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Made in Mexico: An emerging auto giant powers past Canada

Made in Mexico: An emerging auto giant powers past Canada

Posted by Juan Gavasa on February 24, 2015

When Salvatore Lauria started work at Autotek in Puebla, Mexico, there were only a few cars in the company parking lot. Now, 15 years later, the parking lot is full and the vehicles have spilled over on to the neighbouring soccer field.

There are more cars today because Autotek has expanded eight times since it began stamping out bumpers and radiator supports in 1991.

“We often talk about all the expansions we have done in our facility, but we often forget we have had to make four expansions in our parking lot,” says Mr. Lauria, general manager of the plant, which was the first factory Magna International Inc. built in Mexico.

Autotek is a prime example of how Magna is taking advantage of a remarkable growth spurt in the auto industry in Mexico. From that single plant, the Canadian auto parts giant has grown to the point where it now operates 29 plants that employ 24,050 people, more than in any other country where Magna makes parts.

Magna is riding a tectonic shift that is transforming the global auto industry as Asian and European car companies pump billions of dollars of investment into a country perfectly positioned to supply eager North American car buyers and the future growth market of South America.

The shock waves from that shift are battering Canada, which for decades stood as a strong No. 2 behind the United States when it came to North American vehicle production, but has tumbled to No. 3 behind Mexico. One-fifth of the jobs in vehicle assembly and auto parts have vanished in Canada since 2001.

As the auto industry’s centre of gravity in North America moves inexorably southward, the threat to the remaining jobs in Canada is growing, creating worries for workers and posing a problem for policy makers faced with the potential loss of thousands more jobs.

The erosion of one of the pillars of Canada’s manufacturing sector and the corresponding rise of the industry in Mexico is underlined in a series of statistics, including vehicle production, investment in new assembly plants and the trade balance that now stands at $10-billion in Mexico’s favour.

One trend, however, stands out.

Canada’s share of vehicle production in North America fell last year to its lowest level since 1987 – 14 per cent. The figure for Mexico was 20 per cent, compared with 3 per cent in 1987.

The Magna plant in Puebla, Mexico, on Jan. 22, 2015.

A free-trade advantage

The automatic assumption is that auto investment is flooding into Mexico because of rock-bottom wages – and they are low. Assembly plant workers earn the equivalent of about $2.90 (U.S.) an hour, estimates Alex Covarrubias, a professor at Sonora College in Hermosillo, Mexico. That’s about 10 per cent of what workers with full seniority are paid hourly at Canadian and U.S. assembly plants.

Mexico’s location next door to the U.S. market and close to South America is also a major lure for Asian and European auto makers that want to keep their capital investment as low as possible by supplying both markets from a single location.

What’s more, Mexico has free-trade agreements with many of these countries – 45 in total – that allow auto makers to ship duty-free.

“You can export duty-free from Mexico to big automotive markets in the world – except China of course – North America, South America, European Union, Japan,” notes Thomas Karig, vice-president of corporate relations for Volkswagen de Mexico. “There’s no other country in the world that has these kinds of advantages.”

By contrast, Canada, as a competitor with Mexico for investments by global auto makers, does not have similar links. It is a member of the North American free-trade agreement, and has recently signed free-trade deals with Europe and South Korea.

But the assembly industry in Canada is designed to feed the massive U.S. market, not markets around the world.

Mr. Karig works out of the sprawling Volkswagen AG assembly complex in Puebla, a city of about 1.5 million people southeast of Mexico City along the highway between the capital and the Gulf of Mexico port of Veracruz. Autotek is about a half-hour drive away from the Volkswagen plant, which was the first customer for the Magna plant in 1991.

Volkswagen’s Puebla plant is its largest assembly plant outside of Germany, home of the legendary Beetle, and likely its only factory where assembly lines are decorated with several shrines to Our Lady of Guadalupe. Three assembly lines pumped out 475,121 Beetle, Golf and Jetta models last year.

About 80 per cent of the vehicles are exported. Beetles travel from Puebla to 100 countries, and all three vehicle models travel north by rail and ship to U.S. and Canadian markets, and by ship to Asia, Europe and South America from ports on both Atlantic and Pacific coasts that are ice-free year-round.

“Trains, roads, ports; everything is very well set up for the market,” says Airton Cousseau, managing director of Nissan Mexicana. Nissan Motor Co. Ltd. operates plants in Cuernavaca, south of Mexico City, and in Aguascalientes, north of the capital, where it has two assembly plants already operating and a third under construction.

Volkswagen opened the Puebla plant southeast of Mexico City in 1964, so it’s hardly a new kid on the block. The auto maker has spent $4-billion (U.S.) in the past 10 years retooling and expanding that factory as well as building and adding to a new engine plant in the central city of Silao.

The Germany-based company is also part of the massive $8-billion wave of investment announced since 2011. That spending backs the construction of seven new assembly plants that is expected to lead to production of five million vehicles annually by the end of the decade, up from the record 3.2 million that rolled off assembly lines last year.

Outside the Volkswagen factory in Puebla, Mexico, on Jan. 21, 2015. (Brett Gundlock for The Globe and Mail)

As all that money floods into Mexico, one assembly plant closed in Canada and another is scheduled to shut down in 2016.

The new investments, including those by Volkswagen’s Audi AG luxury unit, BMW AG and a Nissan-Daimler AG joint venture to assemble Mercedes-Benz vehicles, will boost Mexico as a maker of luxury vehicles, not just the subcompact and compact cars that for decades dominated the country’s auto output.

The $1.3-billion Audi plant is rising in San Jose Chiapa, a town of about 4,000 people and a one-hour drive from Puebla.

Audi is an example of how economy of scale is another factor working in Mexico’s favour, notably the formidable auto parts supply base that has sprung up because of earlier waves of investment.

“They decide to build a plant not too far from Volkswagen to take advantage of the synergies we can create, the support we can provide them for a startup,” Mr. Karig says. “They come to Mexico because there are a lot of suppliers that already supply Volkswagen that can easily also supply them in the future.”

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