The Mexican Auto Industry. Review of Industrial Upgrading

and Work Issues

Jorge Carrillo, COLEF, Tijuana, Mexico

WORKSHOP“High and Low-Wage Countries in Production Networks of the

Automotive Industry.Relocation, Development Opportunities and Consequences for Work and Employment”

WZB, Social Science Research Center Berlin, November 29th and 30th, 2007.

Sources: Automotive News; Market Data Yearbook; Statistics Canada; Bancomext-Mexico

- 11th Worldwide Producer - 3rd USA Trade Partner- FTA with 44 countries- NAFTA

- 8.7% of Mexico’s GDP manufacture

- 12 times Exports Growths (1980-2005)

- Proximity to the US market: provide products and services with great efficiency; possibility to maintain control and supervision; advantages of having the same time zones.

02000400060008000

1000012000140001600018000

millions

1980 1990 2000 2005

NaftaMexico

Mexico: Peripheral model in the context of NAFTA

1. How important is Mexico?

63%

79%

21%

2.0

NAFTA: Mexican recovery

2006

71%46%0%

% Imports (of total production for domestic)

87%75%66%% Exports

12%25%34%% Domestic

2.41.90.83Production (millions of units)

Future scenario

NAFTA:US

Recession

Export promotion

policyPolicy Orientation

201220001990

Vehicles, what type of trajectory?

Source: Jorge Carrillo, Based on AMIA

63.162.66975% LV (of total production)

Future scenario

NAFTA: Mexican recovery

NAFTA:US

Recession

Export promotion

policyPolicy Orientation

-370No. of Models

-28No. of Brands

34%23%19%% Big Three

Japanese

18%

59%

2006

49%58%62%% Big Three U.S.

17%21%% Big Three

European

201220001990

Source: Jorge Carrillo, Based on AMIA

(Q1)Is there an ongoing relocation of automobile related

activities from the US to Mexico? Which processes (R&D, production ...) and parts of the value chain are

concerned?

• Ford: will close plants in USA, while make a macro investment inHermosillo (2007)

• GM: will close 12 plants in USA & Canada but establish a new plant in San Luis Potosí (2008);

• Delphi: will lay off thousands of employees in the globe, but their manufacture plants in Mexico are healthy;

• Chrysler: will lay off 13,000 workers in Newark but increase operations in Coahuila

• VW: prefer to lay off hundreds of workers in Brazil but no one in Puebla. Mexico will growth 32% in the next 8 years.

• GIANT MOTORS LATINOAMERICA (FAW): 10,000 light trucks for 2009 in Cd. Sahagun (exports for Central and South America)

• SALINAS MOTORS GROUP: new plant in Michoacan (4,000 new direct and indirect employees) (2009)

Source: Sintesis News, Producen

Coahuila

2. New geography, where are located?

• 1980s: 5 OEMs 80% to the North; 4 US & 1 Japan;

• 1990s: 8 OEMs 100% to the Center; 1 US, 4 EU, 3 Japan;

• 2000s: 5 OEMs 80% to the North; 2 US, 1 Japan, 2 China;

OEMs new entrance in Mexico

•OEM’s are located in 11 states: Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, San Luis Potosí, Aguascalientes, Guanajuato, Morelos, Puebla & Edo. de Mexico (2 more= Veracruz and Michoacan) Source: Jorge Carrillo, 2007

2005.- Beginning Production of pick-up Tacoma in Mexico:

Launch of new plant in Tecate, Baja CaliforniaNew generation of TacomaExpected Production : 30,000 annual units2007 37 millions of dlls

- Pick-up- Luxury

- Tacoma

August 2005.- Beginning Production of project Mega Cab:

New vehicle, the biggest in their typeExpected Production : 80,000 annual unitsExclusive production in MexicoFDI: 1,000 million of US dlls.Yaris, 2011

