Mexico’s Auto Industry Between Radical Change and Trade Wars

Yves here. This article illustrates the dangers, even if by virtue of geography, to hitching your economic star to a declining power, as Mexico has with its auto industry dependence on America’s producers. The US has been a laggard in the two biggest developments in the past half-century: the shift to smaller, more fuel efficient cars and more recently to electric vehicles. With smaller cars, Detroit could not accept that the rest of the world (and Americans when quality improved) really wanted a lighter, more compact, more fuel-efficient ride; they were convinced that as these countries got richer, of course they’d want extravagant cars. I’m not as clear on what has led to American automaker sluggishness in embracing EVs, save inertia.

But this article describes how Mexico had prospered from its auto connection, and what might come next.

By Jorge Carreto Sanginés, Facultad de Economía, Universidad Nacional Autónoma de México; Margherita Russo; and Annamaria Simonazzi, Professor of Economics, Sapienza University of Rome. Originally published at the Institute for New Economic Thinking website

In less than three decades the Mexican automotive industry has gone from a minor role to the seventh leading world producer of automotive vehicles. This spectacular growth occurred in symbiosis with the evolution of the US economy and public policy. After an initial period of import substitution, the Mexican automotive industry developed first as a cheap producer of parts and components for the three big US automakers, to grow then as an integral part of the North American productive system, as well as the necessary entry point to the American market for non-American automotive companies.

In our new INET Working Paper we trace the evolution of the Mexican automotive industry from the demise of the import substitution policy through the two treaties with its North American partners (NAFTA in 1994, replaced by the USMCA in 2020). By emphasising its weaknesses and strengths, the analysis attempts to identify obstacles to its further development.

NAFTA (the North America Free Trade Agreement) represents the culmination of an integration process that has profoundly transformed the structure of the Mexican automotive industry, deepening its dependence on the US market. Indeed, despite the many free trade agreements signed by Mexico with other countries and regional organisations, after 25 years of NAFTA, more than 80% of Mexican exports are still concentrated in the US. While there is no doubt that NAFTA has contributed to the spectacular growth of the Mexican auto industry, whether it also increased its resilience or, rather, its dependence is still an open question.

The lens of the centre-periphery relationship can help to understand the present integration of North America and its future direction. The Mexican experience is part of the more general case of the “integrated peripheries,” that is, of those economies incorporated in the new hierarchical division of labour which was ushered in by technological, competitive, and geopolitical changes. As in other such cases, Mexico’s development cannot be accounted for separately from the developments occurring in the core country. Unlike the core-periphery literature, however, our analysis emphasises that the various clusters of cores and integrated peripheries are not alike. In the case under study, the core (the US) has been systematically lagging behind the main transformations pioneered by its competitors. In the 1970s-80s, US legacy automotive companies had to respond to the increasing foreign (mainly Japanese) competition in their own, hitherto protected, market. It is in this context that, among the various strategies adopted, the offshoring of labour-intensive operations and delocalisation of assembly plants to Mexico took on increasing importance.

The automotive industry is now facing truly seismic change: electric vehicles and autonomous driving; automation, robotics and digitalisation; new forms of car ownership and mobility. All these changes have the potential to reshape existing industrial geographies, affecting the relative advantage of integrated peripheries versus semi-peripheries and of different regions within and between cores, as leading companies adopt new digital technologies and alter their component supply chains and sourcing practices.

This transformation is taking place at different speeds, and its effects on the core, semi-peripheries and peripheries in the various regional clusters are unknown at the moment. A large segment of the supply chain, connected with the internal combustion engine, is expected to disappear. The transformations required in Mexico’s supply chain may be very costly. The challenge for Mexican companies is to be integrated into the new supply chains and participate in the co-engineering of the manufacturing process, in the adaptation of models to different markets, and in the design and development of new, more efficient parts and components. Yet, success is only partly in the hands of Mexico.

