Strains on labor markets, infrastructure
Oscar Albin pores over a slide presentation showing Mexico's key advantages for the automotive supply sector. As executive president of the National Auto Parts Manufacturing Association, Albin is particularly proud of a few of them.
For starters, there are the manufacturing costs, which not only run 10 percent below costs in the U.S. but are below even China's, according to the slide presentation, which cites sources ranging from government agencies and international consulting firms to the auto-parts group's own data.
Then there are the free-trade agreements: 14 of them, covering 46 countries, said Albin, a mechanical engineer who spent 23 years at Chrysler de Mexico.
"We are at the center of the world," said Albin, pointing to a graphic showing Mexico's access to North America, South America, Europe and Asia. About 90 percent of the top 100 global suppliers have a local presence.
But life is not all wine and roses for the roughly 600 Tier 1 suppliers in Mexico that feed local plants and export to the U.S., among other nations.
Mexico's fast growth as an export platform for light vehicles and strong demand for components worldwide is causing a shortage of qualified labor, Albin said, and it has quickly become the industry's biggest challenge.
New auto plants from Honda, Mazda, Kia, BMW, Audi and Toyota, along with expansions by Nissan, Ford and General Motors are drawing in more suppliers and further tightening the labor squeeze.
For decades, Mexico has had robust auto and parts industries along the U.S. border areas, where the labor market is already tight. The new entrants are drawing on a different labor pool. The new growth in the auto industry has mostly migrated from northern Mexico to the central Mexico region known as El Bajio, or the lowlands, in search of new workers. And now even that relatively new area is feeling the pinch.
"The availability of labor in the northern part of the country is very, very congested," said Albin during an interview at the Mexico City headquarters of his group, known by the abbreviation INA. "Obviously demand has outstripped supply, and nowadays we have a labor shortage problem in the Bajio since there were so many automotive companies that arrived in such a short time," he said.
Workers are moving into the region from southern Mexico, Albin said, but they must be trained, and turnover is high. "You train 10 and five stay," Albin said. The reason is fairly simple. "Because the salary isn't very good, and they go to other companies for a little more money."
A recent report by the Mexican Automotive Industry Association and the government's National Institute of Statistics and Geography put the average auto worker's compensation at just below $1,000 a month, including benefits.
While workers at automaker assembly plants made considerably more than the average, those toiling at supplier plants are toward the bottom of the scale at around $600 a month, which is below the average for all manufacturing jobs in Mexico, according to the government report, which used the most recent numbers from 2014.
Albin said the solution is not as easy as raising salaries, since that could touch off a bidding war that would undercut the cost advantage that makes the industry attractive in Mexico.
Automotive companies have created incentives to keep workers, whose numbers across the sector are expected to grow to 800,000 in 2021 from 760,000 currently.
"Some of these companies say to workers: "Bring in a family member or a friend and if he stays six months with us I'll give you a bonus,'" Albin said. "So the worker tells his friend, "Please don't leave.'"
The industry is working closely with universities to get more people trained and stave off a crisis as production rises, Albin said. But the pressure goes beyond the labor markets. The Mexican Automotive Industry Association estimates that light-vehicle production in Mexico will reach 5 million units by the end of 2020, up from 3.4 million last year, putting pressure on Mexican infrastructure and institutions.
Assembling in Mexico
Foreign parts suppliers have been pouring into Mexico to feed both global automakers setting up shop there and those operating in the U.S. Here are some of the top investments this year.
• August: French tire maker Michelin breaks ground on a $510 million plant in Leon, Guanajuato, in central Mexico's Bajio region.
• May: Boxmark Leather of Austria says it will spend nearly $100 million to make car seats and interiors in the south-central state of Puebla, where Audi will open a plant this fall.
• May: Japan's Nidec Tosok announces an $86 million investment to make transmission and driveline parts in San Luis Potosi, where General Motors has operations and which is the future home of a Ford plant and a BMW factory.
• April: Italian tire maker Pirelli announces a $200 million investment to build a second plant in Mexico at its existing production site in Silao.
• April: Germany's Robert Bosch says it will invest $80 million to build steering and suspension components in the central Mexico state of Queretaro near several existing automakers' facilities and a planned Toyota Corolla plant.
• February: Commercial Vehicle Group of the U.S. announces a $227 million investment to make electrical equipment in the northern state of Sonora, where Ford Motor Co. has a big car plant.
Albin said key Mexican seaports are becoming congested now that automotive goods are being sent to far more countries. Just 15 years ago, 90 percent of auto production went to the U.S. Today it's 70 percent.
The Veracruz port on the Gulf of Mexico, not far from Volkswagen's sprawling Puebla complex, is particularly congested. There are more ports on the Pacific side, including Lazaro Cardenas, Manzanillo and Mazatlan, he said.
As for U.S.-bound payloads, Mexican railways play a critical role, but they're being squeezed, too. One big problem is a lack of car-carrier boxcars, Albin said. Auto production throughout North America remains robust, and there are a finite number of the carriers.
In some cases, he said, automakers in Mexico are using them for short runs to maritime ports where vehicles are sent north by boat rather than directly by rail.
Generally, he said, infrastructure upgrades to roads, rails, ports and airports are moving forward. "Maybe it's something that should be done more quickly, but it is getting done."
Mike Bafan, president of manufacturing for Toyota in Mexico who is overseeing the construction of a Corolla plant in Guanajuato state, acknowledged the challenges of setting up a new plant in central Mexico but said that every location has its challenges. He says improvements in the Bajio labor market will come from workers migrating from the south and locals who want to stay in the area but don't want to work in agriculture as the region transitions to a manufacturing economy. Bafan said: "I think there's more upside to what's going on in Mexico than downside."