Mexico: The Auto Hub of the World

Bavarian Motor Works (BMW), which is a world famous car manufacturing company, has now set up its plant in Mexico. The company plans to use this plant to manufacture more of its famous 3 series vehicles. The unique thing about this plant is that it has been set up despite Trump’s constant blackmail to automobile companies. Regardless of Trump’s policies and threats, most automobile companies are keen on setting up shop in Mexico. Hence, it would be fair to say that Mexico is on its way to becoming the automobile hub of the world.

In this article, we will explore all the reasons which have contributed towards making Mexico an automobile hub.

Free Trade Laws

Mexico has better agreements in place when it comes to exporting automobiles. Companies that set up shop in Mexico can export their products to close to 70% of the world without paying any tariffs! This provides a major cost advantage to automobile companies prompting them to use Mexico as their base.

For instance, consider a company like BMW, which wants to export vehicles to countries in Europe.

If BMW uses the United States as a base, the European countries will levy a 10% tax on imported vehicles. Since the average BMW vehicle sells for around $40000, this means that a $4000 tax will be payable if the vehicle is exported from the United States.

On the other hand, if the vehicle is exported from Mexico, there will be no tax payable. Therefore, exporting from Mexico will give BMW a $4000 cost advantage. This cost advantage can then be passed on to the consumers, thereby increasing sales. Hence, it would be safe to say that Mexico’s favourable trade deals are one of the reasons that automobile giants are queuing up to set up a plant there.

BMW is not the only company that has set up a plant in Mexico lately. Volkswagen and General Motors are also making their presence felt in Mexico! It is, therefore, no surprise that 80% of the cars manufactured in Mexico are exported.

Strategic Position in North America

North America is probably the largest car market in the world. Mexico is the only low-cost producer in the proximity of North America.

On average, each car produced in Mexican factories costs about $1000 less compared to American made cars. This is because the average Mexican automobile worker is young (age 24) and also cheap ($40 wages per day). This is the reason why many American companies have moved their factory locations south of the border.

The Mexican trade deal with the United States helps to maintain this cost advantage. There are still more ways that Americans are dependent on the Mexican car industry.

For instance, many spare parts used in American cars are only manufactured in America. If heavy tariffs are levied on Mexican imports, the American consumer will have to bear their costs until local American companies start manufacturing these parts.

Geographical Advantage

The geographical location of Mexico has also helped in cementing its role as an automobile hub. Mexico connects many important trade routes. It has a natural passage to North America, South America, Asia as well as Europe.

This helps create manufacturing as well as logistic hubs. Hence, Mexico is the location where most multinational companies want to import raw materials, manufacture the vehicles as well as create distribution supply networks to finally ship out products to their final locations.

Location, as well as supply chain integration, are crucial for the supply chain industry. This is the reason why Mexico is emerging as a regional hub. Most Mexican cities are a few hours’ drive away from both the Pacific as well as the Atlantic Ocean. This makes shipping vehicles in either direction, an easy endeavour.

Lower Production Costs

The overall cost of production in Mexico is significantly lower than in other countries. As explained above, Mexican made cars benefit from lower labour costs and don’t have to pay import duty in many countries.

However, car companies set up in Mexico pay very little in terms of taxes as well! The Mexican government offers tax holidays and tax breaks for companies which open up a plant in Mexico. Also, the cost of energy in Mexico is lower than in the United States. This also leads to substantial cost reductions since the automobile industry is an energy-intensive industry.

Mexicans are able to generate energy at cheaper costs because they use solar power. The climate of Mexico is hot as such harnessing the solar power and using it for car production turns out to be cost-effective.

The reality is that Mexico is already a major automobile hub. At the present moment, 89 out of 110 spare parts required to manufacture a car are made in Mexico itself.

In the future, this number is expected to rise rapidly. Companies like Kia, Mercedes, and Nissan are lining up to expand their production in Mexico. It would not be farfetched to say that within the next decade or so, Mexico will end up becoming the automobile capital of the world.