Mexico – The OM Blog by Heizer, Render, & Munson

OM in the News: Holy Guacamole!

Few companies can match Chipotle Mexican Grill’s avocado appetite. The California-based restaurant chain bought around 5% of all the avocados consumed in the U.S. last year. Since domestic production is limited, most of the roughly 132 million pounds of avocados Chipotle used across its 3,700 locations last year were imported.

Many guacamole lovers flinched when the U.S. threatened a trade fight with Mexico, which accounts for roughly 90% ($3.4 billion worth) of U.S. avocado imports. But Chipotle was ready. For the past 7 years, the chain has been scouring the Americas and the Caribbean, seeking out farms and suppliers that can satisfy its immense demand. In the past, Mexico had supplied 85% of Chipotle’s avocados, leaving the chain at the mercy of the country’s weather and other factors, such as cross-border trade, reports The Wall Street Journal (April 1, 2025).

Food-industry supply chains can take years to build. Many companies are deciding whether to redraw trade lines to avoid the levies, absorb rising costs or pass them along to customers. Chipotle’s globe-spanning hunt for avocados reflects how firms navigate rapid changes in trade policies. It expanded its supply-chain team, directing the group to find new avocado sources. The team identified half a dozen countries, concentrated in locales near the equator, that could support the sun-hungry plants.

So Chipotle broadened its avocado sourcing to Columbia, Peru, the Dominican Republic, Brazil and Guatemala–and plans to develop new suppliers in El Salvador and Honduras. But diversifying avocado sources creates challenges in Chipotle’s kitchens, too. Chipotle has given restaurant crews leeway to add more lime or lemon juice and salt, depending on the results of guacamole taste tests.

Even with a more dispersed supply chain, about half of Chipotle’s avocados still come from Mexico. It is supporting research on ways to cultivate more avocados in the U.S., including in Florida, where I live. (We have 3 avocado trees in our yard and have such a crop that we give it to all our neighbors). Company executives said they will continue to scour the world to find more readily available sources to protect its guacamole stocks.

Classroom discussion questions:

Why is Chipotle expanding its supply chain?
What are the operations management complications of sourcing from so many different countries?

OM in the News: Mexico, Nearshoring, and Manufacturing

The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), has played a crucial role in Mexico’s manufacturing growth (to a recent $374 billion), reports Industry Week (June 12, 2024). The USMCA (see Chapter 2 in your Heizer/Render/Munson text) establishes more significant regional content requirements and higher labor standards, encouraging local production.

Supply-chain relocation has benefited investment in Mexico, where there has been an unexpected increase in the demand for industrial warehouses. Foreign direct investment (FDI) is now over $18 billion and has been vital to technological advances and has strengthened the trade relationship with the U.S., Mexico’s leading trading partner in manufacturing.

The fact that Mexico displaced China as the U.S.’s top trading partner made world news. U.S. data shows an import value of $427 billion from China in 2023, down from $536 billion in 2022 and $504 billion in 2021. By comparison, Mexico’s import value to the U.S. in 2023 was $475 billion, up from $452 billion in 2022 and $382.5 billion in 2021. The trend continues in 2024, since during the first four months of the year, the U.S. imported $129 billion dollars from China compared to $162 from Mexico.

The main engine of the Mexican manufacturing economy is the automotive sector. In 2019, Mexican plants produced $94 billion worth of components; by 2023, that reached $121 billion, and this year, it is expected to reach $152 billion, an all-time high. Mexico is now the leading exporter of auto parts to the United States, with 42.5% of the U.S. market—well above Canada, with 10.5% and China, 8%.

In addition to its modernization, the USMCA now demands higher regional content, going from 62.5% under NAFTA to 75% in the USMCA. This motivates the narrowing of value chains and makes Mexico essential to the region’s productive structure.

Classroom discussion questions:

Why is this reshoring occurring?
How does this impact decisions the operations managers in the U.S. make?

