How Mexico could color UAW talks

Low-cost labor a key concern of union and Detroit 3

The engine line at VW's plant in Puebla, Mexico. Mexico's rise as an auto producer -- it may soon rival Germany -- is reverberating across the auto industry and complicating Detroit 3-UAW talks this year. Photo credit: BLOOMBERG

DETROIT -- When the UAW and the Detroit 3 open contract talks next month, a third party will hover over the discussions and almost surely influence the outcome: Mexico.

The union will seek an agreement that keeps as much Detroit 3 production as possible in U.S. plants, while rival automakers increasingly seek to take advantage of lower labor costs in Mexico.

At the same time, the Detroit manufacturers will use the prospect of shifting work to Mexico as a bargaining chip to blunt union demands for higher wages.

Mexico "is the union's biggest target for in-sourcing [production], and it is also the biggest threat the companies can wield," said Kristin Dziczek, director of the industry and labor group at the Center for Automotive Research in Ann Arbor, Mich.

The labor talks are the latest example of how Mexico's rise as an auto producer -- it may soon rival Germany -- is reverberating across the industry. German and Japanese automakers are rushing to build Mexican plants to lower their dependence on high-cost labor in their home countries, gain access to the North American market and take advantage of Mexico's extensive free-trade agreements.

The deeper South
For these vehicles built in both the U.S. and Mexico, production this year is down at domestic plants, and up at Mexican plants.
  Production Jan.-May 2015Production Jan.-May 2014Change
Chevrolet Silverado/GMC Sierra
 Flint, Mich.*59,49377,720–23%
 Fort Wayne, Ind.*117,818147,043–20%
 Silao, Mexico160,516157,7541.80%
Chevrolet Sonic
 Orion Township, Mich.*15,64554,975–72%
 Ramos Arizpe, Mexico15,68712,49926%
Ford Fusion
 Flat Rock, Mich.19,10525,922–26%
 Hermosillo, Mexico132,591120,21610%
Note: GM's Orion Township plant also produces the Buick Verano; Ford's Flat Rock plant also produces the Mustang. Ford's Hermosillo plant also produces the Lincoln MKZ.
*Automotive News estimates Source: Automotive News Data Center

Meanwhile, many parts makers are opting for production in Mexico over China, where labor costs have been rising. "Mexican labor rates have been steady, and productivity there has gone up rapidly," said Mark Wakefield, a managing director at AlixPartners, a consulting firm with a large automotive practice.

In a roundtable with reporters this month, UAW President Dennis Williams said the increased investment in Mexico production "is a very big concern of ours."

Mexico could loom largest in the UAW talks with General Motors, which has three vehicles that are assembled both in Mexico and in the U.S. The Chevrolet Silverado and GMC Sierra pickups are built in Flint, Mich.; Fort Wayne, Ind.; and Silao, Mexico. The Chevy Sonic subcompact is made in Orion Township, Mich., and Ramos Arizpe, Mexico.

Pickup sales are rising and GM is scrambling to boost production capacity. Where that expansion happens is sure to come up for discussion when negotiators sit down with the UAW. GM in December signaled a willingness to increase its Mexico production by pledging to invest $3.6 billion in its plants there. But a commitment to favor the two U.S. plants would be something the UAW leadership could present to the rank and file as a victory, Dziczek said.

"They will need to show the membership, 'We kept this from going to Mexico,'" she said.

Williams: Investment in Mexico is "a very big concern" of the UAW.

More tension could arrive in the case of the Sonic. Most of the UAW workers in Orion Township are Tier 2 employees, earning up to $19 an hour, $9 less than the full UAW wage that veteran union members get. 

Even so, the economics of making small cars in the U.S. are unfavorable. The Center for Automotive Research estimates that GM spends $674 more on labor costs to make a Sonic than Ford Motor Co. spends to build its competing model, the Fiesta, in Mexico. The center estimates the average Mexican auto worker wage at $5.25 an hour. 

GM bases investment decisions on several factors, including incentives, infrastructure and competitive labor agreements, a GM spokeswoman said, adding that the company is focused on working with the UAW "to deliver an agreement that is good for employees and the business." 

The other two Detroit manufacturers have less dual-sourcing of vehicles. Ford makes the Fusion mainly in Mexico, and has some assembly in Flat Rock, Mich. Fiat Chrysler Automobiles produces the Ram pickup in Warren, Mich., and the heavy-duty versions in Saltillo, Mexico.

But the union knows that Mexico is also winning investments for production of major components. Ford in April said it would spend $2.5 billion on two new Mexican operations: one that will build four-cylinder engines and another that will produce transmissions. 

In the past, said Sean McAlinden, chief economist for the Center for Automotive Research, it was the labor costs of foreign automakers, which opened nonunion plants in Southern states, that colored Detroit's contract talks. Both the union and management worked to help the Detroit 3 steer a course toward the labor rates Toyota Motor Corp., Honda Motor Co. and others were paying. 

But "transplants are not setting the bar in UAW contracts anymore," he said. "Now it's Mexico."

You can reach Neal E. Boudette at NBoudette@crain.com -- Follow Neal E. on Twitter: https://twitter.com/nealboudette

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