Parts Suppliers Are Riding the Wave of Auto Production to Mexico

Nearly lost amid American manufacturing workers’ joy over the continuing boom in U.S. auto sales is the fact that their counterparts in Mexico are even happier: Output south of the border is rising much more rapidly than in the rest of North America, thanks in large part to lower labor costs, more free-trade agreements than the U.S. has and the growing appeal of the country on a logistical basis.

This is a trend that is enveloping more and more U.S. manufacturing CEOs, as dozens of suppliers adjust to the greater opportunities for sourcing their own output in Mexico to supply the billions of dollars worth of plants that automakers now are erecting and expanding there, including Mercedes-Benz, General Motors, Toyota and Ford.

One of the automakers with ambitious plans in Mexico is Audi, the luxury brand that is constructing its first North American plant in San Jose Puebla in central Mexico. The facility will begin turning out a new version of the Audi Q5 crossover vehicle for the U.S. and global markets beginning next year.

And so Audi supplier CEOs must have ambitious plans in Mexico as well. The company plans to spend about $17 billion in proceeds for Q5 components and services, over the life cycle of the vehicle, which will be several years. About two-thirds of those outlays will go to companies headquartered in North America, the company said, and about 20% to European companies. Of course, a great deal of the spending will be on supplies that are produced in Mexico, many of them very close to the plant.

As a result, about 20,000 indirect jobs will be created throughout North America at supplier facilities, in addition to the 1,800 Mexicans who are expected to be employed by Audi at the plant.

Meanwhile, the new tentative labor agreement between Fiat Chrysler and the United Auto Workers union contained a blockbuster that also will accelerate car making in Mexico. The UAW essentially agreed to give up jobs making small cars in the United States in exchange for a greater Fiat Chrysler investment in U.S. plants that build Jeeps, minivans and pickup trucks.

The union was happy to exchange output of low-margin cars for higher compensation for its American workers—who haven’t had a raise in several years—including significant raises in the level of pay for “second-tier” workers who were brought in at much lower wages in the U.S. government bailout of Chrysler in 2008.

Mexico and Mexicans will be significant winners in that deal as Fiat Chrysler brings small-car production to the country, expecting suppliers to follow that had been flowing their products to existing small-car plants in Michigan and Illinois.

But American parts manufacturers will also flourish as opportunities arise for shipping their product south of the border.