Mexico & Nafta - May 2009 (ISSN 1741-444X)

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.