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Mexico Auto Industry Poised for Growth in 2010

Government-sponsored training of Mexican auto workers essential for sustained growth, one analyst says.

Mexico’s automotive industry is on the rebound after a dismal 2009, but one important factor must be addressed before long-term success can be achieved, says a partner with consultancy A.T. Kearney.

“One of the challenges to continue growing is value-added skills (among auto workers),” Ricardo Haneine, tells Ward’s. “What we’ve seen in automotive and other sectors is the major thing for Mexico to continue growing is clearly education.”

As vehicles become more technologically advanced, it is essential Mexico’s workforce receive the necessary training to compete with other auto-producing countries, Haneine says.

“The ministries of education, labor, and economy, are working on (education initiatives),” he says, including funding training for automotive engineers, in short supply.

The Mexican auto industry slowly is recovering from the global economic slump due to several converging factors.

Surprisingly, the number of distressed manufacturers, including General Motors Co. and Chrysler Group LLC, both of which went through Chapter 11 reorganizations last year, favors Mexico.

As auto makers and suppliers attempt to return to profitability, they likely will look to countries with low labor costs, Haneine says. “With the cost position in Mexico relative to the U.S., just moving down to Mexico helps them to break even and restructure more rapidly.”

The changing automotive landscape also may aid the country, as more consumers now are opting for the type of smaller, more fuel-efficient vehicles slated for production in Mexico, Haneine says.

Ford Motor Co. recently began production of its Fiesta B-car at its Cuautitlan assembly plant, and Nissan Mexicana S.A. C.V. is planning to produce the similarly sized Micra at its Aguascalientes, facility, although timing has yet to be announced.

The industry will rebound from last year’s 29% contraction in vehicle production, according to the Automotive Parts Manufacturers Assn. in Mexico, which predicts a 23% rise in light-vehicle production in 2010.

To date, the Mexico auto industry is trending ahead of forecasts. Through February, production was up 84.2% vs. year-ago to 346,830 units, according to Ward’s data.

Much of the increase is due to output being resumed at plants idled last year as auto makers looked to align production with falling demand.

The Mexican government countered last year’s shutdowns with measures designed to keep unemployment in check, Haneine says.

“The government instituted policies subsidizing payments to employees so companies (wouldn’t have) to fire people,” he says, noting President Felipe Calderon committed 2 billion pesos ($147 million) to help auto makers and suppliers avoid mass layoffs.

“(Unemployment) has been mostly contained, but it clearly exists,” Haneine says.

The recession has caused Mexicans to hold onto their vehicles longer, a trend expected to continue due to the ongoing recession and the increasing number of used vehicles imported from the U.S. Currently, the average age of vehicles on the road average is 11 years, the APMA says.

Vehicle population density varies by region.

“If you go to the South where there’s a lot of poverty, 25% of the population don’t own a car,” Haneine says.

Through February, Mexico’s new-car sales were off 0.2% compared with year-ago, at 75,097 units, while light-truck demand slid 13.3% to 48,160.

But as workers return to their jobs and production levels edge upward, Mexico light-vehicle sales are expected to bounce back a bit.

A longer-term forecast by CSM Worldwide has Mexico moving up to the eighth spot in automobile production by 2015, from 10th today.

While Haneine agrees with that, he warns growth will be slow.

“In 2010, (the industry) is not going to reverse the loss of 2009,” he says. “By the end of 2011, we’ll be back to about 80% of former levels in terms of production and investment.”

The auto industry is keen to put behind the nightmare of 2009, which began with a whimper and got even tougher as the months rolled on.

The year began with Ford ceasing output to retool its Cuautitlan assembly plant for production of the Fiesta. It also shuttered its Hermosillo assembly plant in January due to high inventory levels of Fusion, Milan and Lincoln MKZ midsize sedans.

To accommodate the retooling phase, Ford ended production of Mexican-market F-150 light-duty pickups at the Cuautitlan facility. The trucks were previous-generation F-150s based on the PN96 platform, predecessor to the current-model’s P222 architecture.

