Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
November 11, 2014 – 10:30 pm ET
CELAYA, Mexico – Along Mexico’s northern border, south to Mexico City, the automotive industry has made its presence felt here for three decades. Automakers from around the globe targeted Mexico as a regional manufacturing destination in the mid-1980’s. Looking for cost-savings opportunities, unique maquiladora locations and assembly plants were established by the OEMs in places like Juarez and Reynosa to hail the birth of Mexico as a critical manufacturing epicenter. But, by the late 1990’s, many automakers and suppliers gave up on Mexico seeking instead the four to five-fold cost advantages that emerged in Asia as China began its economic rise.
What caused the investment shift in the last decade from Mexico to China? Essentially, there were two issues blocking Mexico’s ascendancy in the auto space: First, they did not celebrate education in the same fiercely competitive way that India and China have during the past fifteen years. Thus, the electrical, mechanical and advanced systems engineering students have not been turned out from Mexican universities to populate the auto industry. Instead, these new, young engineers are trained in China, India and, to an alarmingly lesser extent today, the United States. Secondly, while China aggressively pushed to build a reliable automotive supply chain in-country last decade, Mexico never did. Mexico seemed content to do simple assembly operations versus the more complex advanced engineering functions. Ceding those challenges to U.S., German, and China-based suppliers has cost Mexico dearly, in terms of the vast number of strategic R&D centers now located in China and the United States…but not Mexico.
Today Mexico is seeing renewed investment as cross-region shipments have become mostly obsolete. The dollars began to return to Mexico by the end of last decade. Mexico is experiencing a re-emergence in the auto space because rising regional energy prices coupled with new logistical planning tools have made the cost of shipping component parts exclusively from China a thing of the past. Fortifying Mexico’s prominance as a major manufacturing player again is its desirable proximity to North American and South American markets, and co-location requirements that have brought OEMs and suppliers together in-country.
Over the past ten years automakers including Nissan, General Motors, Honda, Volkswagen, Chrysler, Ford and Audi have made significant investments to expand production and build new plants in Mexico. We are now seeing Mexico become an export base to Europe and Latin America, as well as to the U.S. and Canada as its total landed cost becomes a competitive advantage when compared with other global manufacturing locations.
But warning flags have been raised as serious quality issues are spiking south of the border. As OEMs ramped up production in Mexico to take advantage of low labor costs, timely free-trade agreements, and insulation from fluctuations in the yen, they overlooked the dire impact of a market not ready for prime time. With the rise of new investment has come nagging challenges with vehicle completion and delivery. One example is Honda’s new $800 million plant in Celaya, about 160 miles northwest of Mexico City, which has been struggling to meet demand amid problems caused by an unskilled labor force, language barriers, and logistics issues that were unforeseen.
Honda has experienced delays in the delivery of its HR-V on the heels of similar delays that affected the in-country rollout of the Fit last year, which was two months late and continues to be hampered by delays and stolen parts. Make no mistake, this situation is uncharacteristic of Honda and nearly unprecedented in its history. Ron Harbour, a partner at consulting firm Oliver Wyman, recently pointed to shortages in skilled labor and stolen goods shipped via rail transport. “Railcars do get hijacked. You need to hire guards for the trains,” he told Automotive News.
Like Honda, who was counting on the Fit and HR-V to drive sales growth in the U.S. this year, Lincoln also recognized that it has a quality problem with its Mexican-made Lincoln MKZ. After assembly in Mexico, the Lincoln MKZ is now shipped to Michigan for a final quality inspection.
The deeper socio-political issues facing Mexico must be addressed. Beyond the business issue of quality, the ugly dark cloud hanging over Mexico is the rise of corruption and crime throughout the country. Crime has become so widespread and vicious in places where Americans and others have traditionally felt safe that it leaves auto executives wondering about the viability of its current and future investment. This situation cannot go unchecked or Mexico will potentially face a market show-stopper for the second time, with little hope of an encore at that point.
Mexico presents global manufacturers with many advantages but also significant challenges. With so many new plants springing up, finding enough skilled workers will continue to be problematic, and “theft along the rails” must be controlled. If Mexico expects to once again regain its role as a major regional automotive destination, it will need to address these quality hiccups as well as solve its cultural issues of crime and education.
But the even deeper challenge along the way is whether Mexico makes a societal call for more of its young students to become engineers. If that call to action is met, and those Mexican students work to earn their stake in the dizzying array of new technology that is thrust upon the automotive industry nearly every day, then transformational change could take place. And that in turn could pave a new road that points Mexico in an exciting direction with a brighter future in the global auto space.
Phil Biggs is Executive Vice President for the Nashville, TN-based technology company, NeXovation.
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