By on June 16, 2015

National Flag of Mexico

Despite being unified on the trading front, Mexico and the Southeastern United States are besting Canada and Detroit in the automotive industry game.

Presently, Mexico’s contribution to overall North American annual production came to 18.8 percent in 2014, Detroit Free Press says, double the percentage of vehicles the country’s burgeoning industry made back in 2004. Conversely, Canada’s percentage fell from 16.9 percent a decade earlier, to 14.1 percent last year. The U.S. also lost production volume over the years, rebounding to 67.1 percent in 2014 after its seven-year-decline from a peak of 73.6 percent ended in 2011.

While the U.S. still makes the most vehicles per year, more production is heading south of the Mason-Dixon when not crossing the border entirely. DesRosiers Automotive Consultants president Dennis DesRosiers says “over half the capacity and 80 percent to 90 percent of investment dollars are going to the U.S. South or Mexico,” leaving Detroit and the Canadian auto industry out in the cold.

DesRosiers adds Canada’s industry could downsize to five automakers with a single factory each over the next 10 to 20 years, while Mexico could grow volume to an additional 1 million or 2 million units per year, thanks to heavy investments — $7 billion alone in 2014 — from North American and foreign automakers alike.

Meanwhile, IHS Automotive Consulting managing director Michael Robinet expects production volume in the Southeastern U.S. to grow to 5 million units, while volume in the Midwest will remain around 6 million units/year. Said growth is fueled by a combination of lower labor costs compared to Detroit, a nonunionized workforce at the ready, and state and local financial incentives meant to lure transplants to bring jobs to the region.

As for Canada, the nation’s industry has dwindled from 20 assembly plants — all established under the 1965 Auto Pact trade agreement between the U.S. and Canada — to just 10 in 2014 under the North American Free Trade Agreement. As a result, 2.1 million units of volume were lost since 1992, and is expected to jump to 2.6 million when General Motors ends some production at its plants in Oshawa, Ontario next year. More could be lost if FCA decides to move production of its full-size vehicles out of Canada, as well, a move which some believe will decide the ultimate fate of Canada’s industry.

No matter the projections, all three parties to the trade agreement will continue to fluctuate as far as investment is concerned. GM North America president Alan Batey said as much, stating the automaker wants to maintain a “balanced presence” in all three nations to better handle currency fluctuations and shipping costs, a view held among the manufacturers investing their resources into North America’s overall auto industry.

[Photo credit: iivangm/Flickr/CC BY 2.0]

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22 Comments on “Mexico, Southeastern US Besting Canada, Detroit In Auto Manufacturing...”

  • avatar

    In a desperate move, detroit and ontario workers should leave UAW/CAW and do business exactly like, if not better, than the south. They have to be more competitive.

    Whats better? UAW affiliation without a job, or no UAW affilitation and going to work every day?

    • 0 avatar

      “They have to be more competitive”

      Unionized workers aren’t really that much cheaper, at least at the OEMs themselves. Labour, frankly, isn’t a huge cost: perhaps 3-5% of MSRP. The difference between the transplants (who aren’t unionized) and the D3 (who are) is maybe 2% of MSRP.

      Dealer markup is a bigger percentage than labour.

      The huge bulk of a vehicle’s cost is raw materials and finished parts. That has to do with either commodity prices and/or supply-chain efficiency. A further percent is financing, exh and costs offset by favourable tax incentives, grants and such. Oh, and profits, such as there is.

      Basically, though, this is about playing region off against region. It isn’t about labour costs and hasn’t been for a couple of decades; it’s about getting Michigan and Ontario to cough up.

      Or rather, corporate welfare.

      The “it’s the greedy union” is a really good deflection tactic, but that’s all it is: deflection. You’re supposed to hate the union guy and ignore the rich guys who are making out like bandits.

      I’m reminded of the following anecdote: “A public union employee, a tea party activist, and the CEO of a multinational corporation sit down at a table that has a plate with a dozen cookies on it. The CEO immediately takes 11 of the cookies, then he turns to the tea partier and says, ‘Watch out for that union guy. He wants a piece of your cookie.’”

      • 0 avatar

        If the difference between unionized workers and non unionized is 2% of MSRP that is a big deal in a business with low single digit profit margins.

        • 0 avatar

          “If the difference between unionized workers and non unionized is 2% of MSRP that is a big deal in a business with low single digit profit margins.”

          I understand, but it’s not the reason to peg the UAW/CAW (or labour in general) for the flight of jobs south. To whit: the (un-unionized) transplants also aren’t expanding much, either.

          Saying “wah, wah, it’s the union’s fault!” is either missing the point or mindless union-bashing: it isn’t about labour costs, it’s about wringing concessions out of suppliers and _especially_ out of local and state/provincial governments.

          Mexico might be marginally cheaper, but labour isn’t a huge reason why, but it’ll get lower still as the supply chain there gets more extensive, which is why Ontario and Michigan are trying to keep as much of the market as they can because that supply chain is very hard to re-establish once it’s gone.

