EU Pact Should Boost Mexico’s Auto Industry

This country’s automobile industry, already booming thanks to free-trade pacts with the U.S. and Canada, can expect another big boost from the historic trade agreement signed last week with the European Union.

It will mean even more Mexican-built cars streaming into the U.S., on top of the hundreds of thousands of Volkswagen Beetles, Dodge Rams, Plymouth Neons, Chevy Cavaliers and other models already shipped north of the border each year.

Mexican officials and industry watchers expect a new burst of investment from Europe because the pact sharply reduces or eliminates tariffs on all European manufactured goods, including auto parts, by 2003.

The trade pact will thus make Mexico more attractive to European car makers both as a market for European makes and as a place to make cars to sell to the U.S.

Car and truck production in Mexico will top 1.5 million this year, double the 1990 total, and production is expected to grow by at least an additional million units by 2004. Auto makers here, with almost half a million workers, already are Mexico’s largest private employers.

One of the first European auto makers to capitalize on the new accord could be Renault of France, which is expected to announce in a matter of days that it will begin building a new subcompact model, the Clio, at one of two Mexican factories owned by its new partner Nissan.

France’s Peugeot is also said to be interested in cranking up car production here. And Volkswagen is considering expanding its hugely successful factory in Puebla, where it produces the Beetle, or the company may build another Mexican factory altogether, industry sources say.

“The automotive sector will be among the most exploited sectors of the agreement in terms of boosting trade between Europe and Mexico,” said Mario Lopez, an economist with Irela, an EU-funded think tank in Madrid.

The predicted European influx would further establish Mexico as a major auto production center for North America. U.S.-based car makers are increasingly integrating their parts production and final assembly operations among Canada, Mexico and the U.S. Of the three countries, Mexico is expected to account for the largest share of car-sales growth in North America over the next five years, according to consulting firm A.T. Kearney.

Mexican auto manufacturing has made huge gains in recent years, as U.S. and foreign manufacturers targeting the U.S. market have expanded or moved here to take advantage of lower U.S.-Mexico trade barriers and low wages. Labor here costs about one-seventh what it does in the U.S., and overall production costs are about 20% lower.

Ford, General Motors, Nissan, DaimlerChrysler and Volkswagen have poured billions of dollars into Mexico since the North American Free Trade Agreement took effect in 1994, with Mexico taking in $2.5 billion in auto investment in 1998 alone. Investment is swelling because manufacturers are recognizing the huge savings in making cars in Mexico, even after added transportation costs from Mexico, industry sources said.

The greater European presence in Mexico will intensify competition in the U.S. market for Detroit and Japanese makers. And the more Mexican-built cars that are sent to the U.S., the more jobs will be sent to Mexico. U.S. car and truck production is expected to drop 10% over the next five years, said Carlos Niezen, a manager at A.T. Kearney’s Mexico City office.

The trade deal with Mexico was much sought after by the Europeans, who since NAFTA have sat by and watched their share of total Mexico trade shrink from 16% in 1990 to 8% in 1998, according to Irela statistics. Over the same period, the U.S.’ share of Mexican trade grew to 75% from 66%

Mexico has also reached out to Europe as it has sought to lessen its heavy reliance on Uncle Sam. The EU pact is the eighth bilateral trade accord Mexico has signed, and more are on the way.

Renault’s Clio will be directed at Mexican consumers, who only now are regaining their purchasing power since the peso was devalued nearly five years ago, Niezen said. Mexico’s domestic auto sales are still not back to pre-devaluation levels.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Making Tracks

Mexico’s booming auto industry will benefit from the Mexico-European Union free trade accord signed last week, which should attract more European producers. Mexican vehicle production, including portion built for export, principally to the United States: 1998:

978,758 cars exported

1.43 million cars produced

Source: Mexican Automotive Industry Assn.