General Motors has announced that it is planning to manufacture its next-generation Chevrolet Cruze at a factory in Mexico. The auto maker is going to invest $350 million in its factory in Coahuila, Mexico, to cover the costs of tooling and other changes required to manufacture the new version of the Cruze, which is expected to be revealed later this year. In 2014, GM, which currently imports the vehicle into Mexico from its plant in South Korea, sold 7,870 Cruzes in Mexico, down 15% from 2013, according to data from the Mexican Association of Automobile Distributors. However, given the small size of the Mexican auto market, this move cannot be about expanding sales in Mexico by reducing the transaction price. So, what is this about? We take a look at the factors involved below.
The Chevrolet Cruze is an important vehicle for GM as it trails Toyota and Honda in the passenger car market on account of its perceived weaker engineering. The new version of the vehicle will have better fuel-economy than previous versions, be lighter, more spacious, and more aerodynamic. Improving sales of the Cruze is important for the company as its compact sedans currently lag behind Toyota’s Corolla and Honda’s Civic.
We have a $40 price estimate for General Motors, which is about 9% more than the current market price.
Shipping Jobs to Mexico
Some industry watchers have complained about GM shipping U.S. jobs to Mexico with this move, but this is not true. The company has clearly said that it intends to continue manufacturing the vehicle at its Lordstown facility in Ohio, where the current generation version of its popular compact sedan is currently made. However, the plant is used to manufacture Cruze units for sale in the U.S. and Canada. While the Cruze has done well in both these markets, the company does not expect sales to increase so dramatically that it needs to expand capacity in order to meet growing demand from these markets. The Cruze is now a global model sold in over 100 countries and demand for the vehicle from all countries, except the U.S. and Canada, is met through GM’s manufacturing
It is not clear whether the next generation Cruze will be manufactured in South Korea, where the company has been fighting strong labor unions for years. It seems as though the company is on the lookout for a cheaper and less contentious place to manufacture vehicles. Mexico offers several advantages over Korea in these regards. For starters, workers at auto factories in Mexico make around $10 an hour, much lower than that in the U.S. or Korea. But, more importantly, Mexico has free trade agreements with over 40 countries. This means that a company exporting units from Mexico has duty-free access to 60% of the world’s economic output. GM can use this to sell its cars without having to pay any import duties, and hence lower unit prices, and take higher market share, or higher profits, if it so desires. This is a huge competitive advantage, but one that is quickly being eroded. Several Asian and European auto companies have already opened manufacturing plants in Mexico. Japanese auto maker Honda Motor opened a new $800 million plant in Celaya last year to manufacture the Fit and HR-V. German auto maker Volkswagen will soon start operating a $1.3 billion factory in Southern Mexico to manufacture the Q5 SUV. Ford and Fiat Chrysler are also reported to be mulling significant investments in the Mexican market.