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June 19, 2015 02:00 AM

Auto makers, suppliers flocking to Mexico

Chris Sweeney
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    Theodore Duclos, Freudenberg-NOK president.

    PLYMOUTH, Mich.—Mexico quickly is becoming a major player in the automotive industry.

    With plants from BMW A.G., Audi A.G. and most recently Toyota Motor Corp. set to come online within the next five years, combining for more than $3 billion in investments, and recent expansion from Nissan Motor Co. Ltd., General Motors Co., Ford Motor Co. and Fiat-Chrysler Automobiles N.V., the country's annual vehicle production is expected to hit 5 million units annually by 2020. That is according to Karan Chechi, research director at TechSci Research, a global market research and consulting company that operates in a number of industries, including automotive.

    Most automotive original equipment manufacturers cite Mexico's wealth of free trade agreements as the primary reason for expanding to the country, as many of the vehicles produced in Mexico are exported. The country has more than 40 free trade agreements.

    “Mexico has had a long history of high quality assembly operations. Now it's the combination of looking at the free trade agreements that Mexico has in place with the world, as well as its labor rates, that are driving the new capacity into Mexico and particularly into Central America,” said Dave Andrea, senior vice president of industry analysis and economics for the Original Equipment Suppliers Association.

    “The recent announcements that we have seen are really driven by the overall globalization of the industry. You'll always have the assembly plants near the customer base. From that perspective, and looking at any of the third-party forecasts, the North American production base remains about 18 to 20 percent of that total global number.”

    Suppliers are following suit.

    Toyoda Gosei Co. Ltd. opened a plant in the country earlier in the year, with another set to come online in 2016. Once online, the firm will have production sites in the nation for each of its four core product lines—automotive sealing products, functional components, interior and exterior parts, and safety system products.

    The firm is confident it has enough capacity to support Mexico's projected growth, but these plants were set to come online before its largest customer, Toyota, announced its $1 billion assembly plant.

    “At this moment I would say yes, but it depends on how we get the additional business,” Toyoda Gosei President Tadashi Arashima said. “We may have to invest further because there are quite a few inquiries by customers. I'm not sure if we need to build another factory or just expand the existing ones at this point. But it looks like Mexican car production will increase even further in the coming years, so we have to be prepared for that.”

    Freudenberg-NOK President Theodore Duclos said there is definitely a market in Mexico, and the firm will try to follow its customers to provide products within the region they're serving. The company recently transferred production of its engine, transmission and driveline oil seals to Queretaro, Mexico, and it set a goal of increasing production 400 percent by 2017.

    “Our Mexican manufacturing is an important part of our overall footprint, as is our U.S. manufacturing, our Canadian manufacturing and worldwide wherever else we are,” Duclos said. “We certainly try to be close to where our customers are. That reduces the supply chain length, risk and so forth.”

    Toyoda Gosei and Freudenberg-NOK are not alone. Cooper Standard Automotive Inc. added 90,000 square feet to its sealing and trim facility in Aguascalientes, Mexico. And CQLT SaarGummi Technologies S.a.r.l. will lease a 118,000-sq.-ft. building to extend its EPDM sealing operations into Saltillo, Mexico.

    Andrea said members of the OESA are adding new capacity primarily to support their existing customers.

    “The Tier 1 suppliers need to match their manufacturing footprint with their customers,” he said. “Our membership base at OESA, when we asked them if they were looking at new or incremental volume in Mexico, about 75 percent of them said yes.”

    Andrea said that in addition to the free trade agreements, Mexico is becoming more attractive for investment because the Mexican government has increased its investment in infrastructure.

    There is a deeper pool of skilled labor and engineers in the country, with wage rates for engineers comparable to the U.S. On the hourly side, Andrea said there is still a wage advantage in favor of Mexico, but that wages only account for about 15 percent of the total cost of a vehicle. Other costs—such as land, capital, utility, inbound and outbound transportation, among others—need to factor into where a manufacturer sets up shop.

    “I think successful suppliers have looked to not have one low cost country to go to because that's always a fleeting business proposition,” he said. “Successful suppliers look at it regionally and look at it from a best cost country source. From that perspective, if you look at North America just as the NAFTA region, Mexico is one of those best cost sources. But depending on the component, you can get cost factors within 15 percent of what it would cost in Mexico in some of the southern states. So the supplier or vehicle manufacturer has to take a look on whether or not that tradeoff is worth 10 or 15 percent savings to extend the supply chain.”

    There are tradeoffs for doing business in Mexico. Andrea said sourcing inbound materials and components, along with getting the right availability of automotive specified materials, is a primary concern. Security issues in Mexico have mitigated, at least according to an OESA membership survey Andrea cited. Only 10 percent of respondents said security concerns are worsening. Utility quality also varies by city.

    Some suppliers have moved further down into Central America, Andrea said, to try to service both Brazil and North America. However, in doing that, there are bigger risks.

    “A lot of things we take for granted sometimes until they're not there,” he said. “That's everything from customs and the support of customs at the border for free flow of parts and people. You may not have that kind of business continuity that you have in the U.S., Canada and increasingly in Mexico in some of the smaller countries.”

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