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Made in Mexico: An emerging auto giant powers past Canada Add to ...

Cheaper wages, a growing supplier base and trade advantages are shifting the North American auto industry’s centre of gravity south of the Rio Grande – as well as eroding a key pillar of Canada’s manufacturing sector

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

Vehicle production in Canada and Mexico

Total number of units by year (includes heavy duty trucks)

SOURCE: DesRosiers Automotive Consultants

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.

Canada and Mexico's share of N. American vehicle production

(includes heavy duty trucks)

SOURCE: DesRosiers Automotive Consultants

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.

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

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.

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.”


A Mexican welcome mat

That list of suppliers includes Autotek, from which trucks carrying door beams, instrument panel beams and other stamped parts depart every two hours for the short journey up the highway to Volkswagen.

In one section of the Autotek factory, robots still wrapped in plastic covering sit awaiting installation on a new assembly line that will make cross members for an Audi luxury crossover.

From that original contract with Volkswagen, Autotek has broadened its customer base so that it now supplies a long list of major auto makers that make vehicles in Mexico.

Ben Marshall, assistant general manager of Autotek, points to the free-trade agreements as a key element that has propelled the division’s growth.

“Not to mention your biggest market is next door – being the U.S. – but you have more opportunities globally out of Mexico,” Mr. Marshall says. “We ship to Russia, we ship to Brazil, U.S., Thailand, India, Venezuela.”

Autotek now employs 1,150 people. Another 350 employees will be added this year in Puebla and a satellite plant that supplies Ford Motor Co.

Several Japan-based suppliers have located in the central state of Aguascalientes because of Nissan’s construction of two assembly plants in the city of the same name, says Rodolfo Esau Garza de Vega, the state government’s Secretary of Economic Development.

Brightcove player
The Globe’s Paul Waldie and Greg Keenan discuss the factors that helped Mexico surpass Canada as North America’s No. 2 vehicle producer.

Auto industry jobs have helped strengthen the middle class so that 75 per cent of families in the state own their homes and university enrolment is among the highest in the region, Mr. Garza de Vega says.

“A manufacturing-based economy is certainly stronger than one based on tourism or commerce,” he adds.

For Magna, which is now the fourth-largest private sector employer in Mexico, the equation is simple.

“Our investment is predominantly tied to where the auto makers go,” says Scott Paradise, Magna’s vice-president of marketing and business development for the Americas.

“If you can attract the auto makers, you’re going to attract us and every other supplier.”

Mr. Paradise has found the Mexican government eager to attract new investment and eliminate hurdles and red tape quickly.

“When you go and say, ‘Hey, I want to put a plant in a particular area in Mexico,’ they’re way more welcoming than either Canada or the U.S.,” he says. “That doesn’t mean there’s no interest in the states or in Canada, it’s that [Mexico] wants the jobs.”

Mr. Cousseau of Nissan has had a similar experience in Mexico with governments seeking to eliminate barriers.

The approvals for Nissan’s second plant in Aguascalientes were made so quickly that it went up in 19 months, a record for Nissan’s global operations.

Typically, approval and construction of assembly plants in Ontario and in U.S. states takes 30 months to three years.

Nissan produced 806,000 vehicles in Mexico last year and is planning to crank out 1.1 million annually in Aguascalientes by 2020 from three factories.

Financial incentives

The willingness to encourage investment applies to more than just the auto industry.

The process of gaining approvals to build a pipeline in Mexico compared with the Canadian regulatory system is like “night and day,” says TransCanada Corp. chief executive officer Russ Girling.

Mexico also offers substantial financial incentives to both auto makers and parts suppliers.

When Chrysler Group LLC proposed a $550-million retooling of its plant in Toluca in 2010, Mexico provided $400-million in financial incentives.

In Canada, the federal and Ontario governments typically contribute about 20 per cent of project costs, with Ottawa offering repayable loans and Ontario giving grants.

Mexico’s offer of hundreds of millions of dollars worth of incentives helped convince Ford earlier this year to invest in that country instead of Windsor, Ont., for a new generation of small engines.

Auto maker investments in Canada and Mexico

SOURCE: Center for Automotive Research

Joe Hinrichs, Ford’s president of the Americas, won’t reveal the specific reasons for that decision.

He notes, however, that a decade ago Mexico was offering higher financial incentives than it is today to make up for disadvantages in other areas.

