In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s. Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.
This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles.
Obviously, such a trend implies that a global production strategy is at-play within these moves. Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.
As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations. Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.
The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.
The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models. Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence. Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.
Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.
There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.