Nationally, Mexico’s longstanding problems – poor infrastructure, legal system and corruption – could reduce Mexico’s attractiveness to foreign investment. However, one should note that the Mexican governments have invested considerable resources in the development of domestic production and competence networks. The automotive suppliers in Mexico are now organised around a national network of clusters (Red Nacional de Clusters de la Industria Automotriz). There are nine regional organisations – Clusters – whose mission is to facilitate the collaboration between industry, government, and research institutions to boost the competitiveness of the regional automotive sector. Governments and companies have put considerable effort and money into forming and training qualified engineers, technicians, and workers to fill the shortage of technical talent – in engineering, advanced software, materials and manufacturing – still plaguing the industry.

Could the numerous signs of regional vitality, the recent wave of FDI in Mexico, besides the degree of integration reached by the Mexican and US industries, justify some optimism for the future of the Mexican automotive industry in the electric vehicles era? The horizon is clouded by the uncertainties related to the transformations taking place in the automotive sector and the geopolitical scenario: the end of NAFTA and the advent of USMCA, the entry of powerful competitors into the global market, the trade war between the USA and China, and the effects of an emerging automotive pole in South-East Asia.

Indeed, there are many obstacles along the way. First of all, US policy itself. Once again the US has fallen behind in the profound transformation the industry is experiencing; only recently has it made a sudden and accelerated effort to catch up with China and the EU. US legislation designed to encourage re-shoring and US regulations interpreting the USMCA’s car and truck content requirements could limit Mexico’s future access to the US market, mitigating the potential benefits that derive from the nearshoring of productive investments from Asia. Furthermore, its success in securing free trade agreements could be substantially curtailed by the relocation of production from China to neighbouring countries and the new intra-Asian trade treaties, especially if the United States decides to join them.

Our analysis emphasises the importance of policies targeting the industrial, macro-economic and social context; the need for combining economic and social programmes that include sustained investment, collaboration between public and private sectors, training models and policies to boost skills acquisition and to stimulate productivity growth, and income support and policies to foster cohesion and convergence. But the Mexican case illustrates also the difficulties a late-comer country faces in developing an independent industry and the risks involved in betting everything on the cost of labour.

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  1. jsn

    Inertia indeed!

    The electric Ford F 150 is case in point. Because the big three are still committed to huge vehicles, American products are inherently heavy.

    At $5-10K per hundred miles for batteries alone, the weight of American vehicles makes them resistant to electric conversion on existing platforms. My friend who farms in France has an all electric car and loves it, but it would be terrifying to share road space with an F 150 in a car that small and light. Roadways there, because of history, are scaled for smaller cars and land use regulation keeps the killer big trucks mostly away from day to day drives.

    1. Carolinian

      terrifying to share road space with an F 150

      It can be intimidating here too–particularly when they are two feet off your rear bumper.

      My Hyundai comes from Mississippi but I believe the engine was made in Mexico. But while the cheap labor Mexican auto industry is a boon for car companies I wonder if the $5/hr wages are a boon for the Mexicans.

      And it’s not just makers of everyday cars who have flocked to the low wages. Audi is there and BMW, our SC stalwart, has talked about building a Mexican plant.

  2. Left in Wisconsin

    With smaller cars, Detroit could not accept that the rest of the world (and Americans when quality improved) really wanted a lighter, more compact, more fuel-efficient ride; they were convinced that as these countries got richer, of course they’d want extravagant cars.

    I would say that is half the story. The other half is that, since the Japanese dramatically upped the quality/cost equation in the early 1980s, none of the American companies have been able to either make any money on small cars or match the Japanese, then Koreans… on cost, productivity, or quality/reliability when it comes to small cars, so even if they could eke out a small profit, they know that the Asian producers could (and have) lowered prices whenever they feel like it to further squeeze them.

