April 14, 2016 12:00 pm JST

Free trade fiesta

KEN MORIYASU, Nikkei staff writer

New Nissans are loaded on a train bound for the U.S.

AGUASCALIENTES, Mexico  At 9 o'clock every evening, the rail tracks in the north-central Mexican city of Aguascalientes come alive as long-distance trains pull into the Nissan plant.

      Over the next two hours, 675 brand-new Nissan cars are loaded onto rail cars bound for the U.S.

      American customs officials based at the plant conduct inspections for drugs, firearms and toxic materials before departure. At 11:10 p.m., when the tracks are the least congested, the trains set off on a nonstop journey to dealers throughout the U.S.

      Since entering Mexico half a century ago, Nissan has established itself as the country's biggest carmaker and more recently its market leader. Six of the 10 most popular vehicles sold in Mexico carry the Nissan logo. Armando Avila, a company veteran who leads production at Aguascalientes, is one of the few Nissan executives with a direct line to Carlos Ghosn, the chairman and chief executive.

      In Mexico City, his immediate boss, Airton Cousseau, the managing director of Nissan Mexicana, is frank: "My goal is to sell everything Armando makes." That amounts to 820,000 cars a year. At the new Aguascalientes plant, which makes the Nissan Sentra, one car is produced every 37 seconds.

      Ghosn had so much confidence in Avila that he signed a deal with Daimler to produce Mercedes-Benz compact vehicles alongside high-end Nissan Infinitis. The two companies have jointly invested $1 billion to build a new facility at Aguascalientes with a capacity to produce 230,000 cars a year. The "Nissan-made" Mercedes will hit the market in 2018.

      Nissan's focus on Mexico was accelerated by an economic partnership agreement between Japan and Mexico in 2005. This gave Ghosn and the Nissan board more options, such as shipping parts between factories, or the potential to shift production from one country to the other if currency rates moved excessively.

At Mazda's Mexican plant, cars flow from east to west on a production line that stretches 2km.

      A two-hour drive south from Aguascalientes, in the city of Salamanca, is Mazda's shining new factory. Aligned in a straight line stretching 2km, vehicles are stamped, welded, painted and assembled as Mazda2 and Mazda3 sedans. The cars manufactured here are either taken by truck to domestic Mexican dealers, loaded on a train to the U.S. or taken to a nearby port to be shipped to Europe.

      Hiroshima-based Mazda has invested $770 million in the plant to reduce its dependency on Japanese production, which was exposing the company to excessive currency risk.

      After comparing options, Mazda decided to build its largest overseas plant in Mexico, located at the crossroads of four major markets: the U.S., Latin America, Europe and Asia.

      The list of carmakers that have announced new or additional investment in Mexico over the past three years includes Ford Motor, General Motors, Fiat Chrysler Automobiles, Nissan, Mazda, Honda Motor, Toyota, Volkswagen, Audi, BMW, Daimler and Kia Motors.

      Why Mexico? Labor costs are around one-seventh or one-eighth of those in the U.S. and are now 40% cheaper than in China, according to Carlos Capistran, Mexico economist at Bank of America Merrill Lynch.

      Just 12 years ago, Mexico's wages were around 183% higher than China's, but Beijing's "one-child policy" has curbed the number of Chinese workers and wages have surged. As China's economy slows and future prospects become less certain, the U.S. looks like a more reliable market for new car sales.

      Manufacturing in Mexico, therefore, is a logical choice for automakers. But the "M-word" has become contentious in U.S. politics. When Ford Motor announced a $1.6 billion investment in Mexico this month, it headlined its news release "Boosting small car profitability, Ford invests in new plant" without mentioning the country.

      U.S. presidential candidate Donald Trump has criticized the automaker for shipping jobs across the border and has pledged to impose a 35% import tariff on Mexican-built Fords sold in the U.S.

      But the merits of Mexico are not solely about low-cost labor. Geography helps too. The train journey from the central Mexican plateau -- 1,700 meters above sea level -- to the plains of the southern U.S. is a natural downhill glide and the distance is relatively short. And although automakers will not admit it publicly, the absence of strong U.S. labor unions such as the United Auto Workers is another draw.

GAME CHANGER    Mexico is also a firm believer in free trade. It has 10 free trade agreements covering 46 countries, investment protection pacts with 33 other countries and nine trade agreements within the framework of the Latin American Integration Association. Now it is a founding member of the Trans-Pacific Partnership.

      The fruits are clear. Since signing the North American Free Trade Agreement in 1994, Mexico's trade with the U.S. has expanded six and a half times. Mexico's sole free trade arrangement with Asia, an economic partnership agreement with Japan, has helped bilateral trade grow 73.5% in the past 10 years.

      "The EPA was a game changer," said Sergio Inclan, the representative in Japan for the Mexican Economy Ministry. The embassy is now handling one new company a week entering Mexico, as Japanese parts suppliers follow the automakers across the Pacific.

      Japanese suppliers want to emulate the success of Spanish auto-body parts maker Gestamp in Mexico. Initially, Gestamp entered the country to supply to Nissan in Aguascalientes. Fast forward 18 years, and Gestamp is supplying Volkswagen, Chrysler, General Motors, Fiat and now Audi. Erwin Polo, the vice president of Gestamp Mexico, is looking at the possibility of opening a new plant in central Mexico to supply BMW, Daimler, Toyota and Ford, which will all open factories in the coming years.

      Gestamp, like other global automotive companies, is looking at the possibilities the TPP will open up in Mexico. "Every company will have a TPP map to consider the options. They will be able to save on logistics and save on tariff," Polo said.

      Until now, Mexico's free trade agreements either pointed north to the U.S., east to Europe or south to Latin America. Now a big arrow is pointing west, to Asia.

      "The TPP is interesting," said Keishi Egawa, Mazda's president and chief executive for Mexico, who retired shortly after the interview was conducted. "We will then have duty-free access to a total market of 40 million cars."

RISK VS. REWARD   There are downsides. A Japanese corporate head based in Mexico talked about the precautions he and his fellow expats need to take. "Of course we have double locks on our doors," he said. "We also have to be careful of the midnight mugger."

      Foreign nationals tend not to be targeted for organized kidnapping, because of the difficulty in communicating with headquarters and demanding a ransom. "They are much more likely to be taken to an ATM to extract quick cash" the Japanese executive said. Since ATMs have a daily withdrawal limit, the victim is forced to withdraw cash once before midnight, and once after the date has changed.

      Yet, the success stories seem to outweigh the risks, including in other sectors. Mexico is U.S. retailer Wal-Mart Stores' first and most successful overseas endeavor. Today, Wal-Mart Mexico operates 256 Walmarts, 160 Sam's Clubs, 1,719 Bodega Aurrera budget supermarkets and 95 Superama high-end supermarkets. The company's goal is to double sales within 10 years.

      "There are 200 cities in Mexico without our presence," said Antonio Ocaranza, director of corporate communications at Wal-Mart Mexico. "We will enter with a Bodega Aurrera, and when we establish several stores, we will be ready to open a Walmart or Sam's Club."

      The flurry of activity has governments scrambling to keep up. In Leon, a city where many families of Japanese auto industry expatriates live, Yasuhisa Suzuki, the consul general, was busy moving into a new office when visited by this reporter. The Japanese government opened a consulate-general here this January.

      "I have recently attended four opening ceremonies for Japanese companies and have five more coming up," he said, flipping through his datebook. A half-unpacked TV shows how little time he has had to settle in. "I have run out of things to say in the congratulatory speeches," he said.


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