- Pick-up-Luxury

- Mega Cab

August 2005.- Beginning Production of new project: Chevrolet HHRVehicle type CrossoverExpected Production : 100,000 annual unitsExclusive production in Mexico2006 GM Ramos Arizpe 650 millions of dlls2006-07 New GM San Luis Potosi Plant Avero, G3Wave, Corsa, CUC

- Medium-Luxury

-HHR

July 2005.- First container to Europe of new Jetta A5:

Medium vehicleExpected Production: 220,000 annual unitsExclusive production in Mexico for NAFTA, Europe and the rest of the world2006 510 million of dlls

- Medium-Compact

- Jetta A5- Bora

August 2005.- Beginning Production of Hermosillo project:Ford Fusion Platform, substitute the Focus platform:Also new park of supplies = 2,000 million dollars13,275 new direct jobs created (including new jobs at Ford, Tier 1 & 2 suppliers, and local suppliers). The estimated indirect employment impact is of 23,894 jobs

Luxury Medium Vehicle substitute a compact oneExpected Production: 300,000 annual unitsExclusive production in Mexico2007 Ford Cuautitlan New Investment F250350

- Medium-Luxury

- Fusion- Zephyr-Milán

CharacteristicsSize/TypeModelsFirmsMexico; 2005-07 OEM investment projects

Nissan (Aguascalientes) 1,300 & Honda (Jalisco) 32Source: Bancomext, 2007

Mexico: Auto Parts

• Has become the hub for NAFTA:• 1,100 plants (almost double since 2004) (statistics)

• Located in 20 states (from North to the South)

• 45% OES; 55% SMEs• 70% foreign 30% Mexicans• 89 of the top 100 global suppliers with presence

in Mexico• Production: US 26.1 billion in 2006 • 80% of value goes to USA/Canada

Source: Jorge Carrillo, 2007

345

455

100

First Tier Second Tier Tird Tier

Number of Plants and Employment Autopart Sector in Mexico

(01-2001 / 12-2006)

200

210

220

230

240

250

260

270

280

Thou

sand

s

Empl

oym

ent

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

Hun

dred

s

Plan

ts

Employment Plants

Mexico

Hungaria

Polonia

Rep. Checa

China

Corea

Brasil

Taiwan

Eslovaquia

Romania

0 1 2 3 4 5 6 7

Emergent countriesAuto Parts Exports (2004)

Source Layan , 2006

Source: Jorge Carrillo, Based on INEGI, 2006

Maquila Growth (2001-2006)Auto Parts Tier System (2006)

$26.1$21.6$11.1

Auto parts production (billions of US dlls)

