Mexico & Nafta - November 2006 ( ISSN 1741-444X)

Mexico's economy minister, Sergio Garcí­a de Alba, said that Mexico was worried by the US$5.8bn third-quarter loss Ford declared on 23 October. Garcí­a was quick to add he did not expect the cutbacks Ford is implementing in North America would affect the company's three plants in Mexico. More at risk may be Chrysler's plants in Mexico.

What is undeniable is that Mexico's motor industry, the country's biggest foreign exchange earner, above even oil, is now inextricably linked to the US economy. In the first nine months of this year Mexico's carmakers exported 1.13m of the 1.48m vehicles they produced. 

Compared with the first nine months of 2005, production was up by 31% but exports were up by 41%. Just over 1.04m of the total vehicles exported went to North America. Less than 50,000 of these vehicles went to Canada, so virtually all of the vehicles Mexico exports to North America go the US. In the first nine months of 2006, Mexico shipped 997,000 vehicles (cars and trucks) to the US; this was up 38% on the same period of 2005.

The problem Mexico's motor industry faces is that the big three US car companies, GM, Ford and Daimler Chrysler, all have major problems with their North American operations. All three are cutting back costs and restructuring their expensive US operations. All have shifted some production to Mexico, where labour costs are much lower. 

Motor industry analysts have fretted about the possibility of one of the big three US carmakers going bust. The most vulnerable is probably Chrysler, which is now owned by the German vehicle manufacturer, Daimler-Benz. On 25 October, Daimler executives did not deny that the company was contemplating spinning off or selling Chrysler after revealing that DaimlerChrysler's quarterly loss came to US$1.5bn. Splitting Chrysler from Daimler could easily result in Chrysler going bust. Another German car manufacturer, BMW, gave away its loss-making British subsidiary, Rover, in 2000. Three years later, an independent Rover was hopelessly bust and its motor-manufacturing operations ceased. 

Chrysler, like all the US motor manufacturers, has plunged into losses. Higher petrol prices have meant that Sports Utility Vehicles (SUVs) and pick-ups have become harder sells. Seven years ago Chrysler's Jeep Grand Cherokee and its Dodge Ram pickups were best sellers. US consumers have switched to smaller, more efficient vehicles. Chrysler was hit disproportionately hard because 75% of its sales are of SUVs and pick-ups.

Chrysler's third-quarter losses were mitigated by its assignment of 100,000 vehicles into something its calls an order bank. These are cars that are neither assigned to dealers nor held as inventory. It is not clear that Chrysler will be able to sell these vehicles at a profit. 

If Daimler were to sell Chrysler, the most likely buyer would be the Renault-Nissan combo. An alternative buyer could be a Chinese car company. Both of these options could have severe implications for Mexico. Nissan is already well established in Mexico and if it takes over Chrysler there is no guarantee that it would continue with Chrysler manufacturing operations in their current form. 

When Nissan merged with Renault, Renault's small Mexican manufacturing business was wound down. A Chinese takeover would be even more worrying. There is no guarantee that a Chinese company would not shift production back to China. So far Mexico has managed to head off any shift by the US motor industry to produce vehicles for the US market from China. If one Chinese company proved that exporting vehicles from China to the US was feasible, the outlook for the whole Mexican industry would become problematic.

In Mexican terms the biggest carmaker is GM which built 380,182 vehicles in the first nine months of 2006. The second-biggest vehicle producer in Mexico is now Nissan which built 296,097. The third-biggest carmaker is Ford (258,096) followed closely by Volkswagen (256,103) and then Daimler Chrysler (240,809). 

What all these companies do is use Mexico as a manufacturing platform for exporting, to the US principally. In the first nine months of 2006 domestic car sales (including imports) were up by only 0.7% at 799,676. Yet exports were up by 42% at 1.138m. Imports of new vehicles into Mexico were 462,000 for the first nine months of 2006. This was down 2.5% on the same period of 2005. 

César Flores, the president of the Asociación Mexicana de la Industria Automotoriz, said that he expected the industry to do 1.2m in domestic sales this year; produce 1.9m vehicle and export 1.6m. 

Mexican policymakers, such as Garcí­a de Alba, expect Mexico to benefit from the restructuring of the US motor industry. In June Ford leaked detailed plans on how it would implement its initial plan to cut 30,000 jobs and close factories in the US but expand and upgrade production at its three Mexican plants. In the plan, the three Mexican plants that will get the investment are: Cuautitlán, (Estado de Mexico); Hermosillo (Sonora) and the company's engine plant in Chihuahua. 

The Ford plan, known as the "Way Forward", was announced in outline in January, and called for a completely new plant to be built in North America, probably in Mexico. If the plan is implemented, Ford's production capacity in Mexico will double to 850,000 units a year. The plan would also create 150,000 new jobs in Mexico. In October, Ford's chief executive, Alan Mulally, said that "Way Forward" would now involve the loss of 44,000 jobs in the US and the closure of 16 factories.

Ford has yet to announce how much it plans to invest in expanding its operations in Mexico, where labour is cheaper, but informed leaks suggest that the figure will top US$9bn. The investment should attract tax credits from Mexico worth about US$500m. Ford said in the 'Way Forward' document that the Mexican investment would lead to a 300% increase in the use of Mexican-made components and would also increase Mexico's motor exports by US$18bn a year. 

Ford claimed, after the leak, that 95% of the company's investment over the next six years will continue to go into its US plants with only 5% going to Mexico. Even so, the shift should save the company about US$1.8bn a year. The 'Way Forward' plan calls for a new US$1.4bn plant that could produce 280,000 vehicles a year. The new plant would be designed to enable flexible working practices that allow managers to match output more quickly to demand. 

Hermosillo opened in 1986 and produces sedans. "Way Forward" envisages an investment of US$1bn in this plant which would have its capacity increased to 305,000 vehicles a year. Garcí­a de Alba said on 23 October that Hermosillo had already secured new investment to enable it to produce Fusions and Lincoln Zaphyrs for the US market.

The older Cuautitlán plant builds Super Duty pick-ups and Ikon small cars. Under 'Way Forward' the plant's capacity would be increased to 220,000 vehicles a year. The Chihuahua plant would get the biggest investment (US$2.3bn).

The attraction of expansion in Mexico is clear. Mexican autoworkers are paid, on average, just under M$200 (US$17.4) a day. US autoworkers, according to the Union of Autoworkers, earn US$27.3 per hour. 

In the third quarter, Ford lost US$2bn on its North American operations as its sales fell from US$18.2bn in the third quarter of 2005 to US$15.4bn in the third quarter of 2006. For the year so far, the Ford Motor Company worldwide has last US$7.24bn. 

The problem facing the Mexican motor industry is that 80% of the country's vehicle output is exported, mostly to the US. If the US economy slows down, which is likely despite the US Federal Reserve Board's efforts to ensure a "soft landing" for the US economy, demand for Mexican-built vehicles will be affected.