If Mexico raises wages in the automotive sector as the United States and Canada are pushing for in NAFTA renegotiation talks, there is a risk that automakers will reduce their work forces and reconsider their investments in the country, analysts have warned.
Auto industry expert Mauricio Kuri told the newspaper El Financiero that “there is room to increase salaries” but argued that as a consequence “a lot of auto makers would have to modify the operation of their plants by increasing the use of robots and thereby reducing job opportunities.”
Increased automation would almost inevitably lead to job losses, with the extent of the layoffs likely dependent on the size of any wage increases Mexico accepts or is forced into in order to reach a new NAFTA deal.
According to the College of México (Colmex), automotive sector workers in Mexico are paid on average US $3.14 per hour, whereas their counterparts in the United States and Canada earn US $28.60 and US $26.34 per hour respectively.
In order for a vehicle to qualify for tariff-free import from Mexico, the United States wants 40% of light-duty cars and 45% of trucks to be manufactured at US$16 per hour wages.
Making a car in Mexico is US $4,139 cheaper than in the United States, data from accounting firm Ernst & Young shows, with part of the difference stemming from labor costs.
The United States-based Center for Automotive Research (CAR) says the size of those savings per car made in Mexico is US $700, or 40% less than the amount it costs to make the same vehicle either in the U.S. or Canada.
In addition, CAR data shows that the cost of the parts required to build a car in Mexico is US $1,500 less than in the United States, again due to lower labor costs.
The automotive account manager for market research company J.D. Power México said that the trend towards greater automation of the automotive industry is part of the evolution of the manufacturing sector rather than higher labor costs, but added that the latter would lead companies “to reconsider their investments in the country.”
“Mexico will continue being competitive. If they raised the salaries to US $16 per hour, they will still be below the United States, but it’s important for the industry in the country to start moving towards more specialized knowledge with research centers,” Brais Alvarez said.
Between 2010 and 2017, Mexico received more than US $30 billion in investment in the automotive industry, according to the federal government’s international trade and investment agency ProMéxico.
Honda and Mazda opened plants in Guanajuato, Kia built a factory in Nuevo León, Audi opened one in Puebla and Nissan and Daimler started a joint venture in Aguascalientes in the seven-year period. Toyota is currently building a new plant in Guanajuato that is slated to start operations in 2019.
United States President Donald Trump, who described NAFTA Friday as “a horrible disaster” for the U.S. economy, has blamed cheaper wages in Mexico for manufacturing job losses in that country.
In an address to the Mexican Senate in October, Canadian Prime Minister Justin Trudeau also highlighted the need to improve salaries and working conditions in Mexico as part of the modernization of NAFTA.
Negotiators failed to reach an agreement in principle after five days of meetings in Washington last week, with differences over the amount of regional content required in order for a car to be given tariff-free status another obstacle.
Mexico is pushing for 70% of a vehicle’s content to be made in North America, 5% lower than the figure U.S. negotiators are now proposing.
Although the United States’ NAFTA proposals on vehicle manufacturing are aimed at returning automotive jobs to that country, industry executives and supply chain experts recently told the news agency Reuters that they may not be enough to lure auto makers back.