Mexico is becoming a giant in small cars.
The southern neighbor of the U.S. has seen a surge in automaking capacity in the last five years as manufacturers built plants to take advantage of Mexico's low labor costs, easy access to the American market and free-trade deals with Europe, Brazil and more than three dozen other nations.
But Mexico is making the biggest impact on production of subcompact and compact cars -- vehicles with both narrow profit margins and wide appeal in markets outside North America. The point was emphasized last week when Toyota said it would assemble Corollas in a plant to be built in the Mexican state of Guanajuato, about 100 miles northwest of Mexico City.
"We are seeing a realignment of capacity in North America," said Andrew Csicsila, a director of the operations practice of consulting firm AlixPartners. "The smaller platforms are going to Mexico."
Until 2013, the U.S. assembled more small cars than Mexico. The Dodge Dart, Ford Focus, Honda Civic and Chevrolet Cruze and Sonic are all U.S.-made vehicles.
Mexico has been making the Volkswagen Jetta and Golf, Nissan Sentra and others. Then last year, Nissan ramped up production at a second small-car plant, and the Honda Fit and Mazda Mazda3 began rolling out of newly built Mexican factories.
That pushed Mexico's output of subcompact and compact cars to 1,514,436, ahead of the U.S. total of 1,489,836. That gap is going to widen, too. This year, Honda adds the HR-V and Mazda its Mazda2 to the mix. A new Kia plant in Monterrey is set to start making the Forte in 2016. Corolla production should start in 2019.
Low labor costs make Mexico attractive for production of cars that sell for less than $20,000. On average, American manufacturing workers make $19.71 an hour. Mexican factory workers average just under $20 a day, according to TradingEconomics.com, a research provider. Mexico is now a less expensive labor market than China, which has seen costs soar in the last decade, analysts said.
Mexico's many trade agreements also boost the bottom line on exports. Audi, for example, recently decided against Chattanooga and chose Mexico for a new plant to make the Q5 crossover. Part of that decision hinged on Mexico's free-trade pact with the European Union, a major destination for the Q5. Under current tariffs, the vehicle would be slapped with a 10 percent tariff if it were exported from the U.S.
Nearly 500,000 of the 3.2 million vehicles Mexico produced last year were shipped to markets outside North America. Three markets -- Brazil, Germany and China -- accounted for half of those exports outside the North American Free Trade Agreement region.
"It's easy to get products out of Mexico if you're interested in shipping them to other parts of the world," said Bruce Belzowski, a managing director at the University of Michigan Transportation Research Institute, which is hosting a conference on the Mexican auto industry in May.
For now, though, analysts are not ready to say Mexico is a direct threat to U.S. auto plants and jobs. Csicsila, the AlixPartners executive, noted that U.S. auto production continues to rise even as Mexico revs up. Last year, U.S. light-vehicle production increased by 665,000 units to 11.6 million. Mexican output rose by 280,000 vehicles to 3.2 million.
He said, "Mexico is having great growth, but U.S. capacity is filling up with trucks and larger vehicles."