Mexico's star is ascending these days. Nissan just revealed plans to spend $2 billion on a new factory in Aguascalientes, 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 complex in a few years.
Honda is also investing in Mexico, and so is Mazda. Others are eyeing the region as a car manufacturing location. The Detroit 3 have been there forever. Parts suppliers are 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 though Mexico's cost of living has been inching up for years and American wages have been going down, Mexico's labor rates are still a fraction of those in the United States. Mexico's auto assemblers nowadays pay $4 to $5 an hour. U.S. wage rates differ widely now, from $28 an hour for the Detroit 3 to $14 an hour for Detroit's new Tier 2 workers to hourly wage rates at the transplants that range from $15 to the high $20s.
But all of them are higher than Mexico's $5. And the going rate at Mexican supplier plants is about $2 an hour. Throw in the standard benefits and a parts worker's hourly pay 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 a Mexican plant work on Saturdays? 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 the political situation. Employee wages represent just one part of the equation.
But when the potential savings on hourly wages is that large, it sure looks like simple arithmetic.