As the U.S. dawdles over finalizing free-trade agreements with Colombia and other countries, Mexico is leveraging its vast array of free-trade pacts to take a bigger share of production not only from North America, but globally. Currently, their relationships are primarily with auto manufacturers, but should CEOs of other large producers be considering doing the same?
Toyota is said to be finalizing plans for its first passenger-car assembly plant in Mexico, which would end its status as the last major global car maker that doesn’t have such a presence in the country. General Motors has just announced that it will build its next-generation Chevrolet Cruze in Mexico, investing $350 million in its plant in Coahulla as part of a $5-billion investment in its Mexican plants. And BMW is the last of the major German automakers to announce a forthcoming plant in Mexico, which is to begin production in San Luis Potosi in 2019.
“Parts made in Mexico accounted for 34% of all auto components imported into the U.S. last year, while No. 2 supplier China only brought in 13%.”
Meanwhile, parts made in Mexico accounted for 34% of all auto components imported into the U.S. last year, while No. 2 supplier China only brought in 13% of such parts. Also, Mexican imports of car parts to the U.S. are up by 86% since 2008. The lessons these Mexican companies have learned—as well as the strength of their supply chain relationships—could certainly be of value to all manufacturers.
In addition, the labor-cost advantage in Mexico is becoming comparable to the manufacturing-cost edge in China, and Mexican workers’ have an increasing ability to meet the stringent quality demands of global automotive manufacturers. The biggest attraction of Mexico, however, is its unparalleled status as a beacon of free trade.
Audi, for instance, decided two years ago to construct a new plant to build its Audi Q5 in San Jose Chiapa, Mexico, as its source for the vehicle in worldwide markets beginning in 2016, winning out over Chattanooga, Tenn. next to the Volkswagen factory.
In the end, a major factor that tilted Audi executives in the direction of Mexico was the nation’s free-trade agreements with more than 40 different countries, Rupert Stadler, chairman of Audi AG told The Wall Street Journal. The lack of a duty tax on Q5s shipped abroad will shave several thousand dollars off the price of that vehicle compared with having an origin in the U.S., which lacks free-trade pacts with many more countries than Mexico.
Clearly, Mexico’s free trade agreement offer tremendous opportunity for companies both large and small. Particularly for products and parts being shipped to the United States, the savings in shipping alone over Asia is significant. As the American economy continues a gradual recovery, as Europe remains stagnant and China cools off, CEOs should take a closer look at the benefits of manufacturing in Mexico.