OM in the News: China or Mexico?

“We needed to have a near-source option to complement our supply chains out of Asia,” said one U.S. manufacturer. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”

More and more companies seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S., reports The Wall Street Journal (April 25, 2023). It has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances to U.S. consumers that reduce the need to carry so much inventory. This also offsets the risk of production disruptions and lost sales because of freight delays.

But Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers. Building up similar ecosystems in Mexico will take years. And physical security is a concern in a country notorious for drug cartels and violent crime.

Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ said an industry expert.

China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.

Classroom discussion questions:

Summarize the Mexico vs. China tradeoffs facing American manufacturers.
Figure 8.1 (page 357) lists six KSFs for country location decisions. Compare Mexico and China on each.

OM in the News: Mexico’s Industrial Hubs and Nearshoring

An industrial park under construction in Monterrey, Mexico

Companies from around the world, writes The Wall Street Journal (Feb, 3. 2023), are moving production and equipment to Mexico as they seek a manufacturing hub closer to the U.S., part of a broader shift in global trade. Some companies are relocating from Asia, while others are investing millions of dollars to raise output of goods that are exported tariff-free to the U.S. (In Table 8.3, we point out that Northern Mexico has become a cluster of electronics firms such as Sony, IBM, HP, Hitachi, and Panasonic).

Now, supply-chain disruptions, prolonged Covid-related shutdowns in China, soaring shipping rates and geopolitical uncertainty caused by Russia’s invasion of Ukraine are fueling the nearshoring trend.

In Tijuana, home to one of the world’s largest export manufacturing hubs for TVs and electronics, industrial parks are almost at full capacity. And in Ciudad Juárez, across the border from El Paso, Texas, recruiters are hiring workers for companies arriving or expanding operations at job fairs. Mexico’s manufacturing-based economy, free-trade pacts including the U.S. Mexico Canada Agreement (see Chapter 2) and proximity to the U.S. are among its attractions for investors. Labor shortages in the U.S. also are playing a role.

Mattel, for example, the maker of Barbie dolls and Mega Bloks, expanded its Monterrey plant into its largest manufacturing facility worldwide with an investment of $47 million between 2020 and 2022. The toy maker more than doubled its workforce to 3,500 at the plant as part of a global supply-chain restructuring to boost output and productivity, with immediate access to the U.S., the world’s largest toy market.

The Mexican government says more than 400 companies currently have shown interest in moving production from Asia to Mexico. But Mexico also has problems of government corruption, rule of law, and public insecurity. These are all a drag on decisions to switch investments to the country. In addition, as demand for industrial space picks up, insufficient electricity infrastructure is limiting the speed at which manufacturers can move into Mexico.

Classroom discussion questions:

Why are companies nearshoring? Why not reshoring?
Why Mexico?

Good OM Reading: The Rise of U.S.-Mexico Cross-Border Manufacturing

As we note throughout our text, supply chains are critical to a successful Operations Management strategy. One component of the supply chain, particularly in the automobile sector, is maquiladoras (free trade zones in Mexico). Here is an interview with with Fabiola Luna, President of the Association of Maquiladoras, in Southwest Economy (First Quarter, 2022):

It is an industry mainly located along the U.S.–Mexico border, making easy the logistics for international trade. All raw materials get to Mexico on a temporary basis and then are used in the manufacturing process and exported back to the U.S. Since Texas borders several Mexican states, it is the main intermediary for U.S.–Mexico manufacturing trade.

Juárez is a particularly important city because it was here where the maquiladora model was born back in the 1960s, and since then it has been the economic backbone of the border region. Juárez has 320 plants employing 330,000 workers. About 60% of all maquiladora jobs in the state of Chihuahua are in Juárez. Originally, maquiladora plants were in industrial parks close to international border crossings, but currently they are all over the city.