20061995 2000

Top Maquila Auto Parts, Dec. 2006

USA1940SSI TECNOLOGIAS DE MEXICO 96

USA11,300ARVIN MERITOR 89

USA21,325AUTOMOTIVE SAFETY COMPONENTS INTERNATIONAL 88

USA21,400STRATTEC SECURITY CORPORATION 87

USA21,500SUPERIOR INDUSTRIES INTERNATIONAL, INC 83

JAPAN11,502ALPINE ELECTRONICS OF AMERICA, INC. 82

USA31,520COOPER-STANDARD AUTOMOTIVE 81

USA22,113EATON CORPORATION 68

USA42,589ALLIED SIGNAL CO. 58

USA92,639TI GROUP AUTOMOTIVE SYSTEMS 56

USA12,700TRICO TECHNOLOGIES, INC. 55

KOREA33,015HYUNDAI MOTOR COMPANY 46

USA73,589JOHNSON CONTROLS, INC 42

USA43,845ITT INDUSTRIES 39

USA74,320BOSCH GROUP 37

USA44,390KEY SAFETY SYSTEMS, INC 36

SWEEDEN54,455AUTOLIV, INC. 35

USA114,554TRW INCORPORATION 33

CANADA129,800MAGNA INTERNATIONAL INC 14

USA1610,000VISTEON CORPORATION 13

JAPAN1015,800TAKATA 6

JAPAN2623,000ALCOA FUJIKURA LTD 4

JAPAN4133,400YAZAKI NORTH AMERICA 3

USA834,000LEAR CORPORATION 2

USA5166,000DELPHI AUTOMOTIVE SYSTEMS 1

ORIGINPLANTSEMPLOYEESCOMPANYPLACE

Source: Maquila Portal, 2007

Inward FDI In Mexico. Vehicle Assemblers And Auto Parts

Mexico: FDI in Auto Industry

0%20%40%60%80%

100%

1999 2000 2001 2002 2003 2004 2005 2006

Vehicle Assemblers Auto Parts

FDI: Billion of US dlls.

00.5

11.5

22.5

1999 2000 2001 2002 2003 2004 2005 2006

FDI: Billion of US dlls.

1999-2006: 13.1 billion of U.S. dlls. 80% comes from USA

Source: Jorge Carrillo, Based on INEGI, 2006

(2)Have there been a catching-up and upgrading

processes in the maquila automobile industry, concerning the range of products, the development of Mexican suppliers, higher value added activities like

R&D - when we look 10-20 year back?

• Some companies are satisfied with Mexican auto parts. BMW for ex. for Germany and Spartanburg (S. Carolina); Delphi for USA .

• Exclusive Mexican models: – VW Jetta A5 – FORD Fusion (Lincoln)– DAIMLER-CHRYSLER Pick Up Mega Cab – GM Chevrolet HHR– NISSAN Tiida / Versa– TOYOTA new Tacoma .

• National content has been increasing (60% in Tsuru, Sentra & PT Cruiser)

• More strategic alliances between Mexican companies and foreign suppliers (example: Technocast -Saltillo Industrial Group and Caterpillar) Source: Jorge Carrillo, 2007

Maquilas

• The maquilas were not full companies, initially they were only assembly plants. So they learned and accumulated more functionsassociated with the plant’s roles.

• In some maquilas they evolved in the sense of attracting global business lines, that allowed them to accumulate technical functions related with product innovations, and internal and external functions of articulation.

• Assembly phase (“assembly in Mexico”) • Manufacture phase (“made in Mexico”) • Design phase (“create in Mexico”) • Coordination phase (‘coordinated from Mexico)

manual workrational work

creative workimmaterial work of coordination

Source: Jorge Carrillo, 2007

•100% assembly •Basic processes engineering•Scarce links with the local environment

•Assembly and manufacture Of several components•Manufacture processes engineering•Sub-plants by product family•Lean manufacturing•Multifunctional working cells •1 engineer by 2-3 cells•Statistical controls•Development of Mexican managers

•Creation of a technical center•MTC takes some decisions, eg. suppliers of the MTC•Parent co. keeps decision making about manufacture•Global suppliers for plants•Links plants - MTC•Quality control with documentation•Several Mexican managers•Greater links with the local & regional environment (Universities and institutes)

DELPHI Upgrading Process

grow

th

1978 1990’s1985-90Source:Based onDutrenit et al 2002;

DELPHI PACKARD (WIRE HARNESSES PLANTS)

DELPHI SEC (SENSORS AND VALVES PLANT)

DELPHI MTC (MULTI PRODUCT)

Accumulation of technological capabilities: Business Line E&C: Sensors and Actuators

Brea

k th

roug

h ph

ase

I t

o II

Bre

ak th

roug

h ph

ase

II t

o II

I

Basic assembly of few components

1979-1988

TechnicalCapabilities

Innovative Capabilities

Complex assembly of product’s families

1989-1994

Design of products

1995-2002

Source: Arias Navarro & Dutrenit, 2003

Delphi-Mexico

• Mexican Operations started in 1978

• 66,000 employees• 53 manufacture plants• 11 joint-ventures • 1 Technical Center)

Source: Deplhi, 2005 2,943Total

970Mexico’s corporate roles

324Engineering support

1,649MTCEngineering

COLEF survey in 2002 with 298 auto parts and electronics plants in the North of Mexico

