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OM in the News: Japanese Auto Makers Drive Into Mexico

March 21, 2014
Mazda's new Mexico plant will churn out 230,000 vehicles a year by 2016

Mazda’s new Mexico plant will churn out 230,000 vehicles a year by 2016

When three-tiered car haulers packed with Mazda3s pulled out of the dusty Mexican rail yard here last month, they did more than mark Mazda’s return to North American manufacturing after pulling the plug on Michigan production in 2012. They represented the latest volley in a south-of-the-border blitz by Japanese automakers. Within four months, Nissan, Honda and Mazda have opened assembly plants in what is becoming one of the world’s hottest auto hubs. Mexico is on pace to become the world’s No. 1 auto exporting country to the U.S., thanks largely to the addition of 605,000 units of capacity by those three Japanese automakers, reports Automotive News (March 10, 2014).

Japanese manufacturers are poised for a new assault from Mexico because they can:

• Reap fatter margins from lower cost manufacturing, largely a function of cheaper labor.

• Avoid tariffs on car and truck imports into the United States.

• Mitigate exchange rate losses from yen-based Japanese exports.

• Improve product availability with a shorter pipeline to dealers.

With all this new Japanese capacity, Mexico will eclipse Canada and Japan as the No. 1 exporter to the U.S. next year. Labor and logistics savings are expected to be substantial compared with building cars in Japan and shipping them across the Pacific Ocean. Mexican labor costs are 1/9th those in the U.S. But any savings are initially offset by the upfront costs of the new factories. Honda, for example, sank $1.2 billion into its assembly plant and a new transmission line.  And successfully building an export hub in Mexico means developing a network of high-quality local suppliers.

Classroom discussion questions:

1. What reasons are driving the massive Japanese investment in Mexico?

2. What are the advantages and disadvantages of this move from an operations perspective?

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