    When I had access to good data in the late 80s and early 90s, it was clear that the Big Three didn’t really understand their own accounting – they insisted on including sunk costs (retiree obligations, plant closing costs) in their product costing (at least in part to argue for union concessions) and they had ridiculous mark-ups built-in to their internal parts production – but it was also clear to everyone involved, company and union, that there was a big competitiveness problem, esp with the Japanese. So everyone got on board with the “bigger is better” theme.

    As far as I can see, this problem has never been solved. Ford is by far the best managed of the Big Three (though Chrysler hardly counts anymore) and they are getting out of the car business in the U.S. altogether.

    As for Mexico, it would have been interesting for the author to compare the U.S. Big 3-focused operations from the VW and Japanese operations, which are not insubstantial in Mexico, though definitely much less integrated to the home country than U.S.-focused production.

  3. Nikkikat

    I worked for the county in California. In the late 1970’s the county had purchased EV’s for county workers. There were about 100 vehicles. Right after Reagan was elected the cars were destroyed. The county had them crushed. No more talk of electric cars. The same with Jimmy Carter’s solar panels. The auto industry along with the oil companies made sure we didn’t progress. As to huge SUV’s I believe the public has made that choice. Americans will not give up anything ever.

    1. Joe Well

      It is getting harder and harder to see the road while driving a car with all the SUVs obstructing the view from car-level.

      The only solution is…to get an SUV!

  4. synoia

    It is interesting to compare older and newer pickups side by side.

    The newer pickups ones are Giants in comparison.

    The Ford Ranger was initially quite small. Now it appears to have grown until it is the size of a 15 year old F150. The current F150 almost appears to need a stepladder to get into it.

    1. Greg

      They’re insane, and can only be understood as a childish backlash against the unarguable reality of climate change. Similar to “rolling coal” in expression, but by rich people who influence these sorts of things.

      I just wish the country I live in would ban the import of American-designed cars already, because as mentioned by others, they are an absolute menace on the roads and direct multiplier of road fatalities.

      1. drumlin woodchuckles

        If your country has Free Trade Agreements, your country probably can not do that. If your country is a member of the WTO, I don’t see how your country could “legally” ban American car imports.

        Whereas if your country abrogated and cancelled any Free Trade Agreements it has with America, and if your country abrogated its agreements to any and all GATT rounds it is a part of if America is also a part of them, and if your country withdrew from the WTO; then your country could ban American car imports any time it chooses.

        In other words, if you want your country to have the freedom to ban car imports from America, you will have to get your country to seccede from the Global Free Trade System and all its Agreements and Organizations.

        If you support Free Trade, then American car imports into your country are part of the price you pay to have Free Trade. Do you support Free Trade?

  5. No helmet required

    Live on a street where giant diesel trucks and small Japanese imports with gigantic mufflers accelerate as fast as possible pretending they are on a drag strip. Spewing $4.00 fuel like no tomorrow. Climate change, not a problem. Sound of Freedom- right on. On October 2, 2008, at the vice-presidential debate between Sarah Palin and Joe Biden, “drill, baby, drill” reached a new prominence. Joe Biden, referring to the energy crisis and McCain’s 20 votes against funding solar and wind energy, stated that McCain thinks “the only answer is drill, drill, drill. Drill we must, but it will take 10 years for one drop of oil to come out of any of the wells that are going t

  6. Hayek's Heelbiter

    Did you know that the first electric vehicle was invented in 1830?
    And that at the turn of the century America a leading producer of electric vehicles? William McKinley was taken to hospital in an electric ambulance.
    I sure didn’t.

    More recently, America was once again way ahead of the curve in electric vehicles but sclerotic Detroit wielded its death grip.
    Highly recommend you rewatch Chris Paines 2006 documentary, WHO KILLED THE ELECTRIC CAR.

