the Japanese carmaker, this week open a new $2 billion assembly complex in the city of Aguascalientes? And why are manufacturers such as Mazda, Honda and Audi racing to set up factories in Mexico, while General Motors, which already has operations in the country, is set to invest another $700m?

Mexico, it turns out, ranks eighth among the world’s carmaking nations—and is likely to be seventh soon, as Enrique Peña Nieto, the country’s president was quick to point out when he dedicated the new Nissan plant (see picture, with Carlos Ghosn, the firm’s chief executive, to the right). What is more, Mexico is already number four in car exports, behind Germany, South Korea and Japan. Mr Ghosn this week predicted that Mexico could soon be a bigger export hub for his company than its home base Japan.

With the launch of the new plant, its second in Aguascalientes and its third in Mexico, Nissan hopes to boost its production in the country to 1m cars by 2016, of which 70% will be shipped abroad. The other makers have similar plans: the capacity of the country’s car industry, which produced 2.9m vehicles this year, is expected to reach 4m soon. Mr Peña’s government has hinted to local media that two more automakers are planning to build Mexican operations.  

What is Mexico’s appeal for carmakers?  Low labour costs are a major factor. Wages and benefits are running at an estimated $10 an hour for assembly-line workers. This is high by Mexican standards, but barely 20% of the prevailing wage in neighbouring America.

The proximity to the world’s biggest car market also helps, as does the rapid growth of car sales in other parts of Latin and South America. In fact, vehicles made in Mexico were such a success in Brazil that the country upped its duties on Mexican imports. That did not make much of a dent, however: Mexico’s government has negotiated dozens of free trade agreements, reportedly more than any other country but Israel.

There may be bumps in the road for Mexico’s car industry. The drug war continues. Some carmakers and suppliers do not allow executives to visit facilities in certain parts of Mexico.  Nissan and other firms say that they have not experienced any problems, but officials privately acknowledge that they have been careful not to put operations where they could have to deal with drug violence and corruption, which is chronic in Mexico.

The hope is that carmaking will help stimulate Mexico’s economy—and create a domestic market for the cars being built on the country’s assembly lines.  For that to happen, however, Mexican banks will have to loosen their lending practices. Like in much of Latin and South America, first-time buyers often have to resort to what is known as consorcios, groups of motorists who pool their resources and then hold a lottery to see who will next get a car as their collective savings build.

Nissan has tried to jump-start more traditional lending with its own finance subsidiary. This is one reason, it claims, that it is now the market leader, with nearly 25% of market share, compared with GM’s 19%. But even if the number of domestic buyers does not grow rapidly, the Mexican industry is not likely to slow down. The new Nissan plant is located in a town whose name means “hot waters” in Spanish. And as far as the carmaker is concerned, the Mexican auto industry is steaming hot.