          Side note: Ontario’s woes are almost exclusively due to Dutch disease. Even with a favourable exchange rate, those suppliers aren’t going to come back unless the OEMs do, and the OEMs aren’t going to invest without a deep and cheap supply chain. Exactly none of this is labour’s fault; they can’t control currency rates, nor provide start-up funding.

          • 0 avatar

            The transplants aren’t expanding much because we’ve just been through a bruising recession/depression that saw the elimination of a lot of overcapacity within the industry.

            The market still hasn’t quite reached its pre-downturn peak. This is also a mature industry. Is there a reason for anyone to add much production capacity in this country?

          • 0 avatar

            And from what I can ascertain is being handed to automakers to produce in the SE US, the USA besting Ontario for auto jobs appears to be somewhat of a Pyrrhic victory.

      • 0 avatar
        SCE to AUX

        Assuming you’re correct about the 2% difference (let’s say $500), that’s pretty huge.

        Mfrs are all about reducing product cost and personnel hassle. It is very difficult for an engineer – or a team of them – to find 2% cost reduction in material cost. And don’t forget that ‘material’ cost has its own labor cost built in by upstream suppliers, so really that 2% is much, much higher.

        In my company, the default path is now China, and it’s strictly due to the upstream labor content. We still assemble in the US, but Mexico is probably the next step. That keeps transportation costs down.

        But sticking with just the 2% figure, that $500 is potential cash on the hood for a tight sales month.

        It’s easier to build a plant in the Southeast than to find another $500 to scrape out of a car, and then you don’t have to worry about renegotiating contracts with grouchy unions, either.

        On Hyundai Sonata production alone, that 2% translates to $300k rolling out of the factory every day. It doesn’t take long to realize you’re better off moving the production facility to a friendlier climate.

        As for corporate welfare (which nobody supports until it’s their job being bought), all the kids are doing it. Michigan and Ontario haven’t exactly been stingy with the handouts.

        • 0 avatar

          FWIW, if you look at the history (nearly all) of the transplant factories in the US South, the state and local governments have essentially given the land and infrastructure free to the car companies. The promise (?) hope (?) that the labor force remains union free is just that. It’s not like there isn’t any unionization in the US South, it’s rather sparse. For that matter, it’s not like transplant factories haven’t been unionized, either. Just not in the US South, yet. The jury is still out on VW.

          WRT Mexico, they have the killer app; the FTA that allows them to send completed vehicles nearly anywhere in the region. The US and Canada are trying to catch up, but have lost the advantage for the time being.

          Additionally, while the Great Recession cleared out some overcapacity in the US and Canada, it wasn’t enough. Why do we think Marchionne is frantically trying to find a merger partner for FCA? The scale isn’t there and not enough overcapacity was weeded out in the last recession. Let’s not get into worldwide overcapacity, truly the elephant in the room.

          I’ve often thought these transplant factories are great PR stories; but with worldwide overcapacity, what sense does it make to pit local and state governments against one another when another sweetheart deal is waiting around the corner?

          Not that it matters a great deal, but GM has been investing mightily in the midwest; many upgrades to existing facilities although any new ones were built before the Great Recession. Maybe they’re trying to hit things where they ain’t, maybe they know something about FTA’s we’re not aware of.

          Regardless, based on what I know now, if I were in charge of starting a factory, Mexico is where I would do it. Until FTAs change. Then, on to the next place, where ever that is.

      • 0 avatar

        Awesome anecdote in the last paragraph, psar. My compliments.

        This trend is just another symptom of the worldwide race to the bottom in worker compensation.

        As for the American South: Statistically, the South takes more tax money than it contributes, while the Northeast and Midwest contribute more than they take. Meanwhile the Sun Belt forces right-wing social policies upon the Northeast and Midwest that they despise, providing the backbone of voter support that is effectively preventing self-rule and enabling billionaire control of the entire country.

        A great many Southerners bizarrely portray themselves as more “patriotic” than the rest of their countrymen, while regularly threatening to secede as they unsuccessfully attempted over a century ago, killing tens of thousands in a vain effort to maintain the “right” to enslave the most disadvantaged of their fellows. Now their economic gullibility and blind prejudice is achieving that goal for the rest of the nation, and for themselves, without a shot being fired. Speaking as one Midwesterner, my reply to their secession “threat” is, “There’s the door. Please go through it — just don’t expect to be invited back.”

        • 0 avatar

          States do not pay federal taxes. Individuals and businesses located within various states pay federal taxes.

          There are more high-income people – who pay most federal income taxes – along with more large corporations, located in states such as New York or California than in states such as Alabama or North Carolina.

          If one wants to correct this situation, the solution is quite simple.

          One, cut federal tax rates on high earners.

          Two, start taxing the 40+ percent of taxpayers who do not pay any federal income taxes.

