Concerns about increased costs and violence in the rapidly expanding Mexico

As Mexico’s automotive sector is expanding, several businesses claim that in certain regions of the nation, they are encountering additional problems.

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Some automakers claim they are encountering concerning problems as they explore investing in Mexico.

Even while the sector is depending on the nation more than ever, it is becoming a more costly play for some businesses due to issues including safety concerns, workforce churn, wage inflation, and the effect of a higher peso.

Forvia CEO Patrick Koller told Automotive News, “Security is an issue.” Both labor and overall inflation are high. The shortage of labor is becoming a problem. Not that things are better in the United States, but things are beginning to go wrong in Mexico as well.

Mexico’s role in the North American automotive supply chain is becoming more and more significant as suppliers and automakers work to reduce their reliance on China and other foreign markets.

Increased production of cars parts in Mexico is the result of a number of factors, including high tariffs imposed by the United States on goods manufactured in China, policies encouraging North American manufacturing, and businesses trying to avoid reliving the supply chain difficulties seen during the pandemic.

While imports from China have decreased throughout that period, the U.S. Census Bureau reports that imports from Mexico made up 45% of all motor vehicle parts imported into the country in 2023 as opposed to 40% in 2017.

“We’re trying to pull away from China, which is why we’re seeing more and more in Mexico,” AlixPartners managing director Mark Wakefield stated. “With U.S. labor rates going up and general inflation in the U.S., there’s more incentive to look for other options, and Mexico looks attractive from that perspective.”

But in Mexico, manufacturers are having trouble keeping up with rising wage inflation. The Federal Reserve Bank of Dallas reported in May that labor expenses in Mexico are increasing more quickly than labor productivity, with average daily wages rising by as much as 14% between 2019 and 2023.

The productivity of labor has not increased in line with the increases in pay. According to the report, labor expenses in Mexico’s manufacturing have climbed at a rate that is 1.8 times faster than labor productivity since 2019.

“When labor costs rise faster than labor productivity, they can impede hiring and lower the competitiveness of domestic and international firms in Mexico,” the report stated.

While many Mexican businesses can tolerate wage hikes, Wakefield noted that suppliers with narrow profit margins may be more negatively affected.

Squeezed margins
The supplier industry has experienced a reduction in margins due to decreased manufacturing of new vehicles and rising expenses.

“If you have business cases that are on the margin, then it can get difficult,” he stated. “If you quoted a business at $8 per hour instead of $8.20, that can be meaningful.”

In light of narrow margins, suppliers have been highlighting labor inflation as a major problem.

Lear Corp. experienced a global increase in its yearly salary expenditures of around $60 million between 2022 and 2023.

The corporation has responded by putting in place a variety of cost-cutting measures, such as increasing automation to increase productivity and shifting production to less expensive locations.

On a teleconference with analysts and investors in February, Lear CFO Jason Cardew stated that part of this involves shifting production from close to the border between the United States and Mexico further inland.

“I think one of the biggest challenges we have is in regards to wage inflation,” he stated.

According to Wakefield, businesses also face a problem with staff turnover, particularly with trained tradespeople.

“Turnover is really high, and the training gets to be difficult, particularly when you just have an incredible amount of turnover due to people taking a small amount more to move elsewhere,” he stated.

more robust peso
The strengthening of the peso has hurt auto businesses operating in Mexico in addition to increasing labor expenses. The Fed reports that during the previous two years, the peso appreciated by almost 20 percent versus the US dollar, which resulted in increased export expenses.

High rates of criminality and violence were also mentioned by the Fed as “obstacles to economic activity and foreign and domestic investment.” Homicides have increased by 25% from the 2015–18 period to an average of approximately 35,500 each year nationwide over the last four years, according to the report’s authors.

Koller of Forvia reported that the company has lost trucks that were delivering parts in the area.

Koller stated, “The level of corruption is huge and is increasing every day,” indicating that the corporation is highly concerned about this when deciding where to invest.

When deciding where to locate a hydrogen tank manufacturing, the corporation is still likely to go with Mexico despite these reservations, mostly since that is where its customers are most likely to open offices.

“The tanks are big and transportation of these tanks is not so easy,” Koller stated.


Post time: Jul-04-2024