Mexico’s New Auto Plants Unable To Find Enough Labor… As Detroit Still Suffers Massive Unemployment

North American auto OEMs and their tier 2 suppliers have been in a race to move auto production across borders to low-cost countries (LCCs) for the past couple of decades as soaring wages, pension and OPEB obligations made production in the U.S. all but impossible.  Supporters of minimum wage hikes could learn from the efforts of the United Auto Workers Union which did a masterful job negotiating off-market wage and benefits packages which ultimately only served to provide their members with permanent job losses.

Of course, the groundwork for the shift of auto production to Mexico was laid with the passage of NAFTA in 1993 by former President Bill Clinton (a fairly inconvenient fact that Hillary would prefer to forget).  Since then, Mexico has been a huge beneficiary of automotive plant relocations with offsetting closures coming from the U.S. and Canada.  A chart from the Wall Street Journal, perfectly illustrates the transition of production capacity to our southern neighbor.

And now, with Detroit unemployment still over 10% (in spite of Obama’s stellar jobs “recovery”), newly constructed auto plants in Mexico have only 1 problem, they can’t find enough labor.

Per the Wall Street Journal, soaring auto demand (or if you’re as cynical as we are, soaring demand for subprime paper backed by loans on brand new $70,000 Escalades made to people with a 550 credit score) and substantial new auto manufacturing capacity in Mexico has resulted in a bit of a labor crisis.  To attract workers, OEMs are being forced to pay over 300% more than minimum wage and provide incentives like retention bonuses and “new cowboy boots.”  Another lesson for minimum wage supporters…labor markets work…when labor demand exceeds supply then wages rise.  Unfortunately, the opposite is also true as low-skilled American workers are acutely aware.

Auto-industry investment in the country accelerated in the 1990s after the signing of Nafta. In the lead were Detroit car makers and parts suppliers looking to avoid high labor costs at their unionized plants in the U.S.Today, with an auto-production boom in high gear, those advantages are being chipped away.

Toyota Motor Corp., BMW AG, Ford Motor Co. and several other auto makers have committed to spend a combined $15.8 billion to build new assembly plants or expand existing factories. That is on top of the more than a dozen plants already in operation and billions more being spent by auto-parts suppliers to keep pace.

The competition for employees—both finding and retaining them—is nudging up labor costs. Retention and retraining programs are becoming the norm as are bonuses for employees who agree to stay in place, especially those with valued skills. Some factories are luring recruits with perks such as a new cowboy boots. Vacancies are becoming the norm.

“We have a huge supply gap in Mexico that needs to be resolved,” says Stephan Keese, a Chicago-based partner at consulting firm Roland Berger, which works with manufacturers in Mexico. “We’ve only seen the tip of the iceberg of this shortage. Labor rates going up will be unavoidable.”

Still wages aren’t nearly high enough to offset the cost benefits of moving to Mexico which still remains among the cheapest places in the world to build cars.

Ford is scheduled to open a new $1.6 billion small-car assembly factory in San Luis Potosí in 2018 and hire 2,800 workers. People familiar with the matter say Ford will produce its Focus there, which is currently built in Michigan.A contract reviewed by The Wall Street Journal puts factory wages at the facility at about $1.15 to $2.30 per hour, on par with what other auto-assembly plants currently pay in the region. The move to Mexico will yield cost savings of about $1,300 per vehicle, or about $300 million a year, according to manufacturing experts familiar with the Detroit car maker’s finances.