Detroit’s Big Three accelerate plans to build more small cars in Mexico

By, Carlos Kingwergs

Detroit’s Big Three automakers are accelerating plans to produce more small cars for the North American market in Mexico as they seek to reduce labor costs, while using higher-paid U.S. workers to build their very profitable trucks, sport utility vehicles and luxury cars.

New versions of several of their popular U.S. compact cars are expected to be made in Mexico, people familiar with the companies’ plans said. They include General Motors Company’s new Chevrolet Cruze hatchback, a successor to Ford Motor Company’s Focus compact and a replacement for Fiat Chrysler Automobiles NV’s Jeep Compass compact SUV. The decisions are prompting three major automotive research firms, who are often used by the automakers and their suppliers for industry forecasting, to project a big increase in Mexican output of small cars by the three companies.

AutoForecast Solutions estimates that GM, Ford and FCA will collectively produce 45% of their small cars for the North American market in Mexico by 2020, up from 18% in 2014. LMC Automotive sees the 2020 figure at 37%, also against 18% last year, while IHS Automotive projects the Mexican percentage going to 42% in 5 years, though it calculates the 2014 level at a higher level than the others, at 25%. In response to questions from Reuters, the three automakers declined to discuss their specific plans.

GM said that the “vast majority” of its small cars sold in the U.S. are “produced domestically.” Ford said it is “committed to continuing to improve competitiveness and to invest where it makes the best sense for our business.” FCA said it “has made no official announcements regarding the company’s future production plans.”
The Detroit automakers’ plans to build more small cars in Mexico are likely to be highly controversial ahead of the November 2016 U.S. presidential election.

United Auto Workers President Dennis Williams has faced criticism from union members who say that he has acquiesced to jobs going south. “For someone to suggest that we endorse products going to Mexico is just nonsense,” he wrote to UAW members last month. The UAW declined a request for a comment for this story.

For the automakers it is largely a question of cost and margin. They are determined to reduce costs in production of compact and midsize cars, which already suffer from small profit margins or are losing money.

Overall U.S. sales have been very strong in the past couple of years. Larger vehicles, such as
SUVs and pickup trucks, are the big beneficiaries because the plunge in gasoline prices. Lower gas prices mean that it is more economical for consumers then it was a few years back. The larger vehicles typically generate profits of US$10,000 and more each.

The Big Three are also feeling the heat from foreign rivals, including Nissan Motor Co and Volkswagen AG (VOWG_p.DE), who have been adding production capacity in Mexico. The margins on small cars may erode further if production remains in the U.S. New labor agreements negotiated by GM, Ford and FCA grant the first raises in a decade to veteran workers, and give recent hires a path to earn US$30 an hour after eight years on the job.
At the same time, the Detroit automakers need to continue building and selling small cars to offset the much higher mileage big pickups and SUVs have and meet ever-tightening U.S. fuel economy regulations. Mexican labor rates, which averaged about US$5.50 an hour in 2014, are about a fifth of the wages auto workers earn in the United States, according to the Center for Automotive Research (CAR).

Sean McAlinden, chief economist at CAR, said GM’s Orion Township assembly plant in Michigan, which builds Chevrolet and Buick subcompacts, has the lowest labor costs of any U.S. plant thanks to a favorable agreement with the UAW negotiated as part of the U.S. government’s bailout of GM in 2009. And yet the Ford Fiesta plant in Cuautitlan, near Mexico City, has a US$700 labor cost advantage per car over GM’s Orion plant, he said. With small car sales waning, GM recently announced layoffs at Orion. According to sources at suppliers it is also expected to drop production of the Buick Verano next year.

Mexico is an increasingly attractive production base for a variety of reasons. Its infrastructure, supply base and productivity all have improved in recent years, according to McAlinden. A plunge in the Mexican peso against the dollar to almost 18 pesos to the Greenback from just over 13 a year ago has also made the country more appealing for U.S. manufacturers, at least in the short term, by reducing its relative costs. On the downside, shipping costs from Mexico remain high, and energy sources can be unreliable.

