It’s become one of those unassailable truths about manufacturing: Mexico is winning in manufacturing because of cheap labor.
But what if that’s not entirely true?
A recent Bloomberg article by David Welch and Dave Merrill present some compelling evidence that it’s not low labor rates that make Mexico hypercompetitive.
In the article, Welch and Merrill use a USD$25,000 midsize sedan as a typical example. Overall hourly compensation in auto assembly plants is approximately 30 percent lower for Mexican workers compared to the US. For that midsized car, this amounts to about $600 per vehicle.
The article notes however, that Mexican infrastructure is relatively poor, adding $300 per car in additional shipping expenses for vehicles shipping to Europe and an extra 900 bucks for US-bound vehicles. The net cost advantage per car works out at approximately $300.
Welch and Merrill note that automakers can save $1500 per car using cheaper Mexican parts, savings which come from lower Mexican wages, but also because many parts are imported into Mexico tariff free from Europe and Asia.
It’s $4300 per vehicle cheaper to build in Mexico and ship to Europe compared to US production, because Mexico has a free trade deal with the European Union.
Most of Mexico’s auto exports still come to the US and Canada tariff free under NAFTA, with Mexico sending some 2 million cars a year into the US. That’s over half of Mexico’s total production. But the article states that by 2018, 28 percent of Mexico’s production will go to non-NAFTA countries, up from 18 percent in 2015.
The problem is exacerbated by major automakers’ desire to switch to global vehicle platforms. One plant may be expected to produce vehicles for multiple markets, giving a distinct advantage to jurisdictions with multiple trade deals in place globally.
There’s lots of money on the table: in 2014, automakers avoided approximately $770 million in tariffs by building in Mexico rather than the US.
During his campaign, Donald Trump called for a 35 percent tariff on autos produced in Mexico. The paradox of Trump’s “Made In America” strategy is that to make it work, for carmakers at least, the US will need low or no tariff trade deals with major economies in Asia and Europe.
Now that automakers are truly global producers, protectionism just doesn’t make sense from a major manufacturer’s standpoint. So how will Trump boost automaking jobs in the US? He’ll have tackle the tax and regulatory environment and do it fast before rapidly advancing automation makes the issue irrelevant.
Repatriating a billion-dollar plant may add only a few dozen jobs, a low political rate of return in any congressional district.
To read the article by David Welch and Dave Merrill, visit the Bloomberg website.