• 56% use the best technology available in the global market

• 40% with high level of automation• 68% with ERP systems• 24 numerical control machines and 5 robots per

plant• 72 R&D centers/units located in Mexico by

MNCs with maquila operations• 46% physical work; 34% technicians; 12%

specialized; 3% professional; 0.2% intellectual

Source:Carrillo and Gomis, 2004

Some findings regarding the processes of accumulation of technological capabilities in three

global subsidiaries in Juarez

Source: Dutrénit, Vera-Cruz y Arias (2007)

The processes of accumulation is differ in each line of business, given the specificities of the process of internal accumulation and the corporate strategy of the global company.

As the plants go into learning process they start embedded in technical activities with more innovative level and developing innovative technological capabilities.

The learning processes in the plants permit the local accumulation of technological capabilities and permit to connect the production functions and technology.

The local accumulation is a necessary condition but not enough so that the global companies decide to transfer the technical activities toward Mexico; the global strategy dominated under the internal accumulation of technological capabilities.

(3)Which opportunities and limits do you see in the future for upgrading of maquila industry?

• GEOGRAPHIC LOCATION (near shore)• PRODUCT SPECIALIZATION.• SPECIALIZAED HUMAN RESOURCES• SUPPLIERS (close to 2,000). • OUTSOURCING IS INCREASING: OEMs are more concentrated in

core competences• CROSS-INDUSTRIES ACTIVITIES: such as: Display-automotive;

Textile-automotive; Electronics-automotive; Mems-automotive• DEMAND INCREASE: for auto parts (OEMs & after market). • ELECTRONICS. More electronics and less mechanic. Key role for

companies like Delphi is one of main global supply in mobile electronics and transports systems.

Opportunities

Source: Jorge Carrillo, 2007

Limits

• LOW INTEGRATION: of Mexican suppliers to OEMs and OESs (3rd level).

• NAFTA DEPENDENCY (90%of exports): Over-reliance on Big Three, however is negative in the long run. Asian is needed. Companies and government are taken some steps.

• KEY DECISION ABROAD: The HQ maintain the power of decision on the technical function centered in products (design and R&D),internal linkages, and linkages with suppliers of direct materials.

• LACK OF OPORTUNITIES: The development of Mexican managerial capabilities has been slow. If they assume positions of more responsibility they look for to strengthen the development of technical activities with more innovation and to integrate Mexican suppliers.

• WEAKNESSES OF THE PRODUCTION SYSTEM AND LOCAL INNOVATION: lack of articulation with local actors.

• POOR INFRASTRUCTURE & LOGISTICS SERVICES • GREEN VEHICLES (HYBRIDS) STAGNATED IN MEXICO

Source: Jorge Carrillo, 2007

(4)Have the maquila automobile industry remained a kind of "isolated island" in the Mexican economy or has is developed links and initiated progress also in other

parts of Mexico?• LOW NATIONAL CONTENT BUT:• WIDE DIFFUSION OF PLANTS: along the country (OEMs, maquilas &

non-maquilas)• CLUSTER DEVELOPMENT: Intra-maquila model (Delphi-Juarez, Lear-

Chihuahua) /Satelital model (Ford-Hermosillo, VW-Puebla, GM-Daimler-Chrysler- Ramos Arizpe.

• HORIZONTAL AGGLOMERATION: Machine-shops/modling/plastic inyection (Central & North)

• CO-EVOLUTION PROCESS. • LOCAL EMBEDESNESS: Ex. Toyota founded the Toyota Technical

Insittute for Autos in alliance with Minisry of Education (15 technicalschools in Mexico)

• COORDINATION: of Supply chain management: industrial parks, supplier base, capacity for local purchases, linkages with universities, etc..

