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Mexico to trump Japan as No. 2 car exporter to US, has Canada in its sights for top spot

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CELAYA, Mexico - Mexico is on track to become the United States' No. 1 source of imported cars by the end of next year, overtaking Japan and Canada in a manufacturing boom that's turning the auto industry into a bigger source of dollars than money sent home by migrants.

The boom is raising hopes that Mexico can create enough new jobs to pull millions out of poverty as northbound migration slows sharply, but critics caution that most of the new car jobs are low-skill and pay too little. Mexico's low and stagnant wages have kept the poverty rate between 40 and 50 per cent since the passage of the North American Free Trade Agreement two decades ago.

An $800 million Honda plant that opened Friday in the central state of Guanajuato will produce more than 200,000 Fit hatchbacks and compact sport-utility vehicles a year, helping push total Mexican car exports to the U.S. to 1.7 million in 2014, roughly 200,000 more than Japan, consulting firm IHS Automotive says. And with another big plant starting next week, Mexico is expected to surpass Canada for the top spot by the end of 2015.

"It's a safe bet," said Eduardo Solis, president of the Mexican Automotive Industry Association. "Mexico is now one of the major global players in car manufacturing."

When NAFTA was signed two decades ago, Mexico produced 6 per cent of the cars built in North America. It now provides 19 per cent. Total Mexican car production has risen 39 per cent from 2007, to nearly 3 million cars a year. The total value of Mexico's car exports surged from $40 billion to $70.6 billion over that span.

"I congratulate Honda for its having confidence in Mexico, for having total confidence in the development of our country," said Mexican President Enrique Pena Nieto, who attended the opening of the plant in the town of Celaya along with Honda CEO Takanobu Ito. "They're contributing to two basic objectives, generating wealth and creating jobs in this country."

Manufacturing in Mexico is now cheaper than in many places in China, though the vast majority of the cars and trucks made in North America are still produced in the U.S. for domestic consumption and export to other countries.

And many of the vehicles built in Mexico are assembled with parts that are produced in the United States and Canada and cross the border without tariffs under NAFTA.

"There was a realization that there were some structural issues that had to be resolved in the auto industry to make it more competitive again. Moving parts, not all of the production, to Mexico was a good way to deal with that," said Christopher Wilson, an expert in U.S.-Mexico economic relations for the Woodrow Wilson International Center for Scholars.

Mexico's government and the car industry say the automotive industry has become the primary source of foreign currency for Mexico, surpassing oil exports and remittances from immigrants in the United States.

Migration to the U.S. has slowed dramatically in recent years, though experts attribute that mostly to tougher enforcement and a slower U.S. economy. Despite successes such as the car-making boom, Mexico still isn't creating nearly enough formal jobs for the hundreds of thousands of people entering the workforce each year.

While Mexico's official unemployment rate dropped to 4.62 per cent in the last quarter of 2013, nearly 7 per cent of working-age people work less than 15 hours a week and nearly 60 per cent scrape by in off-the-books jobs such as street vendors or day labourers, whose benefits are virtually nonexistent and whose wages are often below the legal minimum.

The Mexican government announced Friday that the economy grew a meagre 1.1 per cent in 2013, its worst performance since 2009. The government is hoping to see 3.5 per cent growth this year.

Mexico has roughly 580,000 auto workers, whose numbers have risen by 100,000 since 2008. They are paid about $16 a day, more than $4 less than what the average U.S. autoworker is paid every hour. More than half of all Mexican workers earn less than $15 a day, according to Mexico's census agency.

Many car factories in Mexico operate with pro-company unions and some workers have fought without success to form independent unions that could bargain for higher pay and better pensions.

"It's one of the most modern industries that is generating the most money for the country," said Huberto Juarez, an auto industry expert at the Autonomous University of Puebla. "It's not right that these workers are making so little."

Solis, the president of the auto industry association, acknowledges wages are low compared to the U.S. and Canada, but says the boom is creating a new generation of young engineers and funding automotive research in Mexico. A handful of Mexican entrepreneurs have launched boutique car companies in recent years, although their production remains insignificant compared to that of foreign manufacturers in Mexico.

"It's not only about lower salaries. That's short-sighted. It is a component of a larger equation that has to do with the expertise we are developing," Solis said.

Much of the new production is by Japanese companies drawn by the ability to move parts into and out of Mexico without tariffs. Local governments have been competing for new plants by offering tax exemptions, employee training and improved highways connecting the plants to the U.S. border and Mexican ports.

Just 25 miles from the new Honda plant, Mazda is set to open a factory next week to produce 230,000 cars a year. Nissan is expected to turn out 175,000 cars annually at a $2 billion plant it opened late last year in the nearby state of Aguascalientes. And Audi will be producing luxury models at a plant in the state of Puebla that is slated to open in 2016.

"We have gained momentum throughout the years," Economy Secretary Ildefonso Guajuardo said. "Now Mexico is attracting international attention because it has proven to have quality of production and a friendly investment climate."

___

Adriana Gomez Licon on Twitter: http://twitter.com/agomezlicon

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