The main maquiladora industry is the automotive sector. It represents 38% of employment. We manufacture all kinds of auto-related products, such as seat covers, seat belts, battery cables and wiring harnesses. So, practically all cars U.S. consumers own have a component made in Juárez. We also manufacture top-of-the-line all-terrain vehicles (ATVs), refrigerators, washing machines, medical surgical devices and even candies. The popular Brach’s candies are made here.

What we produce now is completely different from what we made 50 years ago. Our manufacturing processes have also evolved with new technologies. For example, some of our plants include high-tech robotics; some have automated processes with a good mix of traditional labor and robots.

We are even adopting the technology needed to supply electric vehicle production. We also have plants that manufacture for Apple, including the iPhone, the MacBook and AirPods. We are manufacturing the electronic products that have become essential. The maquiladora industry has evolved. Our industry continues to be labor intensive with a good mix of automation and a more skilled labor force. We have great expectations for the future regarding new technologies and manufacturing processes for electric vehicles.

Classroom discussion questions:

What is NAFTA and what is USMCA?
Why are maquiladoras an important part of U.S. manufacturing?

OM in the News: Mexican Factories Gain in Supply-Chain Revamps

Workers on an assembly line at the MGA Entertainment toy factory in Ciudad Juarez, Mexico

New data suggests Mexican suppliers are gaining ground as manufacturers reset their supply chains amid growing global disruptions, reports The Wall Street Journal (April 1, 2022). Last year, large American manufacturers solicited chemicals, produce and construction materials and other goods from six times as many suppliers based in Mexico as they did in 2020. At the same time, the number of suppliers in China that received procurement bids declined by 9% in 2021.

The push for suppliers in Mexico comes as more companies say they are resetting their supply chains by adding suppliers and bringing some production closer to end users. The effort is aimed at bolstering resilience, redundancy, and reliability following a series of shocks to supply networks brought on by Covid-19 outbreaks, port bottlenecks, extreme weather and geopolitical conflicts.

“If you’re a manufacturer and you used to have strategic relationships with one or two suppliers that produce the same good or a similar good, we’re now seeing that same manufacturer have relationships with three or four different suppliers,” said one industry expert.

The added suppliers tend to be closer to the buyer and its customers. There was a 514% increase from 2020 to 2021 in Mexican suppliers receiving bids from U.S. buyers and a 155% increase in Latin American suppliers. At the same time, manufacturers sought goods from 26% fewer suppliers in the Asia-Pacific region.

A separate survey of 2,000 U.S. and U.K. CEOs by a London-based group found that 15% had moved production closer to their home countries or sourced from suppliers in nearby regions, and 26% were looking into doing so.

Classroom discussion questions:

What is “nearshoring” and what are its advantages?
What are the OM implications of these two studies?

OM in the News: Mexico’s Shutdown Snags U.S. Factories

Whirlpool has said some of its suppliers in Mexico haven’t secured permission to remain open. A Whirlpool facility in Monterrey, Mexico.

Mexico exported $358 billion worth of goods to the U.S. last year, surpassing China as the nation’s largest trading partner. But many subsidiaries and suppliers of parts or finished goods to U.S. manufacturers remain closed by the order of Mexico’s Health Ministry, limiting the flow of goods back north across the border. So U.S. manufacturers preparing to resume production after a month of lockdowns are returning to work without a reliable supply of parts from plants in Mexico. The supply strains are adding to the uncertainty for manufacturers navigating one of the steepest drops in demand for their products in decades, writes The Wall Street Journal (May 6, 2020).

Mexico’s lockdown covers entire industries that remain in operation in the U.S. or are planning to resume production, including the auto industry. Repairing the frayed supply chains will be an early test for the revised version of a free-trade agreement between the U.S., Mexico and Canada, which is set to take effect in July. The pact, like many trade treaties, lacks standard definitions for essential industries that would remain open during a crisis that affects all three countries such as the coronavirus pandemic.

