FT: Mexican Standoff Looms Between Trump and Carmakers South of Border

The Financial Times reports:

Mexico’s motor industry has seen extraordinary growth in the 22 years since the North American Free Trade Agreement opened up the US market.

Production more than tripled to 3.4m vehicles in 2015, and 82 per cent of the country’s 2.7m exports that year went to the US or Canada.

But Ford’s announcement on Tuesday that it was abandoning plans for a new Mexican car plant highlights the serious threat that incoming US president Donald Trump poses to the industry.

The president-elect has publicly berated US companies that move work across the southern border, including General Motors just this week, and threatened to tear up Nafta.

Sergio Marchionne, chief executive of Fiat Chrysler, has already described Mr Trump’s election as a “game changer” for the car industry.

Since 1994, low labour costs, unfettered access to the US market and free-trade deals covering another 44 countries have propelled Mexico to become the world’s seventh largest car manufacturer and fourth-largest exporter. Its plants and supply chain support more than 750,000 jobs.

Mexican suppliers also provide 40 per cent of all the components used in US-assembled cars, including almost all of the seat belts, air bags and seat covers that go into cars built in the US. In total, a third of all exports from Mexico to the US are cars or associated components.

“Without question, the success of Mexico vehicle manufacturing is tied closely to US, and any tinkering with that could have an impact on output and investment in the country,” says Bill Rinna, a senior analyst at forecasting group LMC Automotive.

Mexico’s lower cost base also means that manufacturers often use plants there to put together vehicles that would be unprofitable if made in the US.

Analysts often cite the Chevrolet Cruze, the vehicle that drew Mr Trump’s ire on Tuesday, when he tweeted that GM should face a “big border tax” for importing cars from Mexico to the US. Although the saloon version of the Cruze is manufactured in the US, the less expensive hatchback model is made in Mexico.

“All the domestic manufacturers struggle to make money in small passenger car assembly in the US,” says one executive from a non-US carmaker when speaking about the decision to invest in Mexico. “Economically, it makes far more sense to manufacture in Mexico.”

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