Content

Legal 3

The Transformation of the Automotive Industry 3

I. Introduction 5

I.1. The Significance and Evolution of the Automotive Industry. 5

Acknowledgements 8

2. The Establishment of the Automotive Industry in Mexico 9

2.1 From Import Substitution to Export 9

2.2 The United States: from Mass Production to Lean Production. 22

3. The North American Free Trade Agreement 27

3.1. The Debate on NAFTA 27

3.2. Trade Agreements and Foreign Direct Investment 34

3.3. Automotive Production in Mexico. 37

4. The Transformation of the Automotive Industry 41

4.1. Globalisation and Regionalisation 41

4.2. The Technological Challenge 59

4.3. Automotive Trade in North America 62

5. Wages and Employment 71

6. The End of NAFTA–A New Treaty, New Challenges 78

6.1. The USMCA 78

6.2. The Transition to New Mobility: the CASE Challenge. 85

7. The Automotive Industry in Mexico, a Success Story? 87

7.1. The Impact of Integration 88

7.2. The Road Ahead 91

BIBLIOGRAPHY 93

Legal

The Transformation of the Automotive Industry

The Development of the Mexican Automotive Industry
in the Context of Globalization and Regionalization

Jorge Carreto Sanginés

Margherita Russo

Annamaria Simonazzi

“UNIVERSIDAD NACIONAL
AUTÓNOMA DE MÉXICO

FACULTAD DE ECONOMÍA

Este libro se inscribe en el proyecto PAPIIT

Clave: IN309620

Título: Transformación digital en la cadena de suministro automotriz en México

D.R. © 2024, Facultad de Economía, Universidad Nacional Autónoma de México, Ciudad Universitaria, 04510 México, D. F.

Formación del libro: Ernesto Rubio y Jorge Romero

Diseño de portada: Alejandra Romero Rodríguez

Primera edición: 20 de septiembre de 2024

ISBN: 978-607-30-9612-6

Prohibida su reproducción parcial o total por cualquier medio sin autorización escrita de su legítimo titular de derechos.

Esta edición y sus características son propiedad de la Universidad Nacional Autónoma de México.

Hecho en México/Made in Mexico.

I. Introduction

I.1. The Significance and Evolution of the Automotive Industry.

Since the beginning of the twentieth century, the automotive industry has been a fundamental driver of industrialisation and has led the technological development, innovation, and industrial transformation. It is still at the core of the technological transition in the twenty-first century but faces new social, technological, environmental, and geopolitical challenges. It is going through a radical transformation that redefines the characteristics of a saturated market in which new scenarios are opened, and new opportunities for the participation of new players are offered. These challenges are driving a reorganisation of global supply chains and exerting influence on the distribution of employment, the regionalisation of production and the dynamics of the evolution of nations’ comparative advantages in which it has settled. Between the end of the 1980s and the financial crisis of 2008-2009, the development of the automotive industry was defined by the technological innovation introduced by the Japanese companies in the productive process: lean production, that is, the innovative production process pioneered by Toyota. As described by the research conducted at the Massachusetts Institute of Technology and published by the title The Machine that Changed the World, the revolutionary leap taken by the Japanese industry was a turning point from mass production to lean production and a “different way of thinking about how humans work together to create value” (Womack et al., 2007, p. VII). The new business system comprises five elements: product design, supply chain coordination, dealing with the customer, producing the product from order to delivery, and managing the combined enterprise (Neil Bailey, 2005). The economic consequences of the technological and organisational changes in the automotive industry in this period, together with the predominance of ideas about economic freedom and regional commercial agreements among the primary motor vehicles and parts and components producing countries, are at the base of a new structure and governance of the global value chains and international trade. The North American Free Trade Agreement (NAFTA) profoundly reshaped the global order within this sequence of events.

