Is Nissan about to repeat VW's miscalculation?

Automotive News | December 15, 2011 - 3:16 pm EST

Wire services have been reporting early rumors of how Nissan Motor Co. plans to expand its North American capacity.

Nissan sales are growing at a healthy clip and its North American production capacity is assigned. So the automaker needs more floor space.

The latest news report claims Nissan will invest $2 billion to build a factory in Mexico capable of producing 600,000 vehicles a year and serving as an export base for the Americas. That's a lot of money and an enormous factory.

We'll soon see whether the report is correct. But for what it's worth, Volkswagen had the same idea more than 20 years ago -- and it didn't work so well.

In the late 1980s, VW gave up on its troubled assembly plant in Pennsylvania and invested $800 million (in 1988 dollars) on a factory in Puebla, Mexico. VW's strategy was to use low-cost Mexican production as its export base for all of North America.

It looked good on paper. But VW learned something: Mexico is a perfectly wonderful place to build fine quality vehicles, but it isn't the United States, where 13 million or more consumers will be looking for new cars and trucks next year.

Saving a few bucks on Mexican wages does not a manufacturing base make.

VW learned that it needed to manufacture in the United States to respond adequately to U.S. retailers and U.S. consumers. And as a result, now more than two decades later, Volkswagen has opened another billion-dollar auto plant in Chattanooga. From that new plant, it envisions sourcing other models for the United States and other markets.

Nissan learned a similar lesson in Brazil. The automaker has long had trouble gathering market share in the booming South American market, and it has blamed its reliance on vehicles imported from Mexico.

So now Nissan is building a Brazilian auto plant to cater to the Brazilian market.

Mexico is similarly a long, long haul from auto dealerships in New York, St. Louis, Chicago and Orlando. Fuel prices and transportation costs can prove volatile, as Mexican manufacturers learned to their horror when gasoline prices spiked in 2008. Business plans can quickly come unstrung. When things get challenging, Mexico can suddenly seem like a very faraway place.

Presumably, Nissan's planners have considered all of this. After all, Nissan has been assembling vehicles in Mexico longer than it has in the United States. And in fact, Nissan is the market leader in Mexico.

But obtaining one or two U.S. products from Mexico is different from creating a regional export base there. The latest wire report pictures Nissan putting $2 billion worth of eggs into one basket.

That would represent a big gamble.

You can make a fortune on a gamble. You can also lose one.

Lindsay Chappell is the Mid-South bureau chief for Automotive News..Lindsay Chappell is the Mid-South bureau chief for Automotive News..

PRINTED FROM: http://www.autonews.com/apps/pbcs.dll/article?AID=/20111215/BLOG06/111219912&template=printart

Entire contents © 2014 Crain Communications, Inc.