During the 1970s, there were so many companies producing cars for the small Mexican market that they were unable to achieve economies of scale. Much decision-making was by government decree. These decrees limited the amount of imported components that could be included in cars manufactured in Mexico and attempted to force auto manufacturers to export at least as much as they imported. As a result of this pressure to export, by 1980 many “Made in USA” cars contained Mexican-built engines, springs, windshields, and transmissions.95
In addition to being highly regulated by government decrees, auto makers were saddled with antiquated machinery, low volume, and erratic quality. In 1981, the production of more than
600,000 vehicles resulted in a trade deficit of $1.548 billion, or 47 percent of Mexico’s total trade deficit. That year less than 3 percent of Mexican production was exported.96
During the De la Madrid administration (1982—1988), the focus of the automobile industry shifted from the domestic market to the export market. This resulted from: 1) Mexicans by and large being unable to afford new cars after the 1982 economic crisis, 2) sharply increased government pressure to export in order to earn money to service the debt, and 3) U. S. auto makers facing increased foreign competition in their home market and turning to Mexico to lower labor costs.
As a result of this shift, the auto industry decentralized and moved north. Establishing plants in northern Mexico not only lowered the cost of shipping finished vehicles to the United States but also allowed plants to escape the combative unions found in central Mexico. Auto makers typically selected plant locations in areas where they could hire workers without previous factory or union experience. Once the new plants were established, companies went to great pains to prevent horizontal links between workers in the northern plants and workers from the long-established plants in central Mexico.97
In the 1980s, while the domestic market languished, auto parts and finished vehicles became the most dynamic export sector. Annual exports of finished vehicles rose to 278,558 by 1990, a 2000 percent increase over 1981. By 1989, largely as a result of exports, auto production surpassed the 1981 level. This increase in exports reflected both high worker productivity and high vehicle quality. These exports were highly profitable as a result of low wages, a well trained, highly motivated workforce, subsidies, tax exemptions, and government-funded infrastructure development. This profitability in turn attracted more investment, which allowed increased exports.98
As part of this move to the north, in 1986, Ford opened a $500-million plant in Hermosillo, Sonora. The choice of plant location reflected government financial and infrastructure support as well as its proximity to the U. S. border and the port of Guaymas. The Hermosillo plant employed cutting-edge technology and a high degree of automation, including more than one hundred programmable robots. By 1990, it had attained the highest quality levels of any auto plant in North America. Productivity and profitability remained high due to a flexible work regime, which allowed employee work assignments to be modified according to the plant’s needs.99
Even before NAFTA came into effect, Mexican auto production was booming. Between 1988 and 1994, domestic car and truck sales increased from 330,965 to 522,350, while exports rose from 174,246 to 575,031.100
As a result of NAFTA, parts and new vehicles produced in any NAFTA nation can be shipped to another NAFTA nation without tariffs. Auto plants located in Mexico could specialize in the production of a limited number of models, some of which were sold domestically and some of which were exported. Producers in Mexico could offer Mexican buyers a complete line of their products, since they were free to import from Canada and the United States models not produced in Mexico. As a result of this specialization, models such as VW’s New Beetle and the PT Cruiser are made exclusively in Mexico and exported.
Given robust economies in both Mexico and the United States, the Mexican auto sector boomed. New investment was attracted by economic stability, low interest rates, and a growing domestic market. By the late 1990s, the auto industry accounted for more than 22 percent of manufactured exports, and vehicles and auto parts formed the largest single component of NAFTA trade. In 2001, exports of autos and auto parts generated more foreign exchange than either tourism or oil exports.101
For decades the U. S. Big Three—Chrysler, Ford, and GM—dominated Mexican auto production. In 2001, they built 1.08 million of the 1.82 million vehicles produced in Mexico. Through 2003, General Motors remained the largest private corporation in Mexico as measured by sales. However, as has occurred in the United States, the Big Three began losing market share to Japanese producers, which in 2007 grabbed a record 35 percent of the Mexican market, up from 23 percent in 2000.102
Mexico’s domestic auto market changed radically as a result of NAFTA. The number of auto makers in Mexico soared, further expanding consumer choice. The new entrants include Nissan, Honda, and BMW. The 2004 signing of a Japan—Mexico free trade accord facilitated the arrival of Japanese brands such as Mazda and Suzuki, yielding a total of thirty-seven brands being offered in Mexico.103
During the early Fox administration (2000—2006), the auto industry went into a slump as both the U. S. and Mexican economies lost dynamism. However, after 2004 the industry rebounded, and in 2006, 2007 and 2008 record numbers of vehicles were produced. Mexico benefited from manufacturers locating much of their capacity to manufacture compacts in Mexico—cars that were suddenly in high demand as U. S. fuel prices increased. In addition, Ford, GM, and Daimler Chrysler shifted production to Mexico to reduce labor costs. Finally, there was increased investment in the auto sector, which responded to Mexico’s proximity to the U. S. market, low wages, and a stable peso.104
The auto sector plays a crucial role in the Mexican economy, directly employing half a million people. It accounts for roughly 3 percent of GDP, 14 percent of manufacturing output, 23 percent of exports (generating $30 billion in revenue), and 6 percent of FDI.105
The auto sector is close to the NAFTA ideal in that auto plants in each of the three signatory nations specialize and achieve economies of scale. Engines and transmissions are often produced in one nation and incorporated into vehicles assembled elsewhere. Ford pickups, for example, were assembled in Cuautitlan, just north of Mexico City, with engines coming from Windsor, Ontario, and transmissions from Livonia, Michigan. to NAFTA rules of origin for parts, many European and Asian parts manufacturers have relocated to Mexico. In Puebla, seventy parts manufacturers have clustered around the sprawling Volkswagen factory.106
There are, however, shortcomings to the auto boom. Despite having productivity as high as or even higher than workers doing the same work in the U. S. and Canada, Mexican auto workers are paid only $8—10 a hour, as opposed to $60 for unionized U. S. auto workers. This limits the amount of stimulus to the domestic market that autoworkers’ wages can provide. The huge boom in the auto industry also diverted investment away from other forms of transportation, an important consideration since only 20 percent of Mexicans own a car. Government plans to stimulate the auto industry are apparently oblivious to falling oil production. The minority of car owners produce pollution that all—car owners and the car-free alike—must endure. Relying so heavily on exporting to the U. S. market has left the Mexican auto industry vulnerable to U. S. recession. This was indicated by light vehicle production during the first half of 2009 being 42.9 percent below the 2008 figure.107
World History
