Although Germany and France perfected the design and engineering of the automobile in the late 1800’s, America became the industry leader during the first half of the twentieth century thanks in part to Henry Ford’s innovations in mass production. This led to Ford, Chrysler and General Motors becoming the dominant automotive companies in the world in the 1920’s, while Asia and Japan rose to prominence after World War II.

Today, the evolution of technology and the burgeoning global economy have led to the boom of manufacturing automotive components in Mexico’s. Let’s take a closer look at the auto industry in Mexico and why so many brands have moved their manufacturing operations south of the border.

Mexico’s Early Auto Years

The automobile industry in Mexico goes back nearly a century. Henry Ford built the first auto manufacturing plant in Mexico in 1925. That first factory, which concentrated on the production of the classic Model T, led to General Motors, Chrysler and Renault also setting up production and assembly plants in Mexico by the late 1930s, though their production numbers were kept relatively low.

In 1962, Mexico issued a decree on automobiles that favored domestic production over importing goods. Automotive manufacturers like Volkswagen and Nissan, attracted by the decree, set up factories in Mexico in the mid-1960s. However, most of these factories, which were constructed around Mexico City, featured outdated machinery and equipment, resulting in inferior, uncompetitive motor vehicles.

Mexico’s debt crisis in the early 1980’s called for new policies and in 1983, the government promoted more exports, encouraging several companies, including Ford and GM, to open more modern, well-equipped factories closer to the Mexico-U.S. border.

The Introduction of NAFTA

The Mexican automotive industry took a turn with the introduction of the North American Free Trade Agreement. This agreement, which was passed in 1994, was signed by Canada, the United States and Mexico and essentially allowed for smoother, efficient and cheapercross-border trade between the three countries.

Some highlights from the agreement:

• Eliminating tariffs: Prior to NAFTA, goods exported from Mexico commonly featured tariffs of 30 percent or more and included long delays to process paperwork. Furthermore, U.S.-made goods imported to Mexico had duties that were on average 250 percent higher than those goods taken from Mexico to the U.S. The agreement aimed to gradually phase out tariffs over the course of 15 years.
• Eliminating other barriers: Along with tariffs, the agreement aimed to break down more tangible barriers by opening up the U.S.-Mexico border and interior to truckers. The agreement also put forth policies to make processing and licensing requirements at the border more efficient.
• Establishing standards: Canada, the U.S. and Mexico agreed to tighten health, safety and industry to meet the highest standards in the world. This also improved the speed of inspections and certifications of export products.
• Focusing on the environment: The three countries agreed to establish a commission to oversee labor and environmental issues, ensuring that the sudden growth of industrialization in Mexico wouldn’t lead to an increase in pollution.
• The passage of NAFTA led to even more investments by auto companies, who installed more advanced equipment and technology so that the Mexican plants would match those in Canada and the United States.

Mexico and the Auto Industry Today

It’s only in the past decade that Mexico has really cultivated the fruits of the North American Free Trade Agreement. Several automaker companies had already set up manufacturing centers throughout the country since those early years, including:

• General Motors
• Ford
• Fiat
• Chrysler
• Volkswagen

In the past few years, these manufacturers were joined by more European and Asian auto companies, such as:

• Audi
• Mazda
• Honda
• Toyota
• BMW

According to Forbes, about 80 percent of the cars manufactured in Mexico are exported globally, with about two-thirds of those exports going to the United States. In 2014, the industry comprised about $19 billion in investments. Production for that year was estimated to reach 3.2 million cars, double what it had been five years prior.

According to data from the Asociacion Mexicana de la Industria Automotriz, Mexico is the 4th largest exporter in the world and was the 7th largest manufacturer of automobiles in 2014. Furthermore, within the first seven months of 2015, the country’s trade surplus in the automotive industry reached $31.1 billion. From January to July of 2015, income from automotive exports totaled at 3.4 times oil exports, 3.6 times remittances, and an astounding 4.8 times the income from tourism.

An Evolution of the Maquiladora Movement

The recent boom in in Mexico’s auto sector has shades of the same growth during maquiladora movement that happened in Mexico during the 1970s and 1980s. The Bracero Program, an agreement between the United States and Mexico that essentially allowed Mexican agricultural and manual laborers to work as legal guests in the United States, ended in 1964. Just a year after that program’s end, the Mexican government passed the Border Industrialization Program, or Maquiladora Program, to put a plug on the growing unemployment occurring along the border with the United States.

Through the Border Industrialization Program, the Mexican Government waived duties, tariffs, and regulations on equipment, machinery, and raw materials imported to the maquiladoras, or manufacturing operations, as long as the items were exported back out of Mexico. This resulted in a sudden sprout of manufacturing centers all along the U.S.-Mexico border. The U.S. auto companies would then ship parts to Mexico where laborers would assemble the parts and send the finished cars back to the States without needing to pay duties.

