Mexico: Riding the waves of manufacturing fortune

March 14, 2014

The recent opening of two automotive assembly plants in Mexico is just the latest sign that Mexico is emerging as a major manufacturing hub for the world. However, in today's economy, global trends shift pretty quickly, and Mexico will have to evolve from just being a land of low-cost labor if it is to remain a major manufacturing player.

Automotive manufacturing in Mexico accelerated in February 2014, which eventually will help the country become the No. 1 exporter of vehicles to the U.S. by the end of 2015.

Honda opened a new manufacturing plant in Guanajuato at the end of February, where it will produce more than 200,000 hatchbacks and compact sport-utility vehicles per year. Only days later, Mazda opened another assembly plant just down the road, where the company will manufacture as many as 230,000 units annually by the time it hits full capacity in 2016. Actually, Toyota plans to have Mazda build about 50,000 compact vehicles at the new plant in 2015. Mexico is becoming the small-car manufacturing capital of North America.

According to research firm IHS Automotive, Mexico is expected to export 1.9 million cars to the U.S. toward the end of next year, slightly edging out Canada, which is expected to send 1.87 million vehicles south to the U.S. Meanwhile, Japan has seen its exports to the U.S. steadily drop—from 1.67 million in 2013 to an expected 1.36 million in 2015. Much of that production has moved to Mexico, where these companies can take advantage of lower labor costs and avoid tariffs on car and truck imports into the U.S.

It’s also a vote of confidence in the Mexican economy. Honda, Mazda, and other automakers want to sell their cars and trucks in the Mexican market. Automotive News, a U.S.-based trade publication, reported that vehicle sales in Mexico have risen more than 7 percent annually since 2010. Mexican consumers have a thirst for small cars, and as anyone who works for GM, Ford, or Chrysler will tell you, the Japanese manufacturers know how to produce and sell well-made compact vehicles.

Of course, the key to prosperity is to always keep an eye on the horizon to see potential challenges and respond to them quicker than the competition. This goal of continuous improvement is commonplace in the lean-manufacturing cultures that dominate many automotive companies. They can’t solely rely on doing the same things tomorrow as were done today because the market is a very dynamic place. Labor rates can go up. An automotive recall is always a possibility. A new automotive design can fall flat on its face. A competitor comes out with an exciting new product that steals the spotlight—and potential buyers. Manufacturers have to be flexible to face whatever comes their way.

Just note that in the beginning of March, Ford announced that it was moving production of two medium-duty truck models from Mexico to an assembly plant in Ohio. Manufacturing technology has a way of closing the gap when it comes to labor costs. For Mexico to be a long-term player in global manufacturing, companies need to commit to being modern manufacturers. That strategy will help them stay afloat in the choppy waters of a global economy.