The consequences for the Mexican automotive industry are formidable. In a few decades, it has gone from a minor role to one of the leading world producers of automotive vehicles and parts and components. This spectacular growth occurred in a symbiotic relationship with the U.S. economy conditioned by industrial policy evolution and under the influence of technological and financial changes. After an initial period of import substitution, between the 1940s and the beginning of the 1980s, the Mexican automotive industry developed first as a cheap producer of parts and components for the three U.S. automakers – General Motors, Chrysler, and Ford -to grow, then as an integral part of the North American productive system, as well as the necessary entry point to the American market for non-American automotive companies.

The fundamental objective of this book is to shed light on the influence and determination of economic and industrial policy, geopolitical strategies, and the technological and market transformation within the evolution of the automotive industry at a global level, particularly in Mexico. What were the main reasons for abandoning the import substitution industrialisation (ISI) policies in Mexico and for integrating into the globalisation process? How did NAFTA influence the global value chains (GVC)? Where is the industry heading, and what alternatives do large automotive companies have to face the increasingly intense competition? What are the consequences of technological change and the regionalisation of production and trade, the electrification of vehicles, autonomous driving, connectivity, and the new sharing modes of using vehicles?

The Mexican experience fits the general description of “integrated peripheries” as opposed to core countries and the “semi peripheries” (Celi et al., 2018; Pavlínek, 2018) Its study can illuminate the prospects of economies with different degrees of development and integration in the new division of labour ushered by technological, consumption, and geopolitical changes. In the general case of “integrated peripheries”, its evolution cannot be accounted for separately from that in its core countries. It has been determined by the competition that companies in the core countries faced after the 1970s and the 1980s. The U.S. companies had to respond to the increasing foreign (mainly Japanese) competition in their own, hitherto protected, market. It is in this context that, among the various strategies adopted, offshoring of labour-intensive operations and delocalisation of assembly plants to peripheral countries took on increasing importance. In the current transition towards new mobility, large firms have had to catch up in the electric vehicle revolution, a task in which the Detroit-3 found considerable hurdles in successfully competing with China. In this context, Mexico’s potential is yet to be fully developed. It is also necessary to consider the country’s difficulties in creating an independent industry and to define what can be viewed as a successful development and for whom. The importance of actual policy options and the urgent task of finding a solution to the environmental and social threats that the world faces at present has to be emphasised.

The book traces the evolution of the Mexican automotive industry from the demise of the ISI policy and through the two treaties with its North American partners (NAFTA in 1994, replaced by the USMCA in 2020). The NAFTA was the culmination of an integration process that profoundly transformed the structure of the Mexican automotive industry, deepening its dependence on the U.S. market. Indeed, despite the many free trade agreements signed by Mexico with other countries and regional organisations, after 25 years of NAFTA and after it has been substituted with the USMCA, more than 80 per cent of Mexican exports are still concentrated in the U.S. While there is no doubt that NAFTA contributed to the spectacular growth of the Mexican auto industry, whether it also increased its resilience or just increased its dependence and subjected labourers to conditions that are in sheer contrast with the enormous benefits that the multinational companies (MNCs) have gotten, is still an open question. This issue is particularly relevant given the transformations that are taking place in the automotive sector and the geopolitical scenario: the entry of powerful competitors into the global market and the transition to electric and autonomous vehicles entail risks and opportunities.

The successful growth of the automotive industry in Mexico is, actually, only one side of the coin; the other side shows the failure of the ISI due to the lack of one of the pillars of such policy, which is the development of a vigorous market, capable of absorbing the production of this industry, as well as the inability to turn the windfall of becoming one of the leading world vehicles, and parts and components producer, in an improvement of the economic and social conditions of the great majority of labourers, whether in Mexico or the United States. From this viewpoint, it is worth questioning whether the technological transition in which the automotive industry is immersed will continue as a remedy for a saturated market at the expense of labourers.

