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You May Say ‘Hola’ to Your New Car as Mexico Ramps Up Auto Production

Mexican President Enrique Pena Nieto gives a speech during the announcement of a $1 billion dollar investment by Toyota. ALFREDO ESTRELLA / AFP - Getty Images

American motorists are used to driving imports. Brands like Toyota, Volkswagen and Hyundai account for a solid majority of the U.S. market. But before you say “konnichiwa,” (hello) to that new Honda Fit you might want to take a closer look.

Most of the models sold by Japanese brands these days are actually built in North America — and a growing number of those are coming from plants south of the border. When it comes to automotive manufacturing, Mexico’s production base is growing nearly as fast as China’s. Most of that is earmarked for export, notably to the U.S.

Toyota this month announced plans to build its first major assembly plant in Mexico, at a cost of $1 billion. The company’s North American CEO Jim Lentz said the new plant is part of a “strategic re-thinking of how and where we build our products.”

Just last month, Volkswagen AG said it would invest $1 billion to expand its sprawling assembly complex in Puebla, a couple hours from Mexico City. And Ford Motor Co. is expected to soon announce a $2.5 billion investment to boost the capacity of its various Mexican operations, including two assembly lines and an engine plant.

A quick rundown of the list of major global makers reveals that few have not already begun investing in Mexico. Those who have yet to set up shop are racing to open up their first plants – a list including Toyota, Kia, Audi and Mercedes-Benz.

'Spectacular growth'

Even before the latest plans were revealed, automakers from around the world had committed to investing $20 billion in the Mexican automotive production base over the last five years, according to the Mexican Automobile Industry Association, or AMIA.

“The growth in production and in exports has been spectacular,” Eduardo Solis, the trade group’s president, said earlier this year. “The growth reflects the confidence the industry has in our country.”

There are a variety of reasons why Mexico’s auto industry is booming. Sales are on fire; local demand is increasing at almost double the rate of the U.S. automotive recovery. That said, Mexicans are expected to purchase less than 1.5 million vehicles this year, hardly enough to justify the huge spate of investments.

“The growth in production and in exports has been spectacular.”

The bulk of the rapidly growing production base is targeted for export -- about 2.9 million of them this year, AMIA forecasts, with 70 percent headed for the U.S.

Toyota's $1B south-of-the-border expansion 1:58

Manufacturers benefit from extremely low labor costs, generally about $10 an hour for wages and benefits, or 20 percent of U.S. costs. But they also take advantage of the fact that Mexico has negotiated free trade agreements with 54 countries, more than any other nation except Israel.

“Mexico is a great place to make a reliable investment,” said President Enrique Pena Nieto as he helped Nissan dedicate its third assembly complex, in Aguascalientes, in November 2013.

Like the majority of the Mexican auto plants, it focuses on small vehicles which can become much more competitive thanks to low labor rates. Along with the Nissan Sentra, Mexican plants roll out models like the Honda Fit, the Volkswagen Golf, Chevrolet Cruz and, in a couple of years, the compact Toyota Corolla which is currently being assembled in Canada.

Change coming

But that is about to change. As part of a growing partnership between Daimler AG and the Renault-Nissan Alliance, the German automaker will help set up a second assembly line at Nissan’s Aguascalientes plant. It eventually will produce both Mercedes-Benz and Infiniti models.

“Our biggest project yet, it takes our partnership to the next level,” noted Dieter Zetsche, the Daimler CEO and head of the Mercedes brand, during a joint news conference held with Nissan’s chief executive Carlos Ghosn.

Audi, meanwhile, is setting up a plant of its own an hour away from its mainstream sibling Volkswagen’s facility in Puebla. The luxury maker is optimistic: “We may even double production” in the near-future, suggested Audi AG Board Member Berndt Martens during a tour of the partially completed site.

The launch of new luxury models has raised concerns about whether Mexican assembly plants can match the quality of lines in the U.S., Europe or Asia. But data from the likes of J.D. Power and other research firms has shown little to no quality gap.

And that means that the growth of Mexican auto imports will likely only to continue expand in the years ahead.

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