Although Ford’s actions hurt the Mexican auto industry in the short term, long term held promise.

In addition to revamping the Cuautitlan plant, the auto maker announced its Chihuahua facility, which builds 4-cyl. engines, would add assembly of diesels for light- and medium-duty trucks sold in a variety of global markets.

A joint venture was formed with Getrag GmbH & Cie KG to establish a new transmission plant in Guanajuato to support various Ford products.

The new multi-plant development effort represented a $3 billion shot-in-the-arm, including outlays by local suppliers to support the Ford projects, making it Mexico’s largest-ever single automotive investment package, according to the auto maker.

The moves were expected to create about 4,500 jobs directly at Ford and add another 25,000 related positions at local suppliers.

Ford wasn’t alone in delivering good news early in the year.

Although production and sales of passenger vehicles were on the decline in early 2009, Daimler Trucks North America LLC in February opened a $300 million plant in Saltillo to build Class 8 heavy-duty trucks.

The 1.3 million-sq.-ft. (120,774-sq.-m) complex, which included a production facility, logistics center, training center and administration offices, had capacity to build 30,000 Freightliner Cascadias annually.

During the plant’s opening ceremony, Andreas Renschler, head of Daimler truck operations, expressed trust in Mexico and its workforce.

“We are confident that with the Cascadia from Saltillo we will be able to fulfill our customers’ high expectations regarding product quality, operating costs, and reliability,” he said.

In January, GM announced production of the Cadillac SRX cross/utility vehicle would move from a plant in Lansing, MI, to its Ramos Arizpe facility.

But the bad news quickly followed.

Several weeks after disclosing its plans for Ramos Arizpe, GM revealed it once again was delaying production of the ’09 Saturn Vue 2-Mode Hybrid CUV, originally scheduled to launch in Mexico in 2008.

Meanwhile, Chrysler said the growing global financial crisis would force it to extend a scheduled shutdown of its Toluca assembly plant, which built the PT Cruiser and Dodge Journey CUVs and employed 2,180 workers.

Nissan quickly followed suit, halting production for part of the first quarter due to declining industry sales. Nissan shut down its Aguascalientes plant for 26 days and the Cuernavaca facility for 12 days.

As the year wore on, both production and sales in Mexico continued to lag like-2008 levels, largely due to historically low vehicle demand in the U.S.

One-fifth of Mexico’s annual exports traditionally are vehicles and car parts targeted for the U.S., but new light-vehicle sales there had plummeted 37.5% in the year’s first four months.

As a result, Mexican vehicle production took a hit, falling 40.5% to 391,281 units in the first quarter.

The freefall in U.S. vehicle demand and ensuing production cuts led to a 7% decline in Mexico’s overall economy in 2009.

“The drop is due to the deterioration of global economic conditions,” Mexico’s Treasury Dept. said at the time, noting 372,289 jobs were lost in the first-quarter.

The ongoing financial woes of the Detroit-based auto makers hit the domestic industry especially hard.

Chrysler entered bankruptcy in mid-2009 and quickly announced it would suspend production at its Mexican facilities in Toluca and Saltillo.

However, following the takeover by Fiat Automobiles SpA, Chrysler Mexico extended PT Cruiser production another year through the ʼ10 model year. It also announced the Fiat 500 would be sourced from Toluca beginning in late 2010.

Prior to its Chapter 11 filing, GM took the preemptive measure of idling 13 assembly plants in North America a varying number of days throughout July, including its Silao operation that built Chevrolet Silverado, GMC Sierra, Chevy Avalanche and Cadillac EXT fullsize pickups.

As a result of GM and Chrysler production cuts, Mexico output in July fell 26.8% to 116,114. But thanks in part to a 24.3% output hike by Ford; July marked the lowest monthly decline of the year, setting the stage for a gradual comeback.

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