This book collects the main research results from the project “Digital Transformation in the Automotive Industry in Mexico” (PAPIIT IN309620), which were discussed in a series of interrelated papers produced by the research team. The Institute for New Economic Thinking INET published some of the documents as working papers. Among these, in November 2020, “The Future of the Automotive Industry: Dangerous Challenges or New Life for a Saturated Market?” (INET Working Paper 141) by Annamaria Simonazzi, Jorge Carreto Sanginés, and Margherita Russo, the issue of the reorganisation of global value chains in the face of new social, technological, environmental, and geopolitical challenges is addressed, comparing the relative position of core and peripheries in the North American and European macro-regions, and focusing on Mexico. A second paper: “Mexico’s Automotive Industry: A Success Story?” (INET Working Paper 166, 2021) by Jorge Carreto Sanginés, Margherita Russo, and Annamaria Simonazzi, traces the evolution of the Mexican automotive industry, emphasises the difficulties faced by the late-comer country in developing an independent sector and the importance of policy choices as well as the macroeconomic context in affecting its development. In 2021, “Who Produces What and Where. Companies and Countries in Vehicle Production, 1999-2017”, by Margherita Russo, Fabrizio Alboni, Jorge Carreto Sanginés, Emanuele Murgolo, and Annamaria Simonazzi presents an online tool to browse automotive production, by OEM and country 1. The paper “Who does What Where: Agents, artefacts and Institutions in the Emerging Electric Vehicle Space” (International Journal of Automotive Technology and Management, 2022) by Margherita Russo, Fabrizio Alboni, Giovanni Bonifati, Jorge Carreto Sanginés and Annamaria Simonazzi, fills the gap on who are the actors in the emerging production of electric vehicle. In the journal Economia e Lavoro (2022), “The World to Come: Key Challenges for the Automotive Industry.” by Annamaria Simonazzi, Margherita Russo, and Jorge Carreto Sanginés addresses the issue of the reorganisation of the global value chains in the face of various challenges: new, large markets opening, and new, aggressive competitors emerging. The analysis of the trade networks emerging in the last 25 years is presented in a new analytical framework by Margherita Russo, Fabrizio Alboni, Jorge Carreto Sanginés, Manlio de Domenico, Giuseppe Mangioni, Simone Righi, and Annamaria Simonazzi in two papers: “A Multilayer Network Analysis of International Trade in Components and Parts” (INET Working Paper 173), and in the journal Structural Change and Economic Dynamics (2023), “Regionalisation and Cross-Region Integration, more focused on the analytical model. The paper is part of the research project “Geopolitical and technological challenges for the automotive global value chains”, PI Annamaria Simonazzi, funded by INET. The application on Mexico has been developed under the complementary project “Digital Transformation in the Automotive Supply Chain in Mexico”, PI Jorge Carreto Sangines, funded by UNAM PAPIIT IN309620.

1 https://public.tableau.com/shared/STW58J97T?:display_count=n&:origin=viz_share_link

The book is structured as follows: the second chapter outlines the main facts and figures characterising the Mexican economy before NAFTA and how the import substitution industrialisation (ISI) was abandoned. The third chapter describes NAFTA and discusses its constitution and main effects. Chapter four places NAFTA in the overall framework of trade agreements and the regionalisation of the automotive world production, highlighting the changes between 1993 and 2017 in the geography of trade relations and the nature and consequences of introducing the lean production model by the Japanese companies. Chapter five discusses the impact on labour cost differentials in Mexico, Canada, and the U.S. Chapter six addresses the topic of the USMCA and the implications of the automotive industry’s transition towards digitalisation and electrification. Chapter 7 collects the main conclusions.

Acknowledgements

The book is part of the research project “Geopolitical and technological challenges for the automotive global value chains”, PI Annamaria Simonazzi, funded by INET. The application on Mexico has been developed under the complementary project “Digital transformation in the automotive supply chain in Mexico”, PI Jorge Carreto Sangines, funded by UNAM PAPIIT IN309620.

The authors wish to thank the publishers of their papers (published in open access) on which this book is based: INET Working Paper Series (nr. 144, 166, 173), Economia & