America's Car Capital Will Soon Be Mexico
This story appears in the September 8, 2014 issue of Forbes
Everything you need to know about the future of the global auto industry is printed on the business cards of Carlos Lozano de la Torre, governor of Aguascalientes, Mexico, a central province named for its abundance of hot springs.
Seated at an enormous round table inside the ornate 17th-century government palace where he has his office, he reaches into the side pocket of his dark gray suit and shuffles through a stack: Here’s one version in German, another in Chinese, another in English. “I have them in ten languages, but I only speak Spanish,” he says with a chuckle as he hands over the English version.
He has the translators working overtime for good reason. Seemingly overnight Mexico’s automotive output has soared, bolstered by a flood of investment from foreign-based carmakers, including Nissan, Honda, Volkswagen and Mazda. With $19 billion in new investment, production has doubled in the past five years to an estimated 3.2 million vehicles in 2014.
The reason is simple: Mexico has some of the most liberal free trade arrangements in the world, and it’s making the most of them. While Washington spent a decade obsessed with the War on Terror to the exclusion of economics-based foreign policy, Mexico was busy hammering out deals, and politicians like Lozano were luring investors. Today Mexico has free trade agreements with 44 countries, making it an ideal export base for automakers from Europe, China, Japan and, yes, America. The U.S.? We have agreements with only 20 countries, and Beltway protectionists have helped ensure we haven’t enacted a new one since 2012.
Negotiations on the ambitious 12-nation Trans-Pacific Partnership remain pathetically slow.
The result is what you’d expect. Eighty percent of the cars built in Mexico are exported to other countries, about two-thirds of them to the United States. “I can export duty free to North America, South America, Europe and Japan,” says Volkswagen of Mexico Vice President of Corporate Affairs Thomas Karig. “There’s not another country in the world where you can do that.”
In recent weeks Infiniti, Mercedes-Benz and BMW have all detailed plans to build cars in Mexico. Hyundai-Kia is expected to announce a plant any day. Audi, meanwhile, is midway through construction of a $1.3 billion factory that will build luxury SUVs in Mexico starting in 2016. Currently the world’s eighth-largest auto producer, Mexico is on pace to surpass Brazil this year. By 2020 Mexico should be number six behind China, the U.S., Japan, India and Germany, with an annual production of 4.7 million vehicles.
The explosive growth of the Mexican auto sector is more than just a repeat of the maquiladora movement of the 1970s and 1980s that sprouted a sea of factories along the U.S. border. Back then American automakers shipped auto parts across the border, where cheap Mexican labor assembled them into cars and sent them back to the U.S. duty free.
Today automakers still like the young (average age: 24) and comparatively cheap (about $40 per day) workforce. But there are plenty of other reasons. European carmakers say Mexico’s dollar-dominated currency gives them a natural hedge against fluctuating exchange rates. For Japanese manufacturers like Mazda, Nissan and Honda, the rise of the yen against the U.S. dollar has made Japan much more expensive than Mexico to produce vehicles.
“Mexico has become a superpower in cars,” says Eugenio Madero, chief executive of Sanluis Rassini North America, a Mexican supplier of suspension components that is a beneficiary of the boom. “It’s like 3 million years ago and a meteorite slammed into the Yucatán Peninsula. The sheer size of the investments changes the face of the Earth. One day there’s a guy plowing the land with a horse, and now there’s a factory there.”
The proverbial crater caused by this explosion sits in Aguascalientes, 450 miles southwest of the Texas border, where silver mining and farming have given way to dense clusters of industrial activity. Just a few hours’ drive from major ports on two oceans, it’s a good place for shipping vehicles in virtually any direction. “Just go to the ocean, and in seven days you’re in China,” says Madero. “If you ship from Europe, you have to go through the Mediterranean and the Red Sea.”
Aguascalientes has long been a major railroad hub because of its strategic location among the major population centers of Mexico City, Guadalajara and Monterrey. The capital city, also named Aguascalientes, is choked with traffic circling the pedestrian plaza, with its charming Spanish colonial architecture. Just outside the city, however, Aguascalientes looks like any other sprawling southwestern suburb, with shopping malls, hotels and industrial areas, including a new Texas Instruments plant.