  7. Gregorio

    China is the thousand pound gorilla in the room. While the US auto industry is slowly ramping up the manufacturing of small numbers of $100k luxury EV’s, Chinese manufacturers like BYD are already producing large numbers of very nice EV’s in the $15-25K range. The only way that the US will be able to hold back that wave is to continue promoting xenophobic cold war rhetoric and tariff/sanctions regimes. It looks like the US auto industry learned absolutely nothing from their experience of being trounced by the Japanese in the 70’s and 80’s. The smartest thing that Mexico can do is to start negotiating with the Chinese to manufacture EV’s in Mexico for the North and South American markets.

    1. Felix_47

      The average health costs in the US are about 13000 per year and in China something like 300 per year per capita. I used to work for one of the big 3 and it was the health costs and worker’s comp which is health costs supercharged by litigation were essentially insoluble problems. The US car industry has been on its last legs for decades. Don’t forget all those big pickups are protected by huge tariffs. Regarding Mexico one thing I never see mentioned is that the workers are getting 2 or 3 dollars per hour doing what American workers in Ohio, Indiana and Michigan were doing for 50 per hour. And many of the workers are recent arrivals from Mexico. Why is the UAW not able to negotiate in Mexico where the unions now are company and government controlled? The answer is obvious….because Mexico is another country. But after 40 years of massive immigration it is hard to say Mexico is any different than the US in terms of demographics. My kids school is 70% Mexican. So why not just join Mexico and the US into one country which it already is defacto and let the UAW organize all the auto plants. Then a strike might mean something. And if Chinese manufacturers set up shop there that would be a very effective strategy to equilibrate wages. Domestic Chinese workers would not be very happy to see their Mexican compatriots making 50 an hour while they are making 8. And Mexico has a pretty good framework for a national health system we could even adopt.

    2. drumlin woodchuckles

      “promoting xenophobic cold war rhetoric and tariff/sanctions regimes” sounds like an artificial brain-manipulation complaint launched by Free Trade Hasbarists to me.

      Free Trade is the New Slavery.
      Protectionism is the New Abolition.

      The Japanese competed on quality, not on lower wages, inferior conditions, zero environmental protections, zero social security costs, zero unions allowed, etc.

      The Chinese goal is to exterminate the American car industry from existence, along with every other trace of remaining industry in America, in order to turn America into a third-world-style corn/soy/coal colony for China. Free Trade hasbarists can cry “cold war” all they like. America should protectionise itself against enemy economic production aggression. And if that economic aggression is disguised by hiding it in Mexico to import it into America from Mexican bases, then that production should of course be banned from entering the United States.

      Would Mexico abolish NAFTA in return? Hopefully. Then Mexico could reprotectionise its agriculture, ban American food imports, and restore its ability to provide a living for its own protected farmers growing food for their own protected National market.

      America should ban economic contact between itself and countries with lower wages, standards, costs, etc. than America has. Under such a Fair Trade regime, would countries with even higher wages, standards, costs, etc. than America has . . . be free to ban economic contact between themselves and America? Of course. And that would be a good thing. That is how we would create a forced march to the top instead of the race to the bottom we now have.

      1. saywhat?

        Protectionism is the New Abolition. drumlin woodchuckles

        Except I remember when US automakers took advantage of their protected status to produce crappy cars designed to fall apart in 3 years (Planned Obsolescence).

        Also we should wonder why foreigners would want US dollars in excess of legitimate needs such as buying US finished products and abolish those reasons. Two such illegitimate reasons that I can think of are:

        1) Foreigners can buy US land.
        2) Foreigners receive welfare proportional to account balance via positive interest (InterestOnReserves) and positive yields on inherently risk-free US sovereign debt.

        1. drumlin woodchuckles

          The less we had to buy from the foreigner, the less we would have to sell to the foreigner.

          As Abraham Lincoln said when told that steel rails from England would cost less than steel rails from America for building the TransContinental Railroad . . . ” If we buy the rail of England, then we shall have the rail and they shall have the money. But if we buy the rail of America, then we shall have the rail AND we shall have the money.”

