Is VW-Mexico Pact Heading South?

Chances are that nearly every Volkswagen tooling down a U.S. road was made in the sprawling, meticulously kept VW factory here, one of the largest and most modern in the Americas.

VW’s Puebla operation is no mere assembly line for the Jettas, New Beetles and Cabriolets it sells in the U.S. It’s a remarkably self-contained manufacturing complex that includes metal stamping, motor and axle making and composite forming, as well as its hemispheric research, design and road-test center.

The factory, which opened in 1966 to serve the Mexican market, produces seven out of every 10 VWs sold in the United States and is the only global source for the New Beetle, which has proved to be one of the most noteworthy new-model roll-outs of recent years.

Puebla has taken on primary importance for Volkswagen in the North American market since the closing of the German auto giant’s Pennsylvania plant in 1988. The Mexican factory now is the only VW plant on the continent. All other VWs that show up in U.S. showrooms come from Europe, except for a few thousand shipped from Brazil.

The German parent has invested billions of dollars in Puebla in the last 30 years. Among 34 Volkswagen plants worldwide, it is second only to the headquarters factory in Wolfsburg, Germany, in unit output (a record 440,000 cars last year), employment (about 16,000) and floor space.

But all is not well in this ultramodern, spit-polished operation that hums along in continuous shifts six days a week and features state-of-the-art robots that perform up to 4,000 welds a vehicle.

Volkswagen has just been through a bruising labor battle, the worst in its 31/2 decades in Mexico, in which it was forced to make big wage concessions to auto workers who struck for 18 days in August.

Frustrated with what they say are antiquated Mexican labor laws and unreasonable union leaders, Volkswagen executives say they have suspended a decision to invest $1.5 billion in the Mexico facility in coming years. Although VW will go forward with plans to add a New Beetle convertible assembly line here next year, that is the extent of the company’s commitment.

Money that was to have been allocated for a new parts manufacturing operation and for an assembly line for the next-generation Jetta is being held up. In the next two weeks, top VW managers will meet in Wolfsburg to reconsider Mexico in light of competing destinations for investments in the company’s 33 other global manufacturing centers.

“We will start making New Beetle convertibles in the first half of next year,” Volkswagen spokesman Thomas Karig said. “But we are deferring other decisions. We feel the union is testing its strength, making an example of us.”

Whether the threats are real or are labor relations brinkmanship is unclear. What seems certain is that the strike has left a bitter aftertaste with the company, which tried hard in the year leading up to the strike to “sensitize” union leaders to competitive pressures in global labor costs.

The walkout was the second in two years in which the company made wage concessions significantly higher than the rate of inflation, a trend VW managers say cannot persist if the plant is to remain profitable. The VW worker’s average daily wage of $27 is the highest in Mexico.

Mexico’s labor costs now make Central European and Brazilian operations more attractive, a Volkswagen spokesman said. As a result, the company could send its new projects to other offshore operations and still be competitive in North American showrooms despite added transportation costs.

Some outside analysts scoff, saying the company has such a huge stake in its strategically placed Puebla operation that it has little choice but to stay the course. Workers in Puebla also are especially productive and are only making up for tepid wage gains during a decade of docile union leadership, some observers say.

“I’m not sure the threats are for real, because after the strike was settled the Wolfsburg people were telling European audiences how important Puebla was for its North American strategy,” said Huberto Juarez, an economics professor at Benemerita Universidad Autonoma of Puebla, who tracks Volkswagen’s local influence.

Others give Volkswagen’s threats more credence--but for reasons other than those the company gives.

Despite the success of the New Beetle and other models, North American operations have not kept pace with VW’s huge sales growth in Europe; indeed, U.S. sales last month fell 15%.

In any case, VW could well deploy capital in other markets to earn better returns, Mexico City auto analyst Isabel Studer said.

“The growth dynamics in the North American market are with sport-utility vehicles and luxury cars, so maybe Volkswagen is disappointed,” Studer said.

Another negative trend for Volkswagen is that it is losing market share in Mexico, where it once led. From 28% of all Mexican car sales in 1993, Volkswagen slipped to 18% last year, falling from first to third place behind American giant General Motors Corp. and Nissan Motor Co. of Japan.

About one-quarter of Volkswagen’s output here is sold in Mexico. The biggest favorite remains the old Beetle, now produced only in Mexico.

Beyond dispute is that once-placid labor relations now are turbulent, especially since a new union was formed by the rank and file in early 2000. Whether it has put Volkswagen at an unfair disadvantage is debatable.

In reality, economist Juarez said, conditions have been poor since 1992, when Volkswagen won a big victory after a two-month walkout, effecting significant changes in work and seniority rules and in cutting union employment by 2,000 to 14,000. (The rank and file has continued to decline to the current 12,300 workers. There are more than 4,000 white-collar workers here.)

The work changes have been beneficial for the auto maker. A team approach on the assembly line has boosted quality and production, and the Volkswagen plant is commonly cited by knowledgeable observers as the most efficient auto factory in Mexico.

But as productivity boomed, wages did not keep pace with the plant’s steadily improving output, Juarez and union leaders say. Workers struck for five days in 2000, their first work stoppage in eight years, and won an 18% compensation gain, despite having had the strike declared illegal by federal authorities.

In the year that followed, Volkswagen took Puebla union leaders to Germany, Spain and Brazil to see plants and talk to their counterparts. VW hoped it would make the unions see that Puebla workers were pricing themselves out of the global labor market.

But workers again walked off the job this summer, initially demanding a 30% increase in wages and benefits before settling for 14.7%. The strike lasted 18 days and was remarkable as much for the federal government’s nonintervention as forVW’s concessions, which caused a sensation among Mexico’s unions.

“We thought we had overcome this kind of labor conflict,” said VW’s Karig, adding pointedly that Mexican workers now earn twice what VW employees in Poland, Hungary and the Czech Republic receive. “Labor costs are no longer the reason to be in Mexico.”

Juarez contends the union was “simply recouping what they haven’t gotten since 1992.”

Amid the labor uncertainty, a job at the Puebla plant remains highly sought after. And Volkswagen is a valued member of Puebla’s economy, responsible for nearly one-quarter of the state’s output of goods and services.

Volkswagen has not only created jobs itself but also persuaded numerous suppliers to set up shop nearby to conform to its just-in-time assembly scheme. The arrival of supplier firms has created hundreds of additional jobs in Puebla.

Touring the factory, a visitor would never know the tension and uncertainty within the 700-acre facility. The grounds are immaculately kept, the workers friendly.

Will this peaceful facade ultimately yield to the underlying labor strife? Until word comes from Wolfsburg, workers will continue to churn out those 1,545 gleaming old and New Beetles, Jettas and Cabriolets every day.

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Chris Kraul is a Mexico City-based business reporter for The Times. He can be reached at chris.kraul@latimes.com.