Mexican auto industry shrugs off Trump tariffs as Canada struggles

Globe and Mail

a day ago

There are early signs that Mexico's low-cost automaking industry is better prepared than Canada's to weather U.S. President Donald Trump's trade war.
Mexico's auto exports fell by 11 per cent in April, the first month the tariffs were in place, compared with a 23-per-cent drop in Canadian car exports. In May, the decline in Mexican car exports was just 3 per cent, according to the Mexican Association of the Automotive Industry. While Canada's corresponding number will not be available until early July, industry watchers expect it to be just as bad as that of April.
The United States is the destination for about 90 per cent of both countries' auto exports, so the U.S.'s 25-per-cent tariffs on non-U.S. content in imported automobiles poses a threat to their auto industries.
However, Mexico appears to be taking it in stride so far, even as General Motors Co., Mazda Motor Corp. and others move production to the U.S. or slow the output of their Mexican assembly lines.
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The world's carmakers have transformed Mexico into one of the world's biggest manufacturing centres, investing billions of dollars to build assembly plants and supply lines to capitalize on the country's low labour costs on the doorstep of the world's second-largest market for automobiles.
Most global automakers are in Mexico, from the Detroit Three to BMW AG, Audi, Toyota Motor Corp. and Nissan Motor Co. Ltd. China, a major seller of cars to Mexicans, is in the early stages of building assembly plants and currently manufactures cars there using Chinese parts.
'Mexico has been a part of the global strategy of the large automotive companies,' said Carlos Alvarado, an adviser with Prodensa, a Mexico-based consultancy, 'to be able to produce at a more efficient cost, at a lower cost, especially to service the North American market.'
The country's vast manufacturing base, established supply chains and low labour rates gives its industry confidence it can withstand the tariff war.
'People are thinking and saying, 'This [tariff] should go away at some point. This is not sustainable. Let's think about midterm, long term, even four years ahead, [when] Trump is no longer President,'' Mr. Alvarado said from Monterrey, Mexico.
Stephan Keese, of Munich-based consultancy Roland Berger, cautions against reading too much into Mexico's export and production numbers, given shipments spiked in the months leading up to the imposition of the tariffs and then slowed while manufacturers assessed their impact. Each carmaker is affected differently, he said, depending on the North American content of their vehicles.
Still, 'I don't really see any concerted efforts to pull manufacturing out of Mexico,' Mr. Keese said.
He attributes this to three factors: the massive investments carmakers have made in Mexico, the country's low production costs and the shortage of labour in many carmaking regions of the U.S. Even before tariffs, U.S.-based automakers were pressed to boost domestic output.
Lana Payne, national president of Unifor, said Mexico's auto industry is on better footing than Canada's because it has attracted far more investment in plants in recent years. The country is also the sole source of many vehicles and components in North America, unlike Ontario plants, some of which make pickup trucks that are also made in Mexico and the U.S.
Automakers in Canada, meanwhile, have been pulling back, idling plants in Oakville and Brampton even before the tariffs. Since the tariffs were announced, Canada's auto sector has shed thousands of jobs.
'The longer this goes on, obviously Mexico will be impacted, but they started out with less of a vulnerable position,' Ms. Payne said in an interview.
The Mexican-made cars produced by Ford Motor Co., General Motors and Stellantis NV are mostly USMCA-compliant and are tariffed only on their non-U.S. content. However, BMW, Audi, Volkswagen Group and other overseas brands have much higher non-U.S. content and face the full 25-per-cent duty when importing vehicles into the U.S.
This added cost has spurred Volkswagen to look at building U.S. factories for its luxury Audi and Porsche brands, according to German news reports. GM recently said it will spend US$4-billion over the next two years at three U.S plants as it shifts production and investment to the U.S. from Mexico.
But for the lower-price and lower-profit automobiles such as the Nissan Kicks or Chevrolet Equinox, Mexico might always be the preferred place of manufacturing. These are cars that need US$4-an-hour labour costs to be viable products, said Sam Fiorani, an analyst with Pennsylvia-based AutoForecast Solutions. Some have unique platforms and production cannot simply be shifted north without spending billions retooling plants.
'These are vehicles that are sold on price, and they are typically the entry-level models for the brands,' Mr. Fiorani said. 'Without Mexico, if those vehicles had to be moved to the U.S. there would have to be a choice between raising the price or eliminating the vehicle altogether.'