Ford investment highlights Mexico's booming carmaking sector

Ford is poised to give Mexico's carmaking sector a fresh boost on Friday with the announcement of $2.5bn in manufacturing investments, further burnishing the reputation of the central American nation as a rising automotive powerhouse.

Michigan-based Ford is planning to spend $1.3bn expanding an engine factory in the northern state of Chihuahua and $1.2bn on a new gearbox plant in the central state of Guanajuato, according to several people familiar with the matter. Ford declined to comment.

The news follows confirmation this week that Toyota will spend about $1bn to build a new plant, also in Guanajuato, ending a three-year moratorium on new factories at the world's largest carmaker by sales.

The Mexican investments by Ford and Toyota, which could create as many as 6,000 jobs, underline the emerging economy's impressive rise in the car industry over recent decades.

In 1985, Mexico accounted for just 3 per cent of light vehicle production in North America, according to LMC Automotive, a consultancy. Last year, this figure had risen to almost 20 per cent, with the US losing roughly the same share over the period.

Carmakers worldwide have poured into Mexico in recent years, attracted by cheap labour costs and lower tariffs due to its extensive free trade agreement network.

The Mexican investments are primarily aimed at producing vehicles for the US, the world's second-biggest car market after China. US sales are at their highest levels since the financial crisis.

Mexico's share of North American production is expected to rise to a quarter by 2022, and some analysts say it would not be absurd to think of the country overtaking the US for the number of cars made. The US last year made 11.5m vehicles, compared to more than 3m in Mexico.

"The US is losing opportunities to Mexico," says Karl Brauer, analyst at Kelly Blue Book, an automotive research company. "Who would have thought that Mexico would be more conducive to building cars than the US because of having more trading routes and more consistent costs?"

Since mid-2013, Nissan, Honda and Mazda have each opened new plants in Mexico. BMW and Audi are building facilities in Mexico, underlining how a country that was once the place to build small, low-cost cars is now grabbing its share of premium work too.

The business case for manufacturing in Mexico is compelling. According to research by Evercore ISI, average hourly labour costs excluding benefits can be as low as $8 to $10. By comparison, Ford, General Motors and Fiat Chrysler Automobiles pay an average $48 to $58 an hour in their US factories.

Despite rumours of teething problems at the new Honda plant, Mexico has largely shed its reputation for poor quality and offers well-established infrastructure and transportation networks. There is now a recognised carmaking cluster in Mexico's central and northern industrial heartlands.

So-called maquiladora factories are allowed to import materials and equipment and export manufactured products duty-free under the North American Free Trade Agreement of 1994 involving the US, Mexico and Canada.

Ildefonso Guajardo, Mexico's economy minister, tells the Financial Times: "More than incentives, at times the most important part is guaranteeing that plants have good logistics in terms of public infrastructure."

He says the wave of investment in the sector under the current presidency, both from carmakers and parts producers, adds up to almost $20bn and will create 50,000 jobs. Mexico has risen to become the world's seventh-biggest producer and fourth-biggest exporter of cars. "By 2020, we expect with all this investment that last year's production of some 3.2m cars will rise to 5m," says Mr Guajardo.

The growth in Mexico is part of a southward drift of car production in North America, says Justin Cox at LMC.

However, with the likes of Volvo announcing US expansion, some analysts warn that North American capacity could be getting ahead of demand in the US.

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"[The US] is not a market that is structurally growing," says Arndt Ellinghorst, analyst at Evercore ISI. "It's a cyclical industry at the end of the day, and history tells us capacity is added at the peak of the market."

But, when the next downturn comes, carmakers' Mexican factories would likely win out over other more expensive North American plants. And there are no signs the flood of carmakers moving into Mexico is slowing.

Guanajuato is now the Mexican state that is home to the largest number of carmakers, with General Motors, Honda, Mazda and now Toyota, which will make its popular Corolla in Mexico rather than Canada.

Guillermo Romero, economy minister for the state, says Guanajuato's attractiveness is strengthened by stable economic policies, security and the growing cluster of car plants.

"There will be more [carmakers] coming," he tells the FT. "We have hundreds of projects from interested companies and 60 per cent of those are automotive and car parts."

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