U.S. suppliers hit big hurdle in quest to move production closer to home

For automotive suppliers, labor costs and availability remain major issues complicating the push to localize production in North America, industry executives and experts say.

While commodity, freight and energy prices have mostly come back down to earth since post-pandemic spikes, elevated labor costs and worker shortages remain a pain point for manufacturers.

The once obvious solution of shipping work to lower-cost countries has become more complex as companies pull supply chains out of Asia. That's led to a manufacturing boom in Mexico, where cheap labor is becoming less so, and the competition for plant workers is perhaps greater than ever, said Alejandro Rodriquez, Mexico country lead for Detroit area consulting firm Plante Moran.

"What we're seeing now is that companies are looking to go to Mexico because they cannot find people in the U.S.," Rodriguez said. "Wages are increasing very rapidly. As a result of near-shoring, the many investments that are coming into Mexico, we're seeing even more of an increase in labor costs because companies are competing for talent."

Over the past five years, the average monthly salary for a manufacturing worker in Mexico has increased 30 percent to 5,620 pesos (about $326 in U.S. dollars, by current conversion rates), according to data from Mexico's Ministry of Economy. In that same timeframe, the average hourly wage of a U.S. manufacturing worker increased more than 20 percent to about $32, according to the U.S. Bureau of Labor Statistics. Based on a 40-hour work week, that amounts to roughly $1,280 a week and $5,120 per month.

Unlike commodity and transportation costs, elevated labor costs are not likely to go back down, said Dan Sharkey, attorney at Brooks Wilkins Sharkey & Turco PLLC who specializes in supply chain disputes. Nor are most customers willing to help eat labor costs after two years of negotiating price increases to cover other inflated costs.

"The one thing that hasn't relented is labor. It has increased significantly and is sticky," Sharkey said. "The customers generally fight back hard on supplier requests for price increases relying on labor costs as a justification. Many view it as an inherent risk that the supplier took when it quoted the parts."

The labor pinch has been especially painful for manufacturers with a heavy reliance on low-cost labor, from seating suppliers to makers of electronic components.

Seating and electronics supplier Lear Corp. employs more than 160,000 people globally, 85 percent of whom are in low-cost countries, according to an annual filing with the Securities and Exchange Commission. The company, which has more than 50,000 workers across 40 plants in Mexico, had an annual median employee compensation of $8,934 in 2022, up 10 percent from the year prior.

CEO Ray Scott said during an Automotive News event earlier this month that as the microchip shortage and other supply constraints abate, labor has emerged as the company's biggest issue.

"If you look at Mexico right now, there's a big influx of manufacturing jobs because of what's happening geopolitically," Scott said. "So there just isn't enough employees to satisfy it."

Seating rival Adient plc, also dependent on cheap labor, is facing similar headwinds. The company is closely watching wage inflation in Europe and Mexico, CFO Jerome Dorlack said last week during the Deutsche Bank Global Auto Industry Conference webcast.

"I think on some of the headwinds that the industry is facing, Mexican labor is certainly a challenge, and it's going to be a challenge for anyone with a significant Mexican footprint, anyone who operates cut and sow operations, harness operations in that region," Dorlack said.

Automotive tech giant Aptiv plc, which employs thousands of people across 32 plants in Mexico, had an annual median employee compensation there of $8,139 in 2022, a nearly 40 percent increase from 2020, according to its annual SEC filing.

The supplier of software and electronic connectors expects supply chain disruptions and inflation to cost the company $180 million this year, about half the damage of last year, CFO Joseph Massaro said during the conference. Even as the operating environment improves, not every aspect has fallen into place.

"There's a labor question in North America that I think has to be resolved," he said. "We don't have answers to that now."

For Detroit-based American Axle & Manufacturing, labor availability is also the top concern, especially in the U.S. The driveline supplier — whose employees earned a median compensation of $46,848 last year, up 23 percent year-over-year — is struggling to attract and retain labor, especially at smaller sites in the country, CFO Chris May said during the conference.

"That continues to be a very active issue that we manage as a company, but it is manifesting itself through inefficiencies and some premium costs," May said. "The inefficiencies associated with labor availability continue to impact our operations probably a little higher than we would have anticipated stepping into the quarter.

Nearshoring was set off five years ago by the trade war between the U.S. and China, which made manufacturing in Mexico an attractive option to avoid tariffs, said Rodriguez, the industry consultant. The United States-Mexico-Canada Agreement, which replaced the North America Free Trade Agreement in 2020, fueled it.

Since then, nearshoring has been accelerated by supply chain fallout from the COVID-19 pandemic, war in the Ukraine and the Inflation Reduction Act, which offers incentives for onshore manufacturing.

"Even though the IRA does not name Mexico, it refers to countries the U.S. has free trade agreements with, so that is why Mexico benefits," Rodriguez said.

Direct foreign investment in Mexico isn't coming just from North American companies looking to rein in their supply chains. Chinese companies are flooding the country not in search of workers, but to gain access to and preserve their business in the U.S. market, Rodriguez said.

"Some companies are looking to expand their operations in Mexico because of not being able to find talent," he said. "China is looking at Mexico to be able to serve the U.S. There are companies in China that have never done any manufacturing outside of China that are trying to add the least amount of volume in Mexico for their products to be considered Mexican."

In the U.S., where plants are dealing with persistent worker absenteeism and turnover, manufacturing has fallen out of favor for many would-be plant workers who can find similar pay in fast food or other industries. In Mexico, a manufacturing job is still sought after, Rodriguez said.

"There's a lot of people that are looking for well-paying jobs. Having that manufacturing job is still very popular."

But companies will have to pay more for that worker, regardless of where the plant is located. At a certain point, the cost increases make for bad business, Sharkey said.

"Many suppliers can't pay the increased labor necessary to make the parts without taping dollars to every box, so it's an economic impossibility to have a sustainable business," he said. "That's one reason why, even three years-plus after COVID hit, we still have so much tension in the supply chain."