China should deepen car industry ties with Mexico following Ford’s decision

By Song Shengxia Source:Global Times Published: 2017/1/9 0:08:39

The pullout of US carmaker Ford from a deal with Mexico will trigger a supply chain reshuffle and create a valuable opportunity for Chinese automakers to expand into Mexico. Instead of mourning the loss of the US carmaker, Mexico should seek greater partnership with China and offer incentives to Chinese investors to attract them to the country. Chinese firms should also seize the opportunity and commit to building its core competitive strength to climb up the global automotive value chain amid an industry supply chain restructuring worldwide.

Last week, Ford announced it was scrapping a plan to build a $1.6 billion plant in Mexico and instead would invest $700 million into an existing plant in Michigan. The move will certainly impact Mexico's economy which relies heavily on US investment and exports to the US market. To rub salt in the wound, US President-elect Donald Trump has threatened to slap a hefty border tax on Toyota and General Motors cars made in Mexico for the US market. But such a situation does not need to be the death of the Mexican auto industry. Instead, Mexico has a chance to start anew and diversify its source of investment in the auto industry and rationalize its industrial structure. China will be more than happy to help Mexico achieve that vision. 

For one thing, Trump's ploy to bring manufacturing jobs back to the US will not necessarily benefit the country. If Trump's tax threats force major automakers to move production back to the US, such a situation won't hold up for long. In many industries, especially the auto industry, production involves partnership along the global supply chain, with different car components such as engines, leather seats, tires and rod bearings being produced in countries which have cost advantages. Given upgrades along the industrial value chain, some components which require lower skills are no longer produced in the US. If production of these components returns to the US, higher labor costs mean US consumers will have to pay more for domestic-made cars compared with vehicles that may have been assembled in Mexico. If the US imports these components from other countries, taxes and other fees will offset any costs saved  and inflate prices. To remain cost efficient, automakers will have to eventually apply more automation or move production to other low-cost countries in Asia or other continents.

Meanwhile, a change in the global auto supply chain as a result of Trump's policy could push China and Mexico closer together. Chinese investors have been eager to extend into Mexico. Last year, a senior executive from China's BAIC Motor Corp said that the company was mulling a plant in Mexico. It is only a matter of time before Chinese automakers flock to Mexico as they seek to optimize their production costs and tap into the potential of gaining greater access in the North and Latin American markets. Ford's withdrawal will serve as a great opportunity for Chinese investors in those markets.

It's perhaps time for Mexico to stop grieving and start wooing Chinese investors who would help the country reduce its excessive dependence on the US and bring more sustainable growth to its car industry.

The author is a reporter with the Global Times.


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