Now, other advantages such as the trade agreements and the ability to ship vehicles year-round from ports have become more important.

Mexico’s location in the middle of the hemisphere is an advantage that cannot be matched.

“In some cases you have to respond to your competition,” Mr. Hinrichs says. “If you have disadvantages, then there has to be some compensation [in other areas] to help offset that.”

Federal Industry Minister James Moore points to Canada’s low-tax environment, skilled work force and government programs such as the federal Automotive Innovation Fund and Ontario’s grant programs as reasons for auto makers to invest here.

But the money that Mexico offered to Ford to land the engine plant “was something we can’t compete with and wouldn’t compete with, but over all we’re continuing to go in the right direction,” he says.

That’s true to a degree, as recent investment announcements in existing Canadian plants attest. Honda Motor Co. Ltd., for example, will spend $857-million in Alliston, Ont., to build a redesigned Civic model with the Ontario government kicking in $87-million.

General Motors Co. said this week that it will spend $560-million along with suppliers to assemble the next generation Chevrolet Equinox at its plant in Ingersoll, Ont.

But when it comes to new assembly plants, which lead to thousands of supplier jobs as well, the score is 7-0 in Mexico’s favour since 2011. Those assembly plants have also led to investments by auto makers in engine and transmission factories.

A Canadian industry group is urging the federal and Ontario governments to create an Automotive Investment Board, modelled in part on the Mexican government’s ProMexico investment arm, but Mr. Moore has expressed skepticism that the establishment of such an agency would change the equation.

Auto makers are well aware of what programs are available from various governments, he says.

“Never once did they say the reason we didn’t invest in Canada is because we didn’t have a single point-of-entry person who could explain to us all the dynamics,” he says.

Workers in the Golf vehicle section of the Volkswagen factory in Puebla, Mexico, on Jan. 21, 2015. (Brett Gundlock for The Globe and Mail)

Work force quality

Industry executives in Mexico laud the quality of the workers.

The combination of that quality, the wages and productivity put Mexico in the forefront of places to build vehicles, says Nissan’s Mr. Cousseau.

“If you mix all three of these items today, Mexico is more competitive than China,” he says.

The fact that three luxury auto makers have chosen to locate in Mexico underscores how far the work force has come.

“Years ago, when the industry first started to grow in Mexico, there was a belief that the cost of labour was less but the quality wasn’t good,” observes Mr. Marshall of Autotek.

“I don’t believe that is true. The quality of the labour down here is phenomenal.”

The wages for assembly-line workers at Volkswagen’s Puebla plant are the equivalent of $3.77 an hour, data compiled by Prof. Covarrubias show. That’s higher than the average across all assembly plants in Mexico and trails only Nissan’s Cuernavaca plant.

It’s also higher than many service sector jobs, as Felipe Coyotecatl Toxqui found when he left his job at a government training centre in Puebla to work for Volkswagen 18 years ago.

The 49-year-old is now a production co-ordinator in the body shop where Beetles are put together.

“I have the opportunity to give my children a better education,” he says. He was able to send all three of his children to private school and his oldest son is now a doctor in Mexico City.

Felipe Coyotecatl Toxqui, right, a worker at the Volkswagen factory in Puebla, Mexico, eats on his lunch break on Jan. 21, 2015. (Brett Gundlock for The Globe and Mail)

But that experience is far from universal, Prof. Covarrubias says, particularly for those workers at plants that are not as old as Volkswagen’s Puebla facility.

Assembly line worker wages have fallen across the industry since 2007, he notes, even though productivity has improved.

A job with full seniority in the auto sector paying wages of more than $30 an hour with a defined benefit pension plan and other benefits has been a ticket to the middle class in Canada and the United States.

Despite all the growth, the rising tide of auto investment in Mexico is not lifting all boats.

“To get a job in the auto sector [in Mexico] is just half a ticket,” he says. “The other point is that in order for you [to advance] into the middle class, you are going to take longer.”

The lag between surging production and the benefits of that growth flowing to workers is evident in sales statistics.

Measured by vehicles per driving-age population, the Mexican market is still underdeveloped.

There are just 20 vehicles on the road in Mexico for every 100 drivers, compared with 80 in Canada.

It’s another sign that Mexico has much more room to grow.

Editor's note: A previous online version of this story said the Center for Automotive Research was the source of data in two charts on vehicle production. In fact, the source was DesRosiers Automotive Consultants. The story has been corrected.

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