European suppliers are expected to be at the forefront of a wave of foreign investment in Mexico over the next few years. They'll be attracted by new Volkswagen, Nissan and Renault assembly plants, and also by a free-trade pact agreed between Mexico and the European community.
Forecasters predict dozens of new automotive parts plants will appear in Mexico in the near future, following the more-level European and Japanese investment pace of the past decade.
In the past, Mexico's supplier industry expansion has centered around either serving local auto plants for the local market, or as border-area maquiladora assembly plants to perform labor-intensive work for components that are otherwise US-made.
Maquiladora plants, mostly located near the US-Mexican border, import raw materials or components duty-free and subsequently export abroad, paying duty only on the value added during assembly.
The coming boom is different. Suppliers now view Mexico as a viable production center for all of North America. And they are moving there to serve automakers that are looking far beyond the local market.
'Mexico is very much in our thoughts right now,' says Georg Liebler, board member for Kolbenschmidt Pierburg AG of Germany, a leading supplier of pistons and vehicle pumps. 'A lot of engines are being created in Mexico, as well as other engine parts. We need to be there. Mexico is definitely on our list.'
Signals for expansion
Three automakers are expanding or launching auto assembly operations in Mexico. Volkswagen is in the midst of a $1 billion project at its complex in Puebla. Nissan Motor Co. has just completed an $800 million project to move all production for the western hemisphere of its Sentra compact sedan to its Aguascalientes factory. And Nissan's new partner, Renault, is preparing to put two vehicles into production in Mexico. Together with Nissan, Renault will build the Scenic compact minivan in Cuernavaca, starting in 2002, and the Renault Clio in Aguascalientes in 2003.
ELM International Inc., an industry-tracking service in East Lansing, Michigan, USA, notes that new investment by European firms already is heavy around VW's Puebla plant.
'Most of the companies going to Mexico right now are going because they need to be there,' says Marc Santucci, ELM International president. 'Volkswagen is having the biggest impact, just because of its size. But I believe you're going to see other activity around the border as well.'
VW already was using a vast Mexican network of its traditional European suppliers to build 410,000 cars a year at Puebla. VW builds the Beetle, New Beetle, Golf and Jetta and Puebla.
The second new development in Mexico is the country's push for more international free-trade agreements. The North American Free Trade Agreement was signed by Mexico, the USA and Canada in 1994, stimulating new sourcing plans for automakers on both sides of the border.
Mexico is preparing to sign another free-trade pact, this time with the European Union. That agreement is expected to take effect in July. In addition, Mexico has just signed a separate free-trade agreement with Israel, and is working out another agreement with Singapore. Reports inside Mexico say the country also is putting together a free-trade agreement with Brazil.
Details of how these various new or planned agreements will work are not yet clear. But automotive manufacturers in Mexico are expected to enjoy some sort of newfound flexibility and cost savings in moving content in and out of Mexico, the USA, Germany, France, the UK, Singapore and Brazil.
'We have been thinking in terms of NAFTA until now,' says Hiroshi Yoshioka, president of Nissan Mexicana SA de CV. 'Now we also have to think about Europe and Israel - and in two or three years, maybe even Brazil.
Magnet for Nissan
Nissan Mexicana still is in the study stage together with planners in Tokyo to determine how it will better incorporate Europe in the local operations, Yoshioka adds. But it is clear that Nissan's Mexican plants could become a magnet for European suppliers.
Earlier this year, Nissan opened its world procurement system to new suppliers. In the quest to cut manufacturing and content costs, Nissan said it would shift future business to low-cost global suppliers. Nissan has relied heavily on Japanese - usually Nissan-affiliated - parts makers for 50 years.
The new edict appears to signal Nissan's willingness to share in Renault's traditional European supplier network.
'We are already doing some business with Valeo,' points out Emil Hassan, Nissan North America's senior vice president for manufacturing, procurement, quality and logistics, referring to Valeo SA of France. The key Renault supplier has expanded rapidly in North America, with new plants in the USA and Mexico.
Hassan predicts additional European investment on both sides of the Mexican border.