          If we buy the manufactured goods of the Foreigner, then we shall have the goods and the Foreigner shall have the money. Whereas if we buy the manufactured goods of America, then we shall have the goods AND we shall have the money.

          But the only way we can restore America’s capacity to make American-manufactured goods in America is to protect the American political-economy and society from foreign-manufactured goods. Once we have restored whatever rudimentary industrial manufacturing ecosystem back into existence which the cinder block ceiling of permanent resource shortages will allow, then we may risk permitting very controlled trade across a very rigidly protected and policed economic membrane.

  8. drumlin woodchuckles

    Did American car companies have an infestation of pro-oil-company Directors on their Boards of Directors?
    If so, could such “secret fossil fuel agents” have sabotaged pro-efficient-car policies from the Boards themselves?

  9. Thomas Wallace

    ICE vehicles are basically a commodity. And were overproduced prior to the current chip shortage. US manufacturers have been an investing disaster, with GM and Chrysler going officially bankrupt, and Ford just hanging on. The victims, in my opinion, of unfair trade practices.
    Now there are no domestic compacts. VW Golf/Jetta, Kia Forte, Mazda 3 are all assembled in Mexico. As Kia owner, I’m happy with the quality, which is more than good enough.
    People in the US wanting big cars now own SUV’s and pickups. I don’t know how much was due to EPA standards vs legitimate buyer preferences.
    Japan, Korea, and Europe all have aggressive industrial policies and subsidize their exports.
    The best selling car in China is a $6,000 mini EV:

    The Wuling Hongguang Mini EV is equipped with a 9.2 kWh battery capable of a NEDC range of 120 km (75 mi) or a 13.8kWh battery capable of a NEDC range of 170 km (110 mi).[6]

    The Hongguang Mini can seat four people and is powered by a single electric motor producing 13 kW (17.4 hp) and 85 Nm (62.7 lbf.ft) of torque with rear-wheel drive. The Hongguang Mini EV has a top speed of 100 km/h (62 mph) and an estimated range of 170 km (110 mi).[6] Based on the NEDC driving cycle, the estimated energy consumption of the Wuling Hongguang Mini EV is 8,1 kWh/100 km.[7]

    In 2020, the Hongguang Mini had a price starting at US$4,162, and tops out at US$5,607 for a fully loaded model, making it China’s cheapest EV.[8] Standard safety features of the Hongguang Mini include anti-lock brakes, tire pressure monitoring sensors, and rear parking sensors. The Hongguang Mini also has standard features including air conditioning, power windows, stereo system, 12 storage compartments, 741 liters of trunk space with the rear seats folded down, and the accelerator and brake pedals feature positive and negative symbols.[9]

    Cars are too commodified for an investor to make money, but niche companies can earn good returns on invested capital. For example AZO, now 1,780.10 and up 60% YTD.

    Personally, I would buy a Hongguang Mini, but they would never pass all US safety regs.

    Sure cars used to be high tech, like textiles in the 18th century. Now, I would try to not give it much thought, and avoid investment in that area.
    Are foreign cars assembled in the US domestics? I dunno if it matters.

    1. drumlin woodchuckles

      If the foreign cars assembled in America contain more American-made parts than the American cars assembled in Mexico do, then it matters.

      Have you heard the saying . . . ” My Ohio Honda is more American than your Mexico Ford” ?

  10. drumlin woodchuckles


    What years do you remember this planned obsolescence of American cars happening in? If I knew what time-frame you are remembering, I would know whether we had “protectionism” at that time or whether we had “free trade” at that time.

    Without that crucial time-relevant information, I cannot know whether the planned obsolescence of ” Detroit Iron” happened during protectionism or during free trade. So I cannot know if what you offer as a counter-example really is a counter-example which really would require me to refine my thinking.

    So if you could supply us the years during which that planned obsolescence was the norm for American cars, that would be very helpful.

    thanks in advance,

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