U.S. companies and some states have been lobbying for Mexican plants near the border to reopen, raising tensions between border towns where manufacturing and trade are tightly linked. Mexican authorities have cited border factories for contributing to higher rates of infection in northern Mexico. Public health authorities there say the trajectory of the pandemic in Mexico is behind the U.S., requiring that more businesses there remain closed. Tijuana, just across the border from San Diego, has been one of Mexico’s most infected areas.

Classroom discussion questions:

Explain why maquiladoras (see Ch. 2 in your Heizer/Render/Munson text) are important parts of U.S. supply chains.
Besides coronavirus, what other risks do supply chains face? (Hint: see Table 11.3)

OM in the News: The Mexican Medical Supply Chain

Workers at the Greatbatch Medical plant in Tijuana

“Nafta has transformed Tijuana from a gritty party spot to a world capital of medical devices,” writes The New York Times (April 1, 2017). Boulevards are lined with factories bearing the names of American-run companies: Medtronic, Hill-Rom, DJO Global and Greatbatch Medical. Inside, Mexican workers churn out millions of medical devices each day, from intravenous bags to artificial respirators, for the global market. Nearly everyone in America who has a pacemaker walks around with parts from here.

A proposed border tax could fracture the industry’s sophisticated global supply chain and force American hospitals to pay more for vital necessities. Hospitals in the U.S. rely on bandages and surgical gloves from China, suturing needles and artificial joints from Ireland, and defibrillators and catheters from Mexico. Annual imports of medical devices has reached $43.9 billion, with Mexico as the leading supplier, ahead of Ireland, Germany and China. Tijuana houses the highest concentration of Mexico’s medical device firms, 70% of which are U.S.-owned.

The high-tech operations emerged after Nafta helped transform Mexican border factories, called maquiladoras, into industrial powerhouses. Now, instead of being garment sweatshops, many maquiladoras in Tijuana employ a new generation of Mexican engineers and skilled technicians to make medical devices. Technicians at these factories earn $14 an hour, compared with $25 an hour for technicians at U.S. factories.

Mexico’s medical device industry buys much of its raw materials and capital machinery from American suppliers. The American-owned Integer plant in Tijuana, for example, buys 90% of its raw materials, duty-free, from the U.S.: stainless steel to be stamped into cups used for hip replacements and plastic to be molded into catheters. Then half of the factory’s output is shipped back to the U.S. and much of the rest to American-owned companies elsewhere. The company, like many others here, is seamlessly integrated: Employees in Tijuana videoconference with R&D teams in the U.S. to fine-tune product designs.

Classroom discussion questions:

What factors appear to threaten this supply chain?
Why is it hard to move the medical factories to the U.S?

OM in the News: America’s Electronics Trash–and Mexico

Life and business revolve around electronic waste in this Mexico City neighborhood, much of it from the U.S. — Life and business revolve around E-waste in this Mexico City neighborhood, much of it from the U.S.

On the street here, in Renovación, a neighborhood in Mexico City, Jesus Gómez watches as 8 men and a woman sit in a circle under an intense sun, breaking two huge sacks of spent Motorola cable-TV boxes apart with hammers and chisels. They wrench out bits of copper, metal, and circuitry, with shards of metal and plastic flying everywhere. Gómez will find buyers for all of it.

Outside the workshop are more piles, and there are yet more in the street; the junk seems to pour in constantly, some of it from around Mexico City and a lot from much farther. Heaps are from Texas. “The gringos throw it out,” says Gomez’ partner. “We do the dirty work of breaking it apart.”

That’s the essence of Renovación. At one unlicensed workshop after another, adults and teenagers disassemble printers, monitors, and PCs. It’s hazardous work: Smash an old TV, and you risk spewing lead into the air. Crack open an LCD flatscreen, and you can release mercury vapor. Mobile phones and computers can contain dangerous heavy metals such as cadmium and toxic flame retardants. Mexican workplace regulations, like those in the U.S., require e-waste shops to provide such safety equipment as goggles, hard hats, and masks. There’s little of that in Renovación.

