Mexico to benefit from Chrysler bankruptcy?
Chrysler's recent
decision to file for bankruptcy and idle its 23 factories in Canada, the US and
Mexico should be good news for Mexico. Already Chrysler has outraged US trade
unions by announcing plans to shut eight plants in the US and shift production
to cheaper sites in Mexico. Canada's government is investing in the Chrysler
rescue plan in return for a commitment that no factories in Canada will be
closed.
Chrysler is the US's third-largest vehicle
manufacturer. It filed for bankruptcy on 30 April. The firm almost immediately
announced that it would shut four of its US plants, located at Sterling
Heights, Michigan; St. Louis, Missouri; Twinsburg, Ohio; and Kenosha,
Wisconsin, by the end of 2010. Production at these, and five other US plants
(Newark, Delaware, Conner Avenue Detroit, North St. Louis and its axle plant in
Detroit) will be shifted to Canada and Mexico. Some US trade unionists are
furious that not one Chrysler plant outside the US will shut down.
It is worth recalling, however, that the US auto
industry has been shedding jobs for years. In 2008, the industry employed only
711,000 people in the US, down from 1.3m in 1999. Last year alone, it shed
230,000 jobs. The ratings agency Standard & Poor's reckons that even
including component manufacturers, the US auto industry only accounts for just
over 1% of non-farm employment.
Outside Mexico, all of Chrysler's North American
plants are temporarily closed while Chrysler is in bankruptcy, a process the
automaker hopes will allow it to emerge, reorganized, within 60
days. The new company to emerge from this process is likely to be 20% owned by
the Italian firm Fiat, with a majority stake held by the US United Autoworkers
Union (UAW).
Chrysler is the first bankruptcy filing by a major
US auto company since Studebaker in 1933.
In Mexico,
where Chrysler is the fourth biggest vehicle maker (after Volkswagen, General
Motors and Nissan), the company claims that production will be more or less
unaffected. In the first quarter of 2009, total output (of 33,998 units) was
51% down on the same period of 2008. Overall, Mexico's automobile production
fell 41% annually in the first quarter of 2009, to 291,800 units.
The
overwhelming bulk of Chrysler's production is exported, mostly to the US. In
the first quarter of 2009, it exported 31,578 vehicles. In 2008, it accounted
for 253,601 of the total 1.66m vehicles exported by the Mexican motor industry.
In 2008, Chrysler manufactured 280,470 vehicles overall.
What is
interesting is that Chrysler also sells large numbers of vehicles inside
Mexico. In 2008, its Mexican sales came to 116,137 units. In the first quarter
of 2009, this was down to 20,565.
Executives
at Chrysler Mexico confirm that the US plants will bear the brunt of the
restructuring. The firm has three major installations in Mexico. Its truck
plant at Saltillo shut for a week on 27 April. The other plants at Toluca
(which builds the Dodge Journey) and its engine plant at Ramos Arizpe remain
open. Fiat executives are assessing the plant in Toluca as a possible
manufacturing centre for a new small vehicle to replace the PT Cruiser.
The Ramos
Arizpe engine plant is likely to be a key element in any comeback by Chrysler.
Harbour Consultants, a motor industry management consultancy, claim that the
Ramos Arizpe and Toluca plants are among the most productive in North America.
What Fiat
sees in Chrysler is its volume and distribution network in North America.
Fiat's chief executive, Sergio Marchionne, reckons that in the future car makers will need to produce at least 1m vehicles a year
from the same basic platform. Currently only VW does anything like that, based
on its Golf platform, which is also used by VW's
subsidiaries: Skoda, Seat and Audi.
The US government's plan to save Chrysler is
unusual. Essentially, the company will emerge from bankruptcy under the control
of the UAW and in partnership with Fiat. The UAW has traded the US$10bn owed by
the bankrupt Chrysler company to the retirees' health-care
fund for almost worthless stock instead of cash. In return, the union will own
55% of the company and get a seat on the board of directors. The UAW also
agreed to cuts in supplemental unemployment benefits, the suspension of
cost-of-living pay increases, and limits on overtime pay.
The UAW president, Ronald Gettelfinger, claimed
that the rescue would end up as a partnership between the union, Chrysler, Fiat
and the US Treasury. Gettelfinger said that the 55% stake in the company would
be held by the retiree trust fund, not the union.
Under the union's 2007 contract, Chrysler, as well
as General Motors (GM), another troubled US automaker, shifted their
responsibility for covering retirees' medical insurance onto a union-managed Voluntary
Employees' Beneficiary Association (VEBA) trust fund. Gettelfinger said that
this reduced the company's obligation to the retirees down to about 60% of what
it was originally.
The auto barons have succeeded in imposing new cuts
since then. The recently approved agreement allows VEBA to begin “adjusting"
workers' health-care benefits in 2010, two years earlier that allowed under the
previous contract. In addition, the union agreed to extend the deadline for
company payments to the fund to 23 years.
The US government is bankrolling Chrysler's
bankruptcy expenses, providing more funds than the US$5bn bailout the company
had originally requested to avert bankruptcy. Chrysler has been given immediate
access to US$1.3bn in federal funds and once it restructures it receives
another US$4.7bn. About US$10bn in new government bailout funds will be given
to Chrysler through the bankruptcy process. VEBA, with about US$10bn in
liabilities, is receiving a US$4.6bn loan from the US Treasury, payable over 13
years at 9%.
When the new Chrysler company,
allied with Fiat, emerges, the eight US facilities and their equipment valued
at US$2.3bn will auctioned off piecemeal.
GM: GM is also considering
shifting production out of the US to cheaper locations such as Mexico, China
and South Korea. Selling such a deal to the US government, which has awarded
the company US$15bn in aid, may be difficult.
GM reckons that a US car worker costs US$54 an
hour, while a South Korean costs US$22 and a Mexican US$10. A Chinese autoworker
costs just US$3 an hour. Auto-analysts claim that GM's Mexican plants are
better equipped than its plants in China, so the company could produce a
premium product there. Analysts suggest that the plants most likely to close
are those that produce those brands that consumers are spurning such as Saturn,
Pontiac, GM, Buick and Hummer. Mexico produces very few of these brands.