Woes of U.S. auto industry cross border into Mexico

MEXICO CITY — The U.S. auto bailout lifts the threat of imminent collapse of plants that have been a steady source of jobs in Mexico.

But the rescue, backed by American taxpayers, is likely to slow investment in Mexico's auto industry, one of the fastest growing in the world.

Lured by low labor costs, with wages as low as $1.50 an hour, Detroit's automakers have been key to an industry that now makes up 3 percent of Mexico's gross domestic product and accounts for one-fifth of its exports.

The 13 plants run by Ford, Chrysler and GM account for more than 50 percent of Mexico's auto production.

While nothing in the $17.4 billion government loan package prohibits it, expansion outside of the United States using taxpayer money would most likely create a huge backlash.

"They really need this money, so my guess is that they will try to stay away from making new investments in Mexico in the short term because it would look very bad," said Juan Pablo Fuentes, an economist with Moody's Economy.com.

Lawmakers have made it clear they expect U.S. automakers to keep jobs at home. And they have leverage: $4 billion of the auto-loan package will be made available only if Congress votes to release $350 billion that remains in the financial-industry bailout fund.

"I think they are very much aware of Congress' concerns and would do nothing untoward that would in essence breach the trust that we have extended to them," U.S. Rep. Sheila Jackson-Lee, D-Texas said in an interview.

Mexico is heavily reliant on exports to the United States. Three-quarters of vehicles produced in the country are exported, 70 percent of them to the United States, according to the Mexican Auto Industry Association.

As U.S. car sales plummeted, Mexican auto exports fell nearly 8 percent in November and production declined 2.1 percent.

General Motors, which employs some 12,700 people in Mexico, let go more than 600 workers when it stopped making the Suburban SUV at its plant in Silao this year.

Chrysler, which employs about 5,000, laid off 800.

Both companies said they will idle several Mexican plants in January to cut costs and shrink inventories.

The Mexican auto association asked Mexico's government for a $3 billion loan to loosen credit for both dealers and customers to boost flagging domestic sales. November sales fared even worse than exports, plunging almost 20 percent.

Yet there is little automakers can do to boost domestic demand amid a lethargic economy, said Luis Flores, an economist at Mexico's IXE Group. Diversifying Mexico's export market, as the auto association has urged, is a long-term goal that will not save automakers from a dismal 2009, he said.

"The reality is that all of 2009 will be a very bad year for automakers no matter what their market strategies are," Flores said.

That erases for Mexico what had been an engine of economic growth.

Since the 1990s, its low cost of labor helped lure an average $2 billion per year in foreign investment in the auto industry, which now employs some 500,000 people, directly or indirectly.

Mexico remains strategically well-positioned once the car market recovers. Already, its plants are switching from gas-guzzling trucks to fuel-efficient compact cars.

Ford is retooling its Cuautitlan Assembly Plant to build its new Fiesta subcompact, part of a $3 billion investment that will create 4,500 jobs in Mexico.

In July, GM opened a new plant in San Luis Potosi to churn out the compact Chevrolet Aveo and Pontiac G-3. And Chrysler is building a $570 million plant in Saltillo for new Phoenix motors intended for fuel-efficient cars under development.

Mexico's dependence on the U.S. auto market is also starting to ease.

While 96 percent of Mexican car exports went to the United States and Canada in 2006, that number has since dropped to 77 percent as sales to Europe and other Latin American countries gain.

Volkswagen is producing nearly as many vehicles in Mexico as GM. Just two weeks ago, Norwegian automotive supplier Kongsberg Automotive announced it would close facilities in Ohio and Kansas and move work to Mexico.

China is also looking to Mexico. Its state-owned FAW Group is building an auto-assembly plant in Michoacan state that by 2010, will be the first to produce Chinese cars in Mexico.