In much of the world, Renovacion couldn’t exist, writes Businessweek (Nov. 14-20, 2016). Business owners wouldn’t be allowed to employ people in those conditions. Twenty-five U.S. states have laws establishing what’s known as extended producer responsibility, or EPR. That means electronics makers must collect, recycle, and dispose of discarded equipment rather than allow it to enter the waste stream. But the lack of a formal, regulated recycling industry is one of many reasons Mexico has become a magnet for spent electronics. E-waste is a poorly tracked trade, but Mexico is the No. 1 importer of used and junked electronics from the U.S., taking in almost 129,000 tons a year.

Classroom discussion questions:

After reading the linked article, what has Dell done for EPR?
What are the ethical issues that arise in this situation?

OM in the News: Ford Moves Its Small Car Production to Mexico

Ford’s factory in Wayne, Mich., will focus on making trucks and S.U.V.s, while production of smaller cars will be moved to a plant in Mexico

“There is no doubt that Nafta played a role in the migration of many American manufacturing jobs to Mexico in the last 22 years,” writes The New York Times (Oct. 19, 2016). Before the trade agreement, U.S. automakers barely had a presence in Mexico. Now, Mexico’s car-making work force is about 675,000 strong. And in a move that has drawn fire from critics of the Nafta, Ford is giving up on making small cars in the U.S. and plans to move production of its Focus compact cars from its Wayne, Michigan factory to a new plant under construction in Mexico.

Ford’s retooling of its Wayne factory, though, is a reflection of the industry’s desire to keep pace with growing demand for high-profit trucks and S.U.V.s, while continuing to produce less expensive models at lower costs with the cheaper wages paid in Mexico. Detroit simply cannot make money producing small cars in the U.S., where a UAW union worker earns about $29 an hour, more than triple the wages of a Mexican employee.

Detroit’s Big-3 auto companies are loath to close any existing facilities, both to keep peace with the UAW and to protect their billions of dollars of assets in factories in the U.S. that are already up and running. What’s more, plants like the one in Wayne are staffed by experienced workers and able to deliver high-quality products. .

It is unlikely, though, that any Detroit automakers will invest in new manufacturing plants in the U.S.. Mexico is simply too attractive an option for carmakers looking to add to their overall production capacity. “Nine of the last 11 auto factories built in North America have been in Mexico,” said one expert. “The fact is Mexico offers high productivity and low wages, and that is a hard combination to beat.” Ford is hardly alone. G.M. is investing $5 billion to upgrade its plants in Mexico. Toyota, Volkswagen, Kia, Honda and BMW are all adding jobs and new products there.

Classroom discussion questions:

Is Ford cutting U.S. jobs?
What factors impact major location decisions such as this?

OM in the News: It’s Getting More Expensive to Make Cars in Mexico

When car companies began flocking to Mexico more than two decades ago, the big lure was labor, which was plentiful and inexpensive. “Today,” writes The Wall Street Journal (Aug.15, 2016), “with an auto-production boom in high gear, those advantages are being chipped away.” Toyota, BMW, Ford, and several other auto makers have committed to spend a combined $15.8 billion to build new assembly plants or expand existing factories. That is on top of the more than a dozen plants already in operation and billions more being spent by auto-parts suppliers to keep pace.

The competition for employees—both finding and retaining them—is nudging up labor costs. The going rate ranges from under $1 an hour at some parts factories to nearly $3 an hour at the large assembly facilities. That is well above Mexico’s minimum wage of 73 pesos, or $4 a day. Still, it is too low to attract the quantity and quality of workers needed to fill the surging number of openings. Retention and retraining programs are becoming the norm as are bonuses for employees who agree to stay in place, especially those with valued skills. Some factories are luring recruits with perks such as a new cowboy boots. Vacancies are becoming the norm.

