Mexico’s auto boom is about wages

Mexico’s star is ascending these days. Nissan just revealed plans to spend $2 billion on a new factory there, which is twice as much as an automaker typically spends on a big new factory. It signals that Nissan is laying the groundwork for what is sure to expand into a massive assembly plant in a few years.

Honda is also investing in Mexico, and so is Mazda. Others are eyeing the region as a carmaking location. The Detroit 3 have been there forever. Parts suppliers are newly investing there. Mexico is booming and beckoning.

And Mexico has a lot going for it, not least of which is proximity to Mexican and South American consumers. But it is hard to attribute the new investment wave to much more than labor rates. The automakers are shy about saying so, but the reality is that in 2012 Mexican wages are still very low.

Even after years of Mexico’s cost of living inching up and American wages going down, Mexico’s labor rates are still a fraction of U.S. rates. Mexico’s auto assemblers nowadays pay $4 to $5 an hour. U.S. rates differ all over the map now, from $28 an hour in wages for the Detroit 3, to $14 an hour for new Tier 2 Detroit 3 workers, to hourly wage rates at the transplants that vary from $15 into the high $20s.

But all of them are far higher than Mexico’s $5. And the going rate at Mexican parts plants these days is about $2 an hour. Throw in the benefits that are standard in Mexico, and a parts worker’s hourly compensation package is closer to $3.

As attractive as those savings are, they look even better when overtime is factored in.

Do the math: Pay time-and-a-half or double-time to run a U.S. assembly line on Saturdays, or pay double-time to have workers in a Mexican plant work on Saturdays? And don’t underestimate that -- there is a lot of overtime going on at North American auto factories right now.

Deciding where to build a new auto factory tends to be advanced calculus. Planners have to factor in soil conditions, railroad schedules, utility rates and even political outlooks. Worker wages represent just one piece of the equation.

But when the potential savings on hourly wages is that large, it sure looks like pretty simple arithmetic.

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