Delphi’s announcement earlier this month that it was relocating its Michigan-based Flint East plant, which supplies GM, to Mexico, continues the recent automotive OEM trend of favouring Mexico over the US as a manufacturing hub. This trend, which will not only grow the OEMs’ Mexican presence but also that of their Tier One and Tier Two suppliers, could increase M&A activity in a variety of ways.
Suppliers building up their plant footprint in low-cost, low labour rate areas such as Queretaro, to be closer to local OEM factories, will be seen as attractive to automotive groups seeking a larger supplier base in Mexico, says Cliff Roesler, principal at Angle Advisors Investment Banking. Northern and Central Mexico areas like Chihuahua and Silao, where Ford and GM, respectively, have plants, will also be hotbeds of activity and will therefore “stimulate enhanced interest” as far as potential consolidation goes, Roesler adds.
Pioneer Metal Finishing’s November acquisition of Parts Finishing Group, he notes, will establish a presence for Pioneer in Queretaro, where PFG has its largest facility.
Delphi’s announcement earlier this month that it was relocating its Michigan-based Flint East plant, which supplies GM, to Mexico, continues the recent automotive OEM trend of favouring Mexico over the US as a manufacturing hub
As large Tier Ones like Delphi grow in Mexico, they will need a larger, more localised supply chain, and could thus target smaller suppliers to expand their presence, according to Jay Baron, president of the Center for Automotive Research in Ann Arbor, Michigan. Furthermore, smaller companies lacking the resources to build their existing base in Mexico may benefit from a larger company’s takeover, he adds.
Large players like Magna could certainly look at Mexican Tier One and Two suppliers to boost their footprint there, suggests Foster Finley of AlixPartners. However, he adds, such a transaction could face scrutiny from the Mexican government, and furthermore US players might be dissuaded from acquiring Mexican groups as security crises may arise in Mexico.
Delphi is certainly not the first OEM to favour Mexico recently as a manufacturing hub. Audi has invested US$2bn in its first Mexican factory; and BMW recently stated it was looking at four potential locations in Queretaro.
Michigan and other northern Midwest areas are not the only places competing with Mexico for manufacturing investment. According to a 6 February article on GreenvilleOnline.com, the Mexican automotive industry received US$11bn in investment between 2010 and 2012, compared to just US$7.5bn received in the Southeast. The Southeast needs a wider supply chain base to compete, says Baron. Areas like South Carolina, Alabama, and Arkansas, while characteristically not at the same level of skilled labour as in Michigan or Mexico, have much lower levels of unionisation and therefore many plants are opening, Finley notes.
The Mexican automotive industry received US$11bn in investment between 2010 and 2012, compared to just US$7.5bn received in the Southeast
Some groups are expanding in Mexico and either the Southeastern or Northwestern US simultaneously. For example, Century Mold, which makes injection mouldings, is growing its Shelbyville, Tennessee site and building a new plant in Querétaro. In addition to recent investments in Mexico, Ford announced late last year that it planned to invest US$773m in six plants in Michigan over the next two years. China-based Sichuan Tengzhong Heavy Industrial Machinery, which is reportedly the top candidate to acquire GM’s Hummer brand, has stated that it wants to locate the brand’s operations near Detroit. On 1 February, Germany’s Huf Hülsbeck & Fürst, which makes electronic key systems, announced a US$20m investment in its Greeneville, Tennessee factory.
Manufacturers have also looked at central and northern Mexican areas like Durango and Chihuahua because of the strong US rail connections, says Finley. Rail doesn’t have the loading and unloading issues that the ports present, he explains, adding that other low-cost areas like China, where wages and ocean shipment prices have gone up, are often less favoured than Mexico.
But not every automotive OEM necessarily favours Mexico. Roesler noted that Toyota and Chrysler have kept their focus on the US, and Finley adds that both need to “Americanize” their products. “When Chrysler goes on a major advertising campaign saying ‘Imported from Detroit,’” he says, “there’s a need to back that up.”
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Sam Weisberg is Mergermarket’s North American automotive correspondent. www.ft.com/mergermarket
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