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The Rise of Mexico's Auto Sector

Published on
January 27, 2016

On a recent trip to Mexico on behalf of a client, I had the opportunity to conduct a number of meetings and interviews with federal and state government officials and industry representatives to learn more about the country’s rising auto industry. While these meetings provided a lot of useful information, what stuck with me was my impression of Mexico’s attitude towards Canada in the context of competition for auto sector investment. These officials seemed to deal with the subject in both a defensive and conciliatory manner, almost as if they knew they had already won but didn’t want to rub it in.

Despite this interesting take-away, I was not there to argue on behalf of Canada or Ontario. I was only in the country to represent my client’s interest in researching the business opportunity while they contemplated a possible investment. Indeed there appears to be great potential there for auto sector suppliers and original equipment manufacturers (OEMs) alike. Rooted in this assertion is the fact that, by my count, there have been five new OEM greenfield automotive projects announced for the country. These include:

Kia Motors - $1 billion Kia Motors facility in Monterrey, Nuevo Leone, announced in 2015 with construction set to get underway in 2016 and an expected output of 300,000 vehicles per year1

Audi - $1.3 billion plant in Puebla to start production in 20162

BMW - $1 billion facility in San Luis Potosi, set to produce approximately 150,000 vehicles a year by 20193

Daimler/Nissan - $1.4 billion facility in Aguascalientes, with production starting in 2017 and an expected direct employment footprint of 5,700 people4

Toyota - $1 billion plant in Guanajuato, Mexico, with vehicle production to start in 2019. Corolla vehicle mandate shifting from Ontario to new Guanajuato plant.5

Five new plants announced in three years is impressive. By contrast, Canada’s last automotive OEM greenfield investment was announced over ten years ago in 2005 and was the Toyota plant in Woodstock, Ontario. It was therefore not surprising when these officials seemed to be on a heightened sense of alert after I disclosed that prior to becoming a consultant I used to work for the Ontario government.

The competitive dynamic between our two countries on auto investment has started to be covered in the media. One example was when it was revealed in January 2015 that Ontario had lost a bid for a new Ford mandate. In response, Ontario’s Minister of Economic Development and Trade, Hon. Brad Duguid, commented that Mexico had extended the company “a generous offer that was, frankly unprecedented.” He went on to characterize the offer as “silly money.”6 Many other outlets including BNN, Forbes, and Bloomberg Media have also started covering Mexico’s manufacturing resurgence.

For a quick aside on direct incentives, it may be true that government grants are part of what is helping these companies commit to Mexico. Unfortunately, public data on these incentives has been hard to uncover, but labour rates aren’t likely the only thing fueling auto investment in the country. Mexico has recognized that with tens of thousands of jobs at stake in an increasingly globalized economy, competition for one of the most valuable streams of investment – auto plants – has forced them to ‘up their game.’ Regardless of one’s politics, we must recognize that in this increasingly competitive space, governments will continue to have a greater role to play.

While somewhat surprised by what I interpreted as defensiveness by the Mexican officials, I was more curious about what they suggested next. They proposed that Mexico should actually become an auto industry partner with Canada.

Mexico, they admitted, benefits from low labour rates which are a fraction of what they are in Canada and the U.S. Because of this, they are less equipped to handle the industry’s innovation and research and development (R&D) requirements. By leveraging our highly skilled, highly trained workforce, and maintaining their labour cost advantages in production work, Mexico and Canada could have a mutually prosperous relationship based on the shared interest in fostering domestic auto sector growth. This was the essence of their proposal; I can only assume they have conveyed that sentiment to government and business leaders.

Being a proponent of our Ontario economy, I was encouraged by this. Mexican officials seemed to recognize the value of our province in the global context, and wanted to seek our support in helping them sustain their economic growth. Upon reflection, however, it seemed less sincere. In this scenario Ontario would get the innovation work, and Mexico would get the large multi-billion dollar plants, the suppliers, and the thousands of jobs. One has only to look at the newly announced Daimler/Nissan plant in Aguascalientes to realize that it would have been nice to have had those 5,700 direct jobs in Hamilton, Windsor, London, or even in my government-focused hometown of Ottawa. In the end I appreciated the offer of partnership, but saw it for it likely was – a consolation prize. From Ontario’s perspective, you have to contemplate if this consolation is something that we should be comfortable with.

The lasting impression left with me after these trips to Mexico is that the country is comfortable knowing that it has the competitive advantage over Canada when it comes to auto investment. Despite the fact that Ontario has been the number one jurisdiction in North America for Foreign Direct Investment (FDI) over the past two years, this has to be troubling given our dependence on the sector. I can only surmise that the province and Canada be adjusting its ‘pitch’ as it tries to regain some leverage in the current “Mexican standoff” with its NAFTA counterpart. The tools that our governments will use in this battle – be they grants, tax incentives, regulations, or other promotional tools and tactics – should be monitored with interest.

1. Details of the Kia plant investment in Monterrey reported on by Bloomberg Business, August 27, 2014: http://bloom.bg/1ZOjPX2 ↩

2. Details of the Audi plant investment in Puebla reported by Bloomberg Business, May 3, 2013: http://bloom.bg/1PxrlWV ↩

3. Details of the BMW plant in San Luis Potosi reported by CBC Business News, July 4, 2014: http://bit.ly/1OKO91Z↩

4. Details of the Daimler/Nissan plant reported by Bloomberg Business, June 27, 2014: http://bloom.bg/1QorQiR ↩

5. Details of the Toyota plant announcement reported by CBC Business News, April 15, 2015: http://bit.ly/20psXUp↩

6. Referenced in the article "Government Support, Labour Costs Steered Ford's Engine Production to Mexico Instead of Ontario" by Kristine Owram, National Post, January 14, 2015: http://bit.ly/1QfuQ2k ↩

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