While Canada Spends Big to Save GM, Mexico Gets Free Ride

While Canada Spends Big to Save GM, Mexico Gets Free Ride

At time when the U.S. and Canada are pouring tens of billions of dollars into General Motors Corp. to give the bankrupt automaker a new lease on life, why is Mexico flying under the radar?

Last month when Washington and Ottawa pledged to invest $60 billion in Detroit’s biggest car company, Mexico — a partner in NAFTA and an integrated North-American auto industry — was conspicuous by its absence at the negotiating table. See the best cars from the 2009 Detroit Auto Show.

That’s more than a little surprising when you consider that Mexico has overtaken Canada in production of GM vehicles, making such popular name plates as the Chevy Silverado and Suburban. Last year GM made a total of 504,858 vehicles at four assembly plants in Mexico; that’s 9% higher than the 463,869 cars and light trucks produced by GM Canada.

Why has Canada contributed $9.5 billion to the rescue of GM’s operations north of the 49th parallel — a figure that works out to an unprecedented $2.1 million for each of 4,400 assembly job it hopes to save — while Mexico has sailed free The short answer is that GM Mexico doesn’t need a bailout because it’s comfortably in the black. “If you have a profitable division at a time when the rest of your business is having a hard time, do you talk about it” says analyst Pascual Francisco at IHS Global Insight in Lexington, Mass., referring to GM’s decision to remain mum about the third wheel of its North-American production base.

The reason GM Mexico has remained profitable while mounting losses have pushed the parent company’s U.S., Canadian and European operations to the brink of disaster boils down to a lower cost of doing business in Mexico. GM and other automakers, including Ford and Chrysler, have managed to keep the cost of production south of the California and Texas borders at Third World levels, thanks largely to Mexico’s weak unions.

A typical line worker at a GM plant in Ramos Arizpe or Silao earns $2.80 per hour, a mere 10% of the $28 per hour earned by his counterpart in Grand Rapids, Mich. or Oshawa, Ont. Add in GM’s crushing legacy costs — pension and health-care obligations to retirees — which are only a minor consideration in Mexico, and it explains why the country is a cash cow.

“GM Mexico’s profit on some vehicles is as high as $16,000 per unit,” says analyst Francisco of IHS Global Insight. By contrast, it’s not clear whether GM is presently making money at any of its U.S. or Canadian assembly plants.

With such a dramatic cost advantage to making cars in Mexico, it’s no surprise that GM plans to max out production in that country as it struggles to shake off Chapter 11 bankruptcy protection and return to profitability.

About three-quarters of the 504,858 vehicles GM Mexico produced in 2008 were exported throughout the Americas and the Middle East. But the vast majority — 68% of the total — ended up being sold in the U.S. market.

At the same time as GM plans to shutter plants from Jacksonville, Fla. to Indianapolis, Ind. on the back of a $50 billion U.S. bailout, the car company is preparing to more than double Mexican output from 344,099 this year to 822,498 by 2014.

Most of that increased output will end up in the U.S., but Canada may ultimately pay the highest price for this shift in production. The reason is that, going forward, slashing output in Oshawa, Ont.—its main production facility located east of Toronto—comes at a much lower political price than doing the same in the U.S., where the U.S. Treasury and United Auto Workers control nearly 80% of the new GM.
Yes, GM has promised to keep 16% of combined U.S.-Canada output north of Detroit, but unless its new models can win market share from Ford and Toyota it will continue its painful slide into oblivion. Also, as GM continues to shrink at home, it can trim a proportionate amount of production in Oshawa without breaking its promise to the Canadian government. Earlier Wednesday GM reported a 34% decline in June sales to 176,571 cars and light trucks in its domestic market. Year to date sales have collapsed 41% to 954,356 vehicles.
“There’s no such thing as 100% protection,” says Toronto analyst Dennis DesRosiers with DesRosiers Automotive Consultants, referring to GM’s commitment to Canada. He notes that as Canada’s total share of North-American auto production has steadily declined since hitting a peak in 2000, Mexico’s share has moved in the opposite direction.

Unless the new GM finds a quick path to prosperity, the billions of dollars invested in the company by Canada may soon end up being used, one way or another, to relocate production to Mexico.

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