• IMMEX (Manufacture, Maquila and Services Industry for Export): macro coordination/ integration in 2006 of two most important exports programs: Maquila & Pitex

Source: Jorge Carrillo, 2007

Source: Jorge Carrillo, based on INEGI, Ministry of Economic, INA & AMDA

Mexico: employment in the Auto Industry

100000

300000

500000

700000

900000

1100000

Y 1997 Y 2005

52560

420477

84095168191

325870

OEM auto parts dealers parts stores repair shops

2005

40%31%

16%

Manufacture: 473,037 Services: 557,132

5%

8%

0 100000 200000 300000 400000 500000 600000

1982

1997

2004

OEMs non-maquila parts maquila parts dealers

0

50000

100000

150000

200000

250000

300000

OEMs non-maquila parts maquila parts dealers

1982 1997 2004

Source: Jorge Carrillo, based on INEGI, Ministry of Economic, INA & AMDA

(5) Is there a relocation or the threat of relocation of production to other low-wage countries in

Latin and Southern America and Asia? • Not so clear in this sector

• In 2012, 62% of NAFTA new installed capacity will be in the South of US or North of Mexico

• According with Ministry of Economy “Each 10 days, new entrepreneurs want to trade or produce in México vehicles from different companies: India (Tata), China (Chamco, FAW), Russia or South Korea (Hyundai)”, (for cheap cars or trucks -5,000 or 10,000 dlls. Imports from China will start (Salinas Distrubution Group with Elektra)

• VW-Puebla preferred to increase wages (5.5%) and closing plants in South America

• Mexican MNCs: Nemak contemplates new plant in China

• Some wire harnesses plants to Central America

Source: Jorge Carrillo, 2007

Exports to China

-

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006

USD

Mill

ions

AutosAutoparts

Mexico:

Source: Mexico Now, 2007

(6) How have work standards and the situation of

unions in the maquila automobile industry evolved in the last 10-20 years?

Traditional lower costs than in the USA 1990, .$1.5 vs. 14.9; 1997: 1.6 vs. 18.1; 2006: 2.6 vs. 22Increasing the gap in union production workers. Mexican engineers cost, on average, 35% less than Americans:

2-10 dills per hour, abundant labor force, skill people and ‘company unions

Wide diffusion of HPHR: less seniority, more labor competencies,less union capabilities, more flexible organization

Source: Jorge Carrillo, 2007

DIFUSSION OF CERTIFICATION & BEST PRACTICES

0

20

40

60

80

100ISO 9000 & QS9000

ISO 14000

SAAST TNCs

H&SWP TNCs

H&SWP SMEs

SAAST SMEs

SIX SIGMA

ERP

Series1

Sources: Carrillo, 2002, 2004 & 2006 Surveys, Projects STPS/COLEF & CONACYT 35947

38% of auto parts with ISO/TS 16949

And Labor

20021990

7.77.3Years of school (average)

3.62.7Years of seniority (average)

3.12.1Number of maquilas’experience (average)

6964Previous labor experience (%)

WORKER'S MONTHLY SALARY RATIO, December 2006

21%

43%

13%

13%6% 4%

MINIMUM WAGES x 1 MINIMUM WAGES x 2 MINIMUM WAGES x 3MINIMUM WAGES x 5 MINIMUM WAGES x 10 MINIMUM WAGES x 10~

$280

$140

$419

$698

$1395 $2093

Sources: Carrillo,1991 & 2004. Survey, Projects STPS/COLEF & CONACYT 35947

Source: Maquila Association

(Q7)Do you see the maquila strategy as a success? How is

its "balance"?• There is evidence of evolution trajectory & industrial upgrading

(intra-firm & inter-firm)

• The auto industry in Mexico, as well as Ford & Delphi cases are path dependence trajectories

• But structural heterogeneity is the common

• Mexican SMEs suppliers still in the low value activities. • Although there are some innovation high value activities in the low

tier• Maquila model: could had been a success model. • But is it too late? and is it too unclear the growth? Impact to weak?

Source: Jorge Carrillo, 2007