          Three, reduce payments under Medicare and Social Security, as benefits paid under those federal programs are included in the calculations that purport to show what each state “gets” from the federal government.

          Of course, the people who vehemently oppose those moves tend not to be right-wing Republicans…

          At any rate, the transplant factories have been operating for over 30 years now, and I have yet to hear any credible evidence that they have turned into a House of Horrors out of Dickens novel.

          And, yes, in the real world, where automobile companies strive to shave a dollar off the cost of a part, a 2 percent cost differential is not exactly something to be ignored.

        • 0 avatar
          SCE to AUX

          @tonycd: Nice political grandstand, but you still don’t explain why mfrs prefer to build a plant in the South.

          Surely you’ve complied with a corollary to Godwin’s rule, which requires a mention of slavery and secession in any discussion of economics, not to mention class envy.

          As for the populist phrase “race to the bottom”, show me a consumer who happily pays more for the equivalent product, and I’ll show you a ghost.

          Since the dawn of time, staying in business has always been about reducing cost. If you want to talk about product quality or working conditions, that’s a different discussion. But when it comes down to cost alone, consumers don’t give a hoot, and neither do you. Please tell me you go out of your way to buy American-made shoes, just because it’s the patriotic thing to do.

          As for the South and the Civil War, as a Northerner I say the South should have freed the slaves and then seceded. They staked their principles on the wrong topic. Lincoln was right to fight it, but we can also thank him for Big Government.

          Back on topic, there isn’t a single benefit for mfrs to build a unionized plant in North America.

      • 0 avatar

        Last I checked, labor costs amounted to roughly 10% of the cost of a typical car.

        That isn’t much. But any cost reductions go to the bottom line, so they can have a fair impact on net earnings.

        Moreover, there aren’t many other areas in which costs can be reduced. The costs of commodities such as steel are pretty much the same everywhere, while parts costs are squeezed about as much as they can be. Aside from improving efficiencies (more platform sharing, parts consolidation, efficient plant operation, etc.), labor cost reductions provide one of the only remaining opportunities.

        That being said, companies do play off states and countries against each other.

    • 0 avatar

      Why are plants relocating to the south? Lots of reasons, none of which have much to do with unions.

      1) Toyota builds Corollas in Tupelo, Mississippi. What’s a living wage in Tupelo versus a northern or midwestern city? It’s a LOT lower. Along the same lines, a lot was made of Boeing building parts of the 787 in South Carolina versus Seattle, and how that proved union labor was overpriced. But the fact is that a decent wage in South Carolina wouldn’t even be close to a living wage in Seattle, which is a very expensive place to live. You have to pay workers more to live in urban areas, no matter whether they’re in unions or not. Thus, the move towards small southern towns.

      2) The country’s population is shifting towards the south, so it just makes good sense to build cars closer to where the growth is – it lessens transportation costs.

      3) As has been previously stated, state and local governments down south are falling all over themselves with tax incentives for business to locate there.

      4) Any plant in the United States can be unionized if the workers want it. And don’t fool yourself – if employers don’t offer decent working conditions, they will face unionization, no matter where the plant is and no matter how Republican the local workers are. Money talks.

  • avatar

    This may have something to do with the fact that Mexico can export its goods and services duty free to North America, Europe and much of South American. Canada and the USA can export duty-free to Mexico, but not to Europe or South America.

  • avatar

    CrapBox – duties tend to go both ways with the EU. Canada has negotiated a FTA with the EU and it will lift most barriers. Vehicles built in Canada can go to the EU duty free and vise versa. Canada is even going to recognize EU emissions and safety standards. Interestingly enough the EU has included a clause defining what a Canadian vehicle is. It closes the loophole of knock down kits being sent to a FTA country and then doing the re-assembly. That clause will be lifted once the USA signs a FTA with the EU.

    • 0 avatar

      Good news. I thought Europe imposed a 10% tariff on Canadian vehicles while Canada imposed a 6.1% tariff on European vehicles. Mexico, on the other hand, could export vehicles such as Beetle to both Europe and Canada without paying a thing.

      Let’s hope that the vested interests (primarily farmers on both sides of the Atlantic) don’t scuttle the agreement.

  • avatar

    A Trump presidency would certainly upset the apple cart…

    If he builds the “big wall” between Mexico and the U.S. (and he says he’ll “build it cheap” – I guess using Mexican labor), and levies a 35% tax on vehicles imported from there, well, that’s a winner! /sarc

  • avatar

    The biggest difference between unionized and non-unionized workers is not labor cost, but labor flexibility, like filing a grievance when a new piece of machinery eliminates some jobs, or refusing to work overtime if a few “brothers” are still laid off.

    You need to bank on a reliable workforce that is not going to fight every change you try to make, otherwise, I agree, pay is the least of problems.

    • 0 avatar

      @kitzler – valid point. Inflexibility in a workplace drives up costs.

      Benefits is another area that is expensive and one thing that really hurt companies were UAW legacy costs or retirement plans.

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