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