Automakers race to Mexico as rising quality spurs factory gold rush

MEXICO CITY (Bloomberg) -- Toyota Motor Corp.'s plan to source cars from Mazda Motor Corp.'s Mexican plant starting in 2015 highlights global automakers' growing reliance on the Latin American nation for quality production as well as lower costs.

Mexico's vehicle output is on pace to reach a record 2.86 million units in 2012, according to researcher LMC Automotive.

More is on the way, as Honda Motor Co. is building its first large Mexico assembly plant, Nissan Motor Co. adds a third factory, Ford Motor Co. produces mid-sized sedans and Volkswagen AG's Audi brand opens the country's first luxury vehicle plant in 2016.

"Across a range of industries, every single company in America that I've talked to will tell you that either their best plant or one of their top plants is in Mexico," said Jeff Liker, an engineering professor at the University of Michigan. "They can build quality and they can deliver on time."

From Japanese carmakers seeking relief from the strong yen to German and U.S. rivals eager to expand exports to the rest of Latin America, Mexico is evolving from its traditional role as a source of low-cost labor.

Automakers are focusing investment within about 300 miles (483 kilometers) of Mexico City to take advantage of the nation's newfound reputation for quality. Mexico's trade agreements covering 44 countries also make it an attractive export platform to ship cars to South America, Asia and Africa as well as the United States and Canada.

Free trade

"Mexico has more free trade agreements than the U.S.," said Sean McAlinden, a labor economist with the Center for Automotive Research in Ann Arbor, Mich. "They have a free trade agreement with the EU that saves them a 10 percent tariff that's applied to U.S.-built vehicles. If you're going to build a world car like Q5 or an Infiniti, Mexico is where you're going to do it."

Central Mexico "will definitely be the hottest growth area with respect to North American vehicle production this decade," said Michael Robinet, managing director of consultant IHS Automotive in Northville, Mich. "The shift to Mexico is not only trying to feed the U.S. and Canadian markets, it's more of a global production play."

Automakers have announced $7.8 billion in Mexican investments in the past 24 months, McAlinden said.

Mazda agreed to build a Toyota-branded subcompact car based on the Mazda2 hatchback at a $500 million plant the company is building in the central state of Guanajuato. The factory will supply Toyota with 50,000 units of the vehicle annually when production begins in mid-2015.

'Highest quality'

"As with all other regions where we have manufacturing operations, we're confident this new vehicle produced in Mexico will be of the highest quality," said Steve Curtis, a spokesman for Toyota's North American unit.

Ford, seeking to win mid-sized sedan sales in the United States from Toyota's Camry, this year began building a revamped Fusion sedan in Hermosillo, Mexico.

The company has said it will also produce the car with looks evocative of an Aston Martin in Flat Rock, Mich., beginning next year.

Ford in March said it planned $1.3 billion in upgrades for Hermosillo.

Toyota has operated a small Tacoma pickup factory near Tijuana, Mexico, that's far from the center of the nation's automotive supplier base.

Along with supplying vehicles for the U.S. and Mexican markets, the plant also helps Toyota comply with a national rule requiring major automakers to have at least 50,000 units of local production capacity or face import tariffs.

'Just catch-up'

Toyota's manufacturing agreement with Mazda "is just catch-up," said Liker, who also teaches efficient manufacturing techniques to companies.

"They have too little capacity in Mexico, compared with many other competitors," he said by phone last week from Mexico City. Toyota "tends to take a very long-term view when it makes a decision like this, so I would expect this plant to eventually become a joint-venture between the two," Liker said.

Honda has a small factory in El Salto, Mexico, that assembles the CR-V compact crossover for sale in the United States and Mexico to comply with the country's trade rules.

While that facility can produce only about 60,000 vehicles annually, the $800 million plant Tokyo-based Honda is building in Celaya is to have capacity to produce 200,000 Fit small cars annually.

Yen impact

The yen's persistent strength relative to the dollar has forced Japan's automakers to shift more production outside of their home market to maintain competitive pricing in the United States, where Toyota and Honda generate most of their profits.

The Japanese currency traded at 79.50 yen to the dollar on Nov. 12, up 3.7 percent from two years earlier and a 27 percent jump from 109.41 yen in 2007.