The Introduction of the IMMEX Program

In November 2006, the Mexican government launched the Decree for the Furthering of the Manufacture, Maquiladora, and Export Services, simply known as the IMMEX program. IMMEX was essentially an offshoot of the Border Industrialization Program, except it now opened up to all countries, not just the United States. IMMEX now allows for all foreign companies to temporarily import their goods, equipment, and raw materials to Mexico without needing to pay taxes or duties as long as the finished goods are exported out of the country within a given deadline.

The main goals of IMMEX include:

• Expanding the Mexican economy and strengthening the country’s competitiveness in its export sector
• Simplifying compliance factors
• Advocating the adoption of new means of operation and business
• Reducing costs in management and logistics
• Modernizing and streamlining overall procedures

The program is meant to be beneficial, but there’s no denying its concentration on the Mexican economy. Getting more business from foreign companies creates more jobs domestically and helps to modernize the infrastructure of maquiladoras with new technology and education opportunities.

Nissan and Aguascalientes

For a good example of the auto industry boom in Mexico, we have to go about 450 miles southwest of the Texas border to the Mexican state of Aguascalientes. While the area was once known for farming and silver mining, it is now home to dense industrial activity and has become a popular manufacturing hub for automotive companies as it is just a few hours in either direction from major ports, allowing for shipping in just about any direction.

One auto company that has made this major railroad hub a home is Nissan. The Japanese car manufacturer has three plants in Mexico, two of which are in Aguascalientes. Its newest developed in 2013 is a 21-million-square-foot factory. The factory, which is one of the largest built in Mexico, was built with a budget of about $2 billion over the course of 19 months, a record for the company.

But it’s not just size. The factory has the numbers to back it up. Production at this Nissan factory in Aguascalientes grew to a full capacity of 175,000 cars per year going 23 hours a day, six days per week. That breathtaking speed and production has also paved the way for over 3,000 jobs in the factory with another 9,000 in supplier companies.

Thankfully, much of the heavy lifting is operated by advanced machines and robotics. In fact, about 72 percent of the factory’s processes are automated. A group of 190 robots can be programmed to weld four different car models. Inside a stamping facility, machines can stamp out about 273,000 parts per month.

Nissan can ship to 50 countries from Mexico. Easy access to trains allows for quick, efficient shipping to the United States and Brazil. Between the two factories in Aguascalientes, Nissan manages to build a vehicle every 38 seconds, an amazing amount that is matched only by its flagship factory in Kyushu, Japan. All three Nissan plants in Mexico produce about 850,000 units per year, accounting for about one in four cars built in the country. By 2020, the company hopes to produce 1 million units per year through their Mexican facilities.

Why More Auto Companies Are Manufacturing in Mexico

How did Mexico become such a hub for the automotive industry? NAFTA certainly had a hand in it, making it easier for auto companies in the United States to produce and ship in Mexico. IMMEX has certainly helped reduce costs for all countries by eliminating tariffs and duties.

A big reason for Mexico’s popularity is its workforce. The workers are young at an average age of 24 and are paid an average of $40 per day. Furthermore, the workers in maquiladoras are highly educated. In fact, the country has more engineering graduates each year than the United States. On top of those engineering experts, many of Mexico’s workers are operational and professional managers who can help businesses improve and expand even further.

Much of it has to do with overall costs. The country offers affordable labor and the elimination of tariffs, but IMMEX also gives companies manufacturing in Mexico special income tax policies and fiscal treatment to reduce overall operating costs. Easy access to railroads and highway systems allows for affordable, streamlined transportation of goods.

The Future of Mexico’s Auto Industry

In the first few months of 2016, the growth in Mexico’s auto industry has taken a bit of a dip as the country’s auto manufacturers are selling fewer vehicles overseas. Much of that comes from the reduced demand from the United States and Canada, who account for more than half of automotive sales in Mexico.

A big reason for the reduced demand has to do with gas prices. Oil prices are lower than they were two years ago, which prompts many consumers to purchase larger vehicle models. Unfortunately, many of the factories in Mexico produce compacts, subcompacts, and other smaller cars. Normally, these can be produced at a profit because labor costs are only a fifth of what would be spent in the United States.

Fortunately, this dip in demand is likely to only be temporary. Plenty of companies maintain their investments in Mexico’s maquiladoras. New plants are already scheduled for production, and Ildefonso Guajardo Villareal, Mexico’s Secretary of Economy, estimates production output to reach up to 5 million units by 2020. Many companies, including Kia, Nissan, and Toyota, are planning factories compact vehicles, while companies like VW, Audi, and BMW plan to create SUVs and luxury models in their upcoming plants. Through adjustments, these automotive brands can still increase production and gain exports for the long term.

How NAPS Can Help

NAPS opened a regional headquarters in Guanajuato, Mexico in 2012 and has since helped automotive suppliers throughout the U.S., Canada, Japan and Europe successfully expand to Mexico. NAPS can run all of the human resources, accounting, import / export, environmental health and safety, permitting and 100% of the government compliance to help automotive suppliers focus on production, quality control and efficiency. To learn more about how NAPS could help your automotive supply chain operations, call (800) 551-8581.