Dominating the dun-colored horizon a few miles to the south is Nissan’s massive new 21-million-square-foot factory. With its bright white walls and roof, it is Lozano’s pride and joy. The governor helped engineer a deal where the government sold the land, just 4 miles from another Nissan factory, to the Japanese carmaker for next to nothing. Nineteen months later the $2 billion plant, one of the largest industrial investments ever made in Mexico, was up and almost running, a record for Nissan. Production of the fourth-generation Nissan Sentra began last November and was quickly ramped up to full capacity of 175,000 vehicles a year, operating 23 hours a day, 6 days a week. Some 3,000 jobs were created, and another 9,000 at supplier companies. “The success of Nissan is the success of Aguascalientes,” says Esau Garza de Vega, Lozano’s top economic development officer.
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Plenty of room to grow next to Nissan’s 21 million-square-foot factory.
Yet for all its size, the sprawling Nissan plant takes up only about 35% of the dusty 1,100-acre site, leaving a clear indication that there is much more to come. In June Renault-Nissan and Daimler said they would occupy part of it by building a $1 billion factory to manufacture Infiniti and Mercedes-Benz small cars starting in 2017.
Stepping out of the blinding desert sun and into the plant’s cool, shiny-tiled lobby, visitors are confronted with a hollow, round Daruma doll, the red-painted Japanese symbol of perseverance. As is tradition, one eye of the doll is painted at the start of a challenging endeavor; the other is painted upon completion. The second eye was filled in when the plant opened last November. It’s a constant reminder of what’s at stake. “The expectations are high,” says Armando Avila, the vice president of manufacturing for Nissan of Mexico. “We have to be very careful.”
Out past the lobby the factory floor is a massive, gleaming cascade of natural light, fresh paint and hushed automation indistinguishable from state-of-the-art plants in Germany, Japan and the southern United States. Amid bursts of sparks, 190 shiny yellow robots weld together the steel skeletons of one of Nissan’s bestselling small cars (72% of the operation is automated). If need be, they can be programmed to weld four different models. Inside the high-speed stamping facility there’s a rhythmic crumping sound as steel parts are formed, 575 strokes per hour, 273,000 parts per month. Yet new technology keeps the decibel level lower than most stamping plants, a boon for workers.
Across the street, connected by a newly built bridge, is a logistics center where railcars are standing by to transport vehicles to the U.S. and Brazil (Nissan ships to 50 countries from Mexico). Between the two plants in Aguascalientes, Nissan is cranking out one vehicle every 38 seconds, which is on par with its flagship plant in Kyushu, Japan.
Out back trucks kick up dust as they trek back and forth all day between three adjacent Japanese supplier factories and Nissan’s loading bays. Parts are delivered within 30 minutes of receiving the signal from the factory. Keeping parts in sequence is the key to Nissan’s highly efficient production system.
To take advantage of Mexico’s duty-free policies, foreign automakers must agree to buy at least 62.5% of their auto parts in North America (including the U.S.), which has created an even bigger bonanza for fledgling Mexican suppliers as well as global parts giants, like Magna International and Delphi, that have followed their customers to Mexico. Magna, for instance, opened its first Mexican plant in 1991 to supply Volkswagen. Today the 750-acre Volkswagen plant in Puebla is the second most productive VW plant in the world, second only to Wolfsburg, with its own fire department, security, ambulances, clinic, banks and currency exchange, plus nine cafeterias serving 12,500 meals per day. And Magna has 30 facilities and $3 billion in revenue in Mexico. Employment has doubled to 24,000 in under seven years.
As for Nissan, with three production facilities south of the border, the company’s Mexican capacity has grown to 850,000 units a year, fast gaining on the 1 million produced each year at its two U.S. factories. The Japanese carmaker manufactures nearly one in four cars built in Mexico. By 2020 Nissan plans to be producing 1 million cars a year there. “No other market for us is doing as well as Mexico,” says Nissan CEO Carlos Ghosn. “It’s a good example for other countries.”
