Mexico is a fantastic place for manufacturing automobiles, according to the Detroit Free Press (DFP). The article cited low wages and the excellent trade relationships between the U.S. and Mexico.
Many highlighted Mexico's strengths as the U.S.'s supply chain partner, making it an ideal offshore location. Companies can ship directly to the U.S. much faster and much easier than moving cars from abroad elsewhere.
"You can go to the west to ship cars up to Vancouver, or Seattle, or you can go to the east coast to ship cars to New York, New Jersey or Europe," said Jim O'Sullivan, president and CEO for Mazda North America. "Or, we have a rail facility there, and we can send cars right into Texas."
Another benefit that Mexico has for offshoring versus somewhere like China is that Mexico has the advantage of virtually tariff-free transportation between the countries, thanks to the North American Free Trade Agreement (NAFTA). Mexico also has free trade agreements with 43 other countries. This places Mexico in the position of a great trade leader, and gives it the potential of becoming a manufacturing powerhouse.
"It's a masterpiece of economic development," said Sean McAlinden, senior economist for the Center for Automotive Research.
For some sectors, low labor costs are the best part of expanding to Mexico. The average Mexican worker makes $7.79 an hour with benefits, in comparison to $37.38 in the U.S. and $39.04 in Canada. Frank Diaz, Nissan senior vice president of sales and marketing, said that it's hard to beat the combination of low wages and high quality that Mexico delivers, according to the DFP.
Los Angeles is a major trader with Mexico
Even cities like Los Angeles are starting to improve trade activity between the U.S. and Mexico. The mayor of Los Angeles, Eric Garcetti, was in Mexico City recently with the intention of promoting trade between Mexico and Los Angeles, CBS affiliate KCAL reported. Mexico is one of Los Angeles's major foreign investors, and trade between LA and Mexico reached $14.91 billion in 2010.
"We're a global city and part of a global economy, and local jobs in L.A. depends on those strong ties that we have," Garcetti said. "So I'm gonna be out there as the mayor of L.A. hustling for that investment, those contracts."
Mexico is popular with the Japanese
Companies like Honda and Toyota are building their new factories in Mexico to avoid the fluctuations of Japan's yen, according to the DFP. Additionally, it is just cheaper to build cars (small ones in particular) in Mexico and ship them to the U.S. than it is to build them in a developed nation like Japan. Nissan expanded its plant in Aguascalientes in order to meet demand for its Sentra compact sedans.
According to Rick Schostek, senior vice president of Honda North America, Mexico is "the proper place" to build a subcompact vehicle, due to Mexico's low labor rates and proximity to North America.
U.S. auto sales set to expand in 2014
Much of the expansion to Mexico has been fueled by automakers seeking to increase their inventory. The U.S. is predicted to buy 16 million cars in the next year, according to Auto News. George Magliano, chief economist for IHS Automotive, said in an interview, "It's a reflection of people's willingness to buy and the strength of the product out there."
Cars are now being built better in Mexico than they have been at any other time, according to the DFP, and many automakers are taking advantage of this and expanding to Mexico through offshoring.
Mike Jackson is director of HIS Automotives North American vehicle production forecasting, and he predicts that auto production will rise from 2.9 million vehicles in 2013 to 4.5 million by 2020.
Companies seeking to begin manufacturing in Mexico may benefit from a nearshoring shelter company. Such a company facilitates expansion into foreign markets and makes it easy for manufacturing companies to speed up auto production.
The Offshore Group: You Manufacture ... We Do The Rest.