Auto-industry investment in the country accelerated in the 1990s after the signing of Nafta. In the lead were Detroit car makers and parts suppliers looking to avoid high labor costs at their unionized plants in the U.S.

Classroom discussion questions:

1.Why did so many auto manufacturers select Mexico?

2. What can OM managers do to retain employees?

OM in the News: Can Mexico Renege on Location Incentives?

Workers at the Kia plant near Monterrey, Mexico conducted tests on the assembly line, which just opened. last month. — Workers at the Kia plant near Monterrey, Mexico conducted tests on the assembly line, which just opened.

The new governor of the northern Mexican state of Nuevo León is balking at the tax breaks, land grants and other public perks that have underwritten the country’s automotive boom of recent years, reports The Wall Street Journal (May 17, 2016). He is refusing to honor a large portion of the incentives promised by the previous state government to woo a $2.5 billion new assembly plant by South Korea’s Kia Motors. Officials say the incentive package amounts to nearly 28% of the investment by Kia and its suppliers, and they are challenging provisions worth up to $100 million, including a 20-year holiday on payroll taxes.

Kia executives say they want it to be honored. The newly opened Kia plant will eventually produce some 300,000 compact Forte cars a year, most of them destined for the U.S., and Mexico has become one of the hottest countries in the globe for car companies. The country churned out 3.4 million vehicles in 2015, making it the world’s 7th-largest producer and 4th-largest exporter. Kia is one of 5 foreign auto makers that have assembly plants coming on line over the next 5 years. Those plants would increase Mexico’s annual production to 5 million vehicles by 2020.

Offering public incentives to auto makers has been standard practice since the 1980s and were key to U.S. southern states winning automotive assembly plants from the Rust Belt, with packages giving back 25%- 35% of the total investment. With its promise of eventually generating 14,000 jobs, Kia’s move here was seen as a vote of confidence for Nuevo León, emerging from years of gangland violence that had turned it into one of Mexico’s more dangerous corners.

Classroom discussion questions:

What other location factors, besides incentives, drew Kia to Mexico? (See Chapter 8).
Compare the Kia location decision to that made by Mercedes, which chose Vance, Alabama, for its first U.S. plant in 1993.

Teaching Tip: Explaining NAFTA to Your Students

Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.

Your students have undoubtedly been hearing about Donald Trump’s threat to “break” the North American Free Trade Agreement. Auto industry workers offered up some of his loudest cheers. But there are still more than 800,000 jobs in the U.S. auto sector, and The New York Times (Mar. 30, 2016) makes the case that without NAFTA (see Chapter 2), there might not be much left of Detroit at all. To be sure, the deals to reduce trade barriers threaten the livelihood of workers in the industries exposed most directly to foreign competition. NAFTA put them in direct competition with Mexican workers earning 1/5 of their compensation.

The American trade deficit in autos and parts tripled in the 2 decades after the NAFTA deal took effect in 1994, to about $130 billion in 2013. The industry lost 350,000 jobs, 1/3 of its workers, a massive shift in a flagship industry. Still, NAFTA itself had a relatively modest impact on the size of the U.S. trade deficit with Mexico. And autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the union-averse South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers.

The integration of production across countries with complementary labor forces — cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the U.S. — turned out to play a central role in reviving our auto industry. The Honda CR-V assembled in Mexico, for example, uses a U.S.-made motor and transmission– and 70% of its content is either American or Canadian. This regional integration gave the U.S.-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry supply chain would develop across Asia, including China and Taiwan and Southeast Asia. Now, as Chinese wages rise, almost every car manufacturer is setting up shop in Mexico.

Classroom discussion questions:

Explain the purpose of NAFTA.
Why is this an OM issue?

