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Why are auto manufacturers fleeing Canada for Mexico?

25 Aug 2015

Manufacturers across all industries are choosing to leverage the offshore advantages of manufacturing in Mexico. The auto industry, in particular, is rapidly moving operations within Mexico's borders. The Globe and Mail noted that as a result, Canada's share of vehicle production in North America fell 14 percent last year. Mexico, on the other hand, increased its share of auto manufacturing from 3 percent to 20 percent across the same time period.

Auto manufacturers are moving their businesses to Mexico because they are simply unable to sustain good profit in Canada. A separate article from The Global and Mail cited Toyota's recent move from Canada to a $1 billion plant in Mexico - the end of a relationship with Canada that began in 1988 - underlying the fact that the company was not making enough profits within the country's borders. 

Canada's economic downfall
A primary factor motivating manufacturers in Canada to move to Mexico is the steady decline of Canada's economy. The Canadian market shrank for the first five months of 2015, and Business Insider stated that over the last three years, the Canadian dollar has lost 25 percent against the U.S. dollar and 21 percent over the Mexican peso. Further, Mexico's exports to the U.S. have risen sharply since 2008, while Canada's have remained the same. Resulting unemployment and rising oil prices are deterring manufacturers from continuing business in the country. 

Auto manufacturing quality is just as good in Mexico than in the U.S. or Canada, that is why quality of labor is no longer deterring manufacturing in Mexico. Quality of labor is no longer deterring manufacturing in Mexico.

Quality and productivity skyrocketing
Manufacturers in Mexico are reaping the benefits of significantly lower labor costs compared to those in Canada. Business Insider cited the cost of labor in Mexico is as much as 10 times lower than in Canada. Labor in Mexico isn't just cheap, though. Manufacturers are finding Mexican workers to be highly productive, diversely skilled and able to yield high-quality products.

CBC News shared an anecdote from Bill Hammond of Hammond Power - a Canadian company that builds electrical transformers - who believes Mexico has taken great strides in correcting the labor quality problem that previously existed in the country.

"There was a time when Mexico had a reputation of building shoddy product," Hammond said. "We're finding now that global manufacturers are more than willing to accept products coming out of Mexico because the quality levels are as good as they are out of the United States or Canada."

Business Insider also cited the Mexican workforce's more robust skills training as a reason for skyrocketing productivity at manufacturing plants.

Improvements in quality and productivity are no coincidence. Mexico has taken great strides to create better educational opportunities for Mexican citizens who view manufacturing jobs as a route to greater economic stability for their families. According to Area Development, Mexico has doubled its number of public two-year colleges and four-year universities, and the government financed 140 new colleges and universities, the majority of which emphasize science and engineering. As a result, more Mexicans are earning engineering degrees annually than both Canadians and Germans.

Open trade
Mexico's 44 free trade agreements may be an even larger motivator for manufacturers to shift their operations from Canada. The country's 45 free-trade agreements allow manufacturers to export duty-free from Mexico to big automotive markets across the world. While Canada is a member of the North American free-trade agreement and has recently signed free-trade deals with Europe and South Korea, the country does not provide the same climate for exporting internationally due to competitor investments with Mexico, The Globe and Mail noted. Further, Mexico's free-trade climate allows automakers to save up to 10 percent per vehicle when shipping cars to international markets in North America, South America, Europe and Japan. 

"Auto industry jobs in Mexico have strengthened the country's middle class."

A warm welcome
Mexico has felt the economic benefits of the booming manufacturing sector, which has surpassed tourism as a key driver of growth within the country. According to The Globe and Mail, auto industry jobs in Mexico have strengthened the country's middle class, resulting in 75 percent of families owning their homes and a major spike in university enrollment. As such, the Mexican government welcomes businesses to migrate within its borders by offering an array of economic incentives.

To encourage even more growth, the government goes above and beyond to ensure manufacturing in Mexico remains efficient and profitable. For example, The Globe and Mail cited Scott Paradise of Magna, who has found the Mexican government to be extremely willing to eliminate hurdles and red tape. Further, Mexico has offered financial incentives to many automakers looking to conduct business within the country. When Chrysler proposed $550 million worth of expansions and improvements to its plant in Toluca in 2010, Mexico contributed $400 million in financial incentives.

As the auto industry continues to migrate from Canada to Mexico, both manufacturers and Mexico will reap the benefits.

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