North American Auto Manufacturing from Detroit to Mexico

My problem with American unions isn't about unions and pay scales as such. It's about American manufacturing's lack of competitiveness. Let's look at cars.

In the 1960s, Detroit was the epicenter of automobile manufacturing, both in North America and the world as a whole.

The Big Three of GM, Ford and Chrysler dominated the industry and GM dominated the Big Three. The UAW was the union at all three companies. Labor really wasn't a competitive factor in the industry, since pattern bargaining resulted in the same wages and benefits at all manufacturers.

And then by the 1980s Japanese manufacturers became important sellers in the U.S. Eventually Toyota, Honda and Nissan all established union free facilities manufacturing cars for sale in the North American market.

The North American Big Three-UAW auto manufacturing dominance, if not monopoly, was then properly declared as over. And it's been over for a long time now.

And here's the bigger challenge for today. UAW like pay and benefits are rapidly going away, if not already gone, in the private sector.

North American 'union' based pay standards are being ripped apart by global competition, and that competition now is forming a serious presence right next door in Mexico. Mexican labor is paid at a fraction of U.S. pay rates for comparably skilled work. And that is a huge problem for American manufacturers and its hourly paid employees going forward. And on top of that, the pie isn't growing fast any longer, if at all. That makes the problem even worse.

When American companies dominated global business in the 1960s, unions were able to negotiate an increasing share of the expanded pie for their members. In other words, as a company's business grew and its owners prospered, how much of the ever enlarging pie was distributed to labor was the issue at the bargaining table. Not the distribution of a stagnant or shrinking pie but an ever bigger one.

Now the world has changed. It's not just about divvying the pieces of a big and growing pie. American companies have to compete aggressively to even get any piece of that pie.

So let's zero in on auto manufacturing in general, and North American auto manufacturing specifically. The U.S. and Mexico.

We think of Mexico for making lots of things, but not especially as a world class manufacturer of cars. But that's all about to change as we'll see.

In Mexico, Auto Plants Hit the Gas his the somewhat surprising update:

New trade deals and low-cost labor have made Mexico a profitable base for car production. It's also attracting other parts of the auto-supply chain, from steel mills to brake makers, as the "made in mexico" trend grows. 

Mexico is taking center-stage in the production of cars, where lower costs and skilled workers are reordering the global auto market.

Six years ago, Mexico was the world's ninth largest exporter of cars. Today the country is ranked fourth—behind Germany, Japan and South Korea—with exports expected to total more than 2.14 million vehicles this year.

One in 10 cars sold last year in the U.S. was made in Mexico. . . .

Mexico's Economy Minister Bruno Ferrari boasted that a batch of new factories planned by car makers will help Mexico surpass South Korea in a few years. Volkswagen AG, Honda Motor Co General Motors Co., Mazda Motor Corp., Fiat SpA, Daimler AG and Nissan have all announced expansions in the past year. Volkswagen's Audi unit plans a new $1.3 billion plant.

For decades, the free world drove cars made primarily in the U.S., Germany and Japan. But a global shift toward smaller cars has put pressure on profit margins, forcing car companies to find lower-cost manufacturing elsewhere.

"Mexico is extremely competitive," Carlos Ghosn, Nissan's chief executive, said in an interview. Plants in Mexico operate more hours a year than other Nissan facilities world-wide. "You can run your plants with practically no limits if you want," he said.

Also bolstering Mexico's appeal, he said, are currency advantages and the high productivity of Mexican employees.

Labor was a smaller portion of the total cost of a vehicle when SUVs and light trucks soared in popularity. But the financial crisis has spurred consumers to shop for smaller, cheaper cars—which have slimmer profit margins. . . .

Wages for Mexican assembly-line workers begin at $40 a day, experts said. That is far below minimum wage requirements in the U.S. or Europe and approaching the average manufacturing wage in China, which is $3 per hour. . . .

Car companies also are drawn to Mexico's proximity to the U.S. market. Factories in the central highlands, where Mexico's auto industry is clustered, can deliver new cars to the U.S. within days. Trans-Pacific and trans-Atlantic shipments can take weeks.

Mexico's trade deals over the past two decades have helped propel the auto expansion. Since the North American Free Trade Agreement came into force in 1994, Mexico has signed trade agreements with 44 countries, including the European Union, Japan and Israel. . . .

Volkswagen AG's plant in Puebla is now the company's biggest factory in North America, with capacity to produce 2,500 cars a day. For decades, the earlier model of the Beetle was Mexico's most popular car, known by its Mexican nickname "Vocho."

Today, the cars welded here are primarily for export to the U.S., Europe and China, where 2,800 Beetles were shipped last year. Volkswagen is spending another $550 million to open a new plant in the city of Silao to supply engines to its operation in Chattanooga, Tenn.

Mexico's trade deal with Brazil and Argentina allows Volkswagen to avoid a 35% duty by shipping Mexican-made cars to Brazil. Volkswagen's European-made trucks face a 25% duty coming into the U.S., but none if the vehicles are made in Mexico.

"If I can sell this car in Japan, the U.S. and South America, then Mexico is the right place to produce this car," said Mr. Hinrichs at Volkswagen. . . .

The country's productivity has set new industry benchmarks. Nissan's Aguascalientes plant, for example, experimented with a new production scheme that allowed the plant to operate 23 hours a day, six days a week. Studies conducted by Nissan of its Mexican-made compact car Versa showed a quality level equal to cars from its plant in Oppama, Japan. . . .

Nissan's Mexico plant used to play second fiddle to U.S. factories, with Mexico picking up production of a model only after the U.S. plant had reached capacity.

But for its new Sentra, a $16,000 compact, the Mexican plant in Aguascalientes will operate as the first producer—and a U.S. facility will pick up the slack. "Production used to have a second life in Mexico," said Bill Krueger, Nissan's head of manufacturing in North America. "In this case, the U.S. is now a follower."

Summing Up

Mexico is already one tough competitor in car manufacturing, both globally and for the future U.S. market as well. And it's probably going to be an even tougher one in the years to come.

In the future, smaller and more fuel efficient cars will create the need for lower cost auto manufacturing. The effect on competition will be very real and permanent in nature.

In brief, low wages and the lack of the U.S. "UAW Big Three labor history," combined with the physical proximity to the huge U.S. market, will make Mexican production hard to beat.

I have no easy answer as to how to make the existing U.S. car manufacturers competitive with Mexican auto makers, but there's a definite need for an all-out-all-hands-on-deck effort to increase productivity in the U.S. facilities.

And that means the UAW must join hands with American manufacturers in the productivity improvement game. There will also be a need for U.S. and Mexican operations to team up to collaboratively achieve maximum global and North American supply chain efficiencies in the future.

In addition, government subsidies for American workers may be required as we transition to a more competitive auto manufacturing base. Subsidies would be better than unemployment, and Mexican assembly wages of $40 per day are a tiny fraction of UAW wages in the U.S. Thus, something has to give and creative solutions will need to be found.

Simply stated, U.S. manufacturers are going to have to find a way to be reasonably competitive with Mexican auto makers in the future. Either that or --- well, we all know the answer to that one.

It's not a case of labor versus management any longer, if it ever was.

It's simply a matter of finding a way to maintain a U.S. competitive presence in global automobile manufacturing.

At least that's my take.

Thanks. Bob.