Why Are Auto Manufacturers Moving to Mexico?

Source: Thinkstock

Source: Thinkstock

One of the advantages that automakers have is the ability to have multiple sites of production all working simultaneously. This allows them to specialize production plants toward specific vehicles or platforms, and also set up shop where tax and trade agreements offer the most advantage. Production is constantly shifting to different places, and the trend certainly hasn’t stopped as of late.

Recent reports have rumors swirling that General Motors (NYSE:GM) is planning on moving production of their Chevrolet Equinox and Cadillac SRX SUVs to Mexico from Tennessee, in order to take advantage of the country’s extensive free-trade agreement structure. But that doesn’t mean the company is completely giving up on the Tennessee plant; in fact, some production will remain there, it’s just unclear as of right now what GM plans to do. But the news does provide some insight into what seems to be the next big thing in auto manufacturing: moving to Mexico.

General Motors is not the only big car builder to make recent waves with plans of moving south of the border. Kia has also announced plans to build a $1 billion factory to open in 2016, and there have also been plans released by Infiniti, Mercedes-Benz, and BMW.

It seems that Mexico is destined to become the world’s new auto manufacturing hub. So what makes Mexico so attractive to auto companies? According to an article from Forbes, it’s the fact that the Mexican government has been hard at work creating a hospitable business environment over the past 10 to 15 years, while the United States has been focusing their efforts on exhaustive military campaigns. The Mexicans have been able to secure some of the more liberal trade agreements in the world, and their total number of agreements totals 44. As for the United States, we only have 20, and haven’t worked out a new deal since 2012.

Forbes reports that $19 billion in new investment has come to Mexico from foreign automakers over the past few years, and production is set to hit 3.2 million vehicles in 2014. That number is expected to hit 4.7 million by 2020.

Source: iStock

Source: iStock

The advantages of moving to Mexico are painfully obvious. It makes for a perfect production and exporting grounds for European and Asian car companies, and also allows for cheaper parts and labor than they could probably find in the United States. While a lot of American companies export jobs to countries with cheaper labor like China or India, seeing America’s automakers shift production to Mexico has to sting a little big.

But this is all coming after years of hard work from the Mexicans, and it’s due to change the country’s economy in a big way. “Mexico has become a superpower in cars,” chief executive of Sanluis Rassini North America told Forbes“It’s like 3 million years ago and a meteorite slammed into the Yucatán Peninsula. The sheer size of the investments changes the face of the Earth. One day there’s a guy plowing the land with a horse, and now there’s a factory there.”

Things sure are exciting from the perspective of the Mexicans, who are due to cash in big time by attracting so much foreign investment. But the car companies themselves have plenty of reason to be giddy as well, as they have found a safe, cost-effective launching pad from which to attack North and South American markets.

“We are committed to producing world-class quality vehicles here in Mexico that feature industry-leading styling and high-tech convenience and safety features that customers have come to expect from Kia, while making significant contributions to both the economic growth of the State of Nuevo León and the future development of the Mexican automotive industry,” said Hyoung-Keun (Hank) Lee, Vice Chairman of Kia Motors Corporation in a press release.

So what does this all mean for American consumers? It could mean lower prices down the line, as transportation and production costs will be cut down for many car companies. But there’s also the chance that the shifting paradigm could have a negative impact on manufacturing jobs that are being shifted south of the border. As for the full range of effects, we’ll have to wait and see. But if America wants to give its economy a shot in the arm by attracting more foreign investment, working out some trade deals and creating a more hospitable environment — as Mexico has — would be a great way to start.

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