OM in the News: Mexico’s Auto Assembly Lines Surge Ahead

When Audi decided to move global production of its Q5 SUV to North America, the prize went to Mexico. Audi now is finishing a $1.3 billion factory in a small town called San Jose Chiapa. Mexico’s low wages and improved logistics were part of the draw. But for Audi, which plans to ship the factory’s output all over the world, what tipped the scales was Mexico’s unrivaled trade relationships. The Audi deal shows that Mexico’s 40 different free-trade pacts give it allure in the global car market, threatening the American South’s industrial renewal.

Seven Asian and European auto makers have just opened, or will open shortly, new Mexican assembly plants, reports The Wall Street Journal (March 18, 2015). Others have made significant expansions in Mexico, among them Nissan, GM, Ford and Fiat Chrysler. This month, VW said it would spend $1 billion expanding a Mexican plant to build a small SUV for the U.S. and foreign markets. All told, auto makers and parts suppliers have earmarked more than $20 billion of new investments. The wave of investment has turned Mexico into the world’s 7th-largest producer of cars—it passed Brazil last year—and the 4th-largest exporter after Germany, Japan and South Korea. Mexico’s current production of 3.2 million cars and trucks will rise more than 50% to 5 million by 2018. It has been more than six years since an auto maker picked the U.S. South for a “greenfield” plant, meaning one where the company didn’t already have facilities. Such projects have all gone to Mexico lately.

Audi is taking some unusual steps to control its risk. First, to ensure quality, the company created a consultancy that fanned out to 160 parts suppliers in Mexico, encouraging some to change plant design or improve weak production processes. The company created an inventory of local sources for every part and for all raw materials used in the Q5, and has required suppliers to source from its list. And Audi now is training 600 people from Mexico at its headquarters in Germany. Visiting on 18-month stints, the Mexicans train on Audi systems and are indoctrinated with the company’s intense focus on quality.

There is an excellent 3 minute video linked to the WSJ article.

Classroom discussion questions:

1. Why are automakers heading to Mexico?

2. What can the U.S. do to entice manufacturers?

OM in the News: America’s Car Capital Will Soon Be… Mexico

By 2020, Nissan plans to produce a million cars a year in Mexico

“Seemingly overnight,” writes Forbes (Sept. 8, 2014), “Mexico’s automotive output has soared, bolstered by a flood of investment from foreign-based carmakers, including Nissan, Honda, VW and Mazda.” With $19 billion in new investment, production has doubled in the past 5 years to an estimated 3.2 million vehicles. The reason is simple: Mexico has some of the most liberal free trade arrangements in the world. It has agreements with 44 countries, making it an ideal export base for automakers from Europe, China, Japan and America. (The U.S. has agreements with only 20 countries.) The result: 80% of the cars built in Mexico are exported to other countries..

In recent weeks Infiniti, Mercedes and BMW have all detailed plans to build cars in Mexico, with Hyundai-Kia just around the corner. Audi is midway through construction of a $1.3 billion factory that will build luxury SUVs starting in 2016. Currently the world’s 8th-largest auto producer, Mexico is on pace to surpass Brazil this year. By 2020 Mexico should behind only China, the U.S., Japan, India and Germany, with an annual production of 4.7 million vehicles. Automakers like the young (average age: 24) and comparatively cheap (about $40 per day) Mexican workforce. But there are plenty of other reasons. European carmakers say Mexico’s dollar-dominated currency gives them a natural hedge against fluctuating exchange rates.

Nissan has led the way with its massive new 21-million-square-foot factory. It took just 19 months for the $2 billion plant, one of the largest industrial investments ever made in Mexico, to get up and running, a record for Nissan. Production of the Sentra began last November and was quickly ramped up to full capacity of 175,000 vehicles a year, operating 23 hours a day, 6 days a week. Some 3,000 jobs were created, and another 9,000 at supplier companies. The boom in Mexican production is already rattling the North American auto industry. Today 40% of all auto-sector jobs are in Mexico, up from 27% in 2000. Canada and the Midwest have taken the brunt of the job losses.

Classroom discussion questions:
1. Why Mexico?

2. What are the supply chain implications?