Mexico’s Auto-Production Boom Is Driving Up Labor Costs – Wall Street Journal

Posted: Sunday, August 14, 2016

A recruiting booth along the road in Juárez tries to attract workers for an automotive leather plant.

CIUDAD JUÁREZ, Mexico—When car companies began flocking to this border town more than two decades ago, the big lure was labor, which was plentiful and inexpensive.

Today, with an auto-production boom in high gear, those advantages are being chipped away.

Toyota Motor Corp.
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, BMW AG
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, Ford Motor Co.
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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.”

The pressure isn’t yet so severe that it is undermining the rationale for moving production to Mexico. But it is an unexpected sticker shock—labor is one of the few costs manufacturers can control—and threatens both profitability and production quality.

At some plants, wages have risen by double-digit percentages in recent years. In Juárez’s export-focused factories, called maquiladoras, employee turnover hit an average rate of 10% in June, according to Amac-Index Juárez, a manufacturers association, a level not seen since the first wave of foreign-owned companies moved to Mexico under the North American Free Trade Agreement.

Leonardo Galicia, a 21-year-old factory worker for Strattec Security Corp.
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, a Milwaukee-based auto supplier, leads a 26-person team in Juárez assembling ignition switches. When people leave, they don’t give notice—they are just no-shows.

“It’s a headache,” said Mr. Galicia. “The line doesn’t stop but it does slow down. My biggest concern is I’ll have to train someone who is new.”

Protests over wages have rumbled through the summer here. Laborers at several of the city’s largest manufacturing plants, including those making parts for the auto industry, have staged demonstrations, rallying for higher pay and better working conditions.

The going rate ranges from under $1 an hour at some parts factories to nearly $3 an hour at the large assembly facilities. That is well above Mexico’s minimum wage of 73 pesos, or $4 a day. Still, it is too low to attract the quantity and quality of workers needed to fill the surging number of openings, recruiters and manufacturing consultants say.

Often, Mexicans can earn more money in the informal sector that employs half of the country’s workforce, such as selling newspapers at traffic intersections or food on the street.

Some large auto makers generally play down the problem. Executives at Volkswagen AG
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, Nissan Motor Co.
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and Honda Motor Co.
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say turnover is manageable, salaries are competitive and recruiting difficulties are temporary.

“There are enough people willing and eager to work,” said Thomas Karig, vice president of corporate affairs for Volkswagen in Mexico.

One of the country’s largest car manufacturers, Volkswagen will begin production this year of its luxury Audi
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brand in San José Chiapa, a rural town an hour’s drive from the company’s main plant in the city of Puebla. Audi said 230,000 people have applied for the project’s 4,200 jobs, although whether they have the appropriate skills is hard to gauge.

The scramble for workers is most pronounced in Mexico’s industrial strongholds—cities such as Juárez in the north of Mexico—and in the central, heartland states of Guanajuato, Aguascalientes and San Luis Potosí. In Guanajuato, manufacturers including Honda and Mazda Motor
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Corp are busing workers from as many as two hours way, labor recruiters say.

In Juárez, home to nearly 300 factories, large banners around the city advertise openings, new shift work and benefits. To avoid bumping pay, employers are increasingly offering perks such as English classes, use of soccer fields and $200 referral bonuses, or about a month’s pay, for those who recommend new hires. Local officials estimate the city’s manufacturing sector has nearly 15,000 unfilled jobs.

Isai Galindo, 25, works for a plant that manufactures swimming-pool parts. Recently, he turned up at a roadside recruitment tent for a factory that stitches leather trim for automobiles. He listened to the pitch: The company would pay him more than Mexico’s minimum wage, offer flexible hours, overtime and money toward basic education for him and his family.

Mr. Galindo didn’t seem impressed. “I’ll have to think about it and check other options,” he said, before walking away.

Alejandro Sauter-Bindel, a plant manager at Continental AG
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’s auto parts plant in Guadalajara, said companies need to be careful not to price themselves out of the market, which could prompt the industry to move further south in search of even lower-cost areas.

“What is important is the [labor] market doesn’t get overheated,” he said.

In an effort to fill the labor vacuum, Mexico’s state and federal governments have rushed to churn out more engineers from public universities, expand enrollment at technical schools and create special training programs tailored to factory needs. One $37 million state-funded facility stands on the grounds of Audi’s plant near Puebla, and was built as an incentive to win the company’s business in 2014.

“We obviously have to redouble our efforts to develop human capital,” said Ildefonso Guajardo, Mexico’s secretary of the economy, in a recent interview. “In the long run, cheap labor isn’t a sustainable advantage.”

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.

After rebounding from the financial crisis, the U.S. car business has put a disproportionate amount of new North American production capacity in Mexico in an attempt to keep up with record sales volumes. Annual light-vehicle production will climb to 5.1 million by 2020, a 50% increase from last year’s record 3.4 million, according to forecasting firm LMC Automotive.

Demand for workers has risen so sharply that a popular solution is for car makers to poach from neighboring suppliers.

“People were working for two or three months and then leaving,” said Sergio Hurtado, a 21-year-old worker at Michigan-based Lear Corp.
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’s auto parts plant in Juárez. “They would go to other factories for better pay.”

Lear, which makes auto seats and electrical systems, recently boosted wages at his plant in response, bumping his pay 37% to about $46 a week and adding overtime bonuses and paid days off on birthdays, Mr. Hurtado said. The company declined to comment.

Ricardo Garcia, operations manager for DIGA, SA de C.V., a supplier of foam parts to automobiles, has seen turnover as high as 10% a month at its plant in Monterrey. The main culprit, said Mr. Garcia, is Kia
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Motor Corp., which recently opened a new assembly plant.

Mr. Garcia said one of his engineers recently told him he was leaving for Kia. He offered him a 30% increase in pay, but that wasn’t enough.

Victor Alemán, a spokesman for Kia, which in May began production of its Forte compact car at a new factory outside Monterrey, said the company is paying employees an average of $7,200 a year, with engineers earning at least three times that.

BMW opened a vocational center in September to educate factory machinists, electricians and other skilled tradespeople. Lourdes Quijas, BMW human-resources director in San Luis Potosí, Mexico, where the company is spending $1 billion to build its first Mexican plant, said she is confident the company can fill its slots—eventually.

“We have a lot of challenges finding workers, more so in the last six years with all these other companies—Honda, Kia—investing in Mexico,” she said.

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.

Honda Motor Co.’s plant in Celaya, Mexico.

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.

Ford spokesman Mike Moran said the car maker expects to improve profitability but declined to discuss specific figures. The spokesman also pointed to other worker benefits in the contract, such as life insurance, matching funds for worker-savings accounts and year-end bonuses equivalent to 20 days’ pay.

Meanwhile, the hunt for new hires continues. In Apaseo El Grande, a once-sleepy farm town near Celaya, and now the future home of a Toyota factory, a recruiter ran her finger down a list of 400 vacancies. Most of them were for jobs at an industrial park housing Honda’s component suppliers.

“We didn’t expect to have this type of industry,” said Elizabeth Cárdenas, a municipal job-bank director. “Before, everyone here worked in agriculture or migrated to the United States.”

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