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By 2020, Nissan expects to build 1 million cars a year in Mexico
Mexico has a long history in the carmaking business, not all of it good. Henry Ford built the first auto plant in Mexico in 1925 to produce Model Ts, and by the late 1930s GM, Chrysler and Renault were all producing there but not in large numbers. In 1962 the Mexican government issued an automotive decree that favored domestic production over imports, attracting newcomers like Volkswagen and Nissan, both of which opened plants in the mid-1960s. Most of the factories were situated near Mexico City and were equipped with outdated machinery that made Mexican cars uncompetitive. In 1983, after a national debt crisis, Mexico shifted policy again, this time promoting exports, which encouraged GM and Ford to open new, more modern factories closer to the U.S., where their output was headed.
The North American Free Trade Agreement in 1994 stimulated another round of investment by the major automakers. Now they were installing state-of-the-art technology in Mexico on par with their plants in the U.S. and Canada. With its auto industry forever changed by Nafta, Mexico aggressively sought trade deals with other countries in Europe, Asia and South America, in sharp contrast with Latin rivals like Brazil and Argentina, which adopted more restrictive policies.
The boom in Mexican production is already rattling the North American auto industry. Today 40% of all auto-sector jobs are in Mexico, up from 27% in 2000. Canada and the Midwest have taken the brunt of the job losses. But even southern states like Tennessee and South Carolina are worried. Twenty or 30 years ago they were the ones attracting foreign auto factories away from Detroit. Now they, too, stand to lose out on new investments.
“There’s a recognition that if we don’t do something different, that will be the case,” says Suzanne Dickerson, an executive at Clemson University’s International Center for Automotive Research. The last auto factory built in the U.S. was Volkswagen’s plant in Chattanooga, Tenn., in 2011.
VW’s luxury unit, Audi, considered the U.S. when it was deciding where to build the hot-selling Q5 sport utility in North America, says Bernd Martens, the company’s board member for procurement. Mexico had a $500-per-car labor cost advantage, but that was offset by higher transportation costs. The clincher was Mexico’s trade policy. Specifically, the U.S. lacks trade agreements with Japan, the European Union and Brazil. Added tariffs mean a car exported from Tennessee to Brazil costs 55% more than one exported from Mexico.
Audi’s decision to move luxury SUV production from Germany to Mexico was a significant milestone for the industry–a sign that the country’s industrial sector had earned a reputation for high quality. “The Q5 is one of our major cars. It must be planned carefully,” says Martens, especially because Audi is introducing new technologies and new production strategies for the next-generation vehicle.
Instead of importing components from Germany, Audi intends to buy 90% of the Q5′s parts in North America. That required a deep review of the entire supply network in Mexico to address weaknesses in smaller companies further down the chain, Martens says. A udi is providing extra training for lower-tier suppliers to ensure they meet its expectations. “We are not going to change the Q5′s specifications for Mexico,” he says.
Another issue is security. When Ford Motor began shipping Fusion sedans from its Hermosillo plant north to the U.S. a few years ago, criminals found a way to hide drugs inside the trunks. Today some carmakers, like Volkswagen, seal their vehicles in plastic before they are loaded on railcars. They also obtain special clearance to pass quickly through U.S. customs.
In Aguascalientes Governor Lozano went even further to make sure security was not a deterrent to investment: He took direct control of the police force. “The bad guys go somewhere else to live,” he says. “We know that if we don’t have security good things won’t happen.”
If that seems to be just part of a sales pitch, it’s one that seems to be working. His province added more than 44,000 new jobs in the past three and a half years. Lozano isn’t slowing down, either. He just returned from Asia with a $100 million investment from a big automotive parts supplier. Grabbing a remote control off the table in his conference room, he’s eager to explain how he landed the deal. “Can I show you a video?” he asks. “We did this in Chinese”.