Ford confirmed a few weeks ago in its tentative contract with the United Auto Workers union that it will stop building Focus compact cars at a factory in Wayne, Michigan in 2018. UAW officials have said the replacement for the current Focus will be made in Mexico, while the Michigan assembly plant is expected to start assembling a pickup truck and an SUV, according to people familiar with Ford’s plans. Ford has declined to say what vehicles it plans to build in Wayne.
Supplier sources also said that GM plans to build the Cruze hatchback in Mexico while the Cruze
sedan will continue to be built in Ohio, and that FCA has long planned to produce the Compass replacement in Mexico rather than in Illinois. GM and FCA declined to comment on where the vehicles will be made.

Moving production of mass-market, fuel-efficient sedans to Mexico is a challenge to a goal the Obama administration stressed when it drove government-funded restructurings of GM and the former Chrysler in 2009. Gas prices had soared to US$4 a gallon or more during the 2008 financial crisis, killing sales of Detroit’s trucks.

GM and FCA agreed to build small cars in the U.S. as part of their government-funded bankruptcies. Now profitable and free of government ownership, their CEOs no longer must answer to the White House. Ford, which restructured without federal help, shifted U.S. production toward more fuel-efficient vehicles when truck sales swooned, but now is ramping up U.S. production of SUVs and pickups to meet robust demand.

Steven Rattner, the investor who was the first head of the White House auto task force, said the threat to U.S. jobs was a concern then and now: “we were well aware of the situation with Mexico and the possibility that jobs would continue to migrate there,” he told Reuters.

About GM – General Motors
At GM 212,000 plus employees work in 396 facilities touching six continents, they speak more than 50 languages and touch 23 time zones. From designing and engineering state-of-the-art plants and developing new vehicles and technologies to creating new marketing programs, our team members are valued for their unique contributions. GM along with our strategic partners, produces cars and trucks, and sells and services our vehicles, through the following brands: Chevrolet, Buick, GMC, Cadillac, Baojun, Holden, Isuzu, Jiefang, Opel, Vauxhall and Wuling. We also have significant equity stakes in major joint ventures in China including SAIC-GM, SAIC-GM-Wuling, FAW-GM and GM Korea.
GM is expanding their leadership in vehicle electrification with advancements in batteries, electric motors and power controls. The GM team is also working on a range of high-volume, fuel-saving technologies including direct injection, variable valve timing, turbo-charging, six-speed transmissions, diesel engines, and improved aerodynamic designs.

About FORD
Ford is the second-largest U.S. based automaker and the fifth-largest in the world based on 2010 vehicle sales. At the end of 2010, Ford was the 5th largest automaker in Europe. Ford is the 8th-ranked overall American-based company in the 2010 Fortune 500 list, based on global revenues in 2009 of
US$118.3 billion. In 2008, Ford produced 5.532 million automobiles and employed about 213,000 employees at around 90 plants and facilities. Ford has manufacturing operations worldwide, including in the United States, Canada, Mexico, China, the United Kingdom, Germany, Turkey, Brazil, Argentina, Australia and South Africa.

About FCA – Fiat Chrysler Automobiles
FCA, the seventh-largest automaker in the world, designs, engineers, manufactures and sells passenger cars, light commercial vehicles, components and production systems worldwide. The Group’s automotive brands are: Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, SRT and Maserati, in addition to Mopar, the parts and service brand. The Group’s businesses also include Comau (production systems), Magneti Marelli (components) and Teksid (iron and castings). Formed in 2014 through the merger of Fiat (founded in 1899) and Chrysler (founded in 1925), FCA is listed on the New York Stock Exchange (“FCAU”) and the Mercato Telematico Azionario in Milan (“FCA”).
FCA has nearly 228,690 Employees and has locations in 6 continents, Asia Pacific, North America, Central and South America, Africa and The Middle East. http://www.fcagroup.com/en-US/Pages/home.aspx