Toyota has a history of manufacturing tie-ups in North America.

The company previously operated a joint-venture factory in California for 25 years with the former General Motors Corp. that ended with the U.S. company's 2009 bankruptcy.

Since 2007, Fuji Heavy Industries Ltd.'s Subaru plant in Lafayette, Ind., has built Camry sedans for Toyota under contract. Toyota has since increased its equity stake in Fuji Heavy to about 16.5 percent.

While Toyota and Mazda haven't built vehicles together in the past, the two carmakers have had a technology-sharing agreement on hybrid-electric systems, said Jeremy Barnes, a spokesman for Mazda's North American unit in Irvine, Calif.

Past pattern

While the two Japanese automakers share no equity ties, Toyota may take a position in Mazda, said Liker, who specializes in research about the largest Asian automaker.

"I wouldn't be surprised," he said. "I don't know that that's a plan. That certainly has been the pattern in the past."

Ford formerly held a controlling interest in Mazda. Ford began selling its Mazda stake in 2008 and now holds about 2.1 percent of Mazda shares, according to data compiled by Bloomberg.

While Mexico's automobile plants have competitive labor costs and quality levels that are "equal to and in some cases greater than" those of U.S. plants, automakers can incur other costs that cancel out the benefits, said Ron Harbour, a manufacturing analyst and partner at New York-based consulting company Oliver Wyman.

Shipping, violence

One source of added cost comes from shipping cars to international markets. Another is drug-related violence, which, according to the Mexican newspaper Milenio, has claimed 57,449 lives since President Felipe Calderon took office in December 2006.

"You can wash away a good chunk of that labor savings with the logistics cost, particularly today when fuel costs have gone up, the cost of containers, the cost of security," Harbour said.

"You now have to protect the trucks and trains, which can be looted," he said. "There's all kind of costs that come in addition to the labor savings."

Violence in central Mexico is lower than in much of northern Mexico. Honda and Mazda both chose the central state of Guanajuato for their plants. Audi chose the state of Puebla, southeast of Mexico City, to assemble its Q5 SUV for the global market. Parent company Volkswagen has produced cars in Mexico since 1967.

New wave

Bolstered by the new wave of investment, Mexico's light-vehicle production probably will rise 34 percent to 3.83 million by 2017, according to LMC.

The researcher's 2.86 million vehicle estimate for this year would make Mexico the world's eighth- largest auto producer.

"We could easily outpace the numbers we have by 2017 with another new plant or two announced, if that were to be the case," said Jeff Schuster, an analyst at LMC. "In the past, you saw the Detroit brands moving in there and putting up additional facilities. Now it's the South Koreans, the Japanese and the Europeans all looking to expand in Mexico."

Busy port

While domestic sales in Mexico remain lower than the 2006 peak, auto exports rose 12 percent to a record 1.98 million units in the first 10 months of the year, the Mexican Automobile Industry Association said Nov. 7.

The United States accounted for 63 percent of shipments, followed by the rest of Latin America, at 16 percent, and Europe taking 9 percent of Mexican-built autos.

Vehicle exports to Africa more than quadrupled to 26,608 while shipments to Asia rose 83 percent to 38,194.

Veracruz, Mexico, was the busiest vehicle port in North America last year, handling 753,685 units for such companies as Ford, Nissan and Volkswagen, according to Finished Vehicle Logistics, a London-based publication specializing in automotive distribution.

About 588,000 of the vehicles were exports. More automakers, including Seoul-based Hyundai Motor Co. and Munich-based BMW AG, may locate plants in Mexico, Schuster said.

Hyundai doesn't have current plans for a Mexican vehicle-assembly factory, said Chris Hosford, a spokesman for the company's U.S. unit in Costa Mesa, Calif.

BMW hasn't announced plans for building vehicles in Mexico while analyzing potential production sites globally, said Elizabeth Solis, a spokeswoman in Mexico City.

The company said last month it will invest 200 million euros ($254 million) in a factory in Brazil to open in 2014.

"Very recently, there's been a combination of updating facilities and bringing in new ones to modernize the manufacturing," Schuster said. "Additional global training has brought the workforce in line from a quality standpoint and a process standpoint. And then obviously because of the cost benefits, now we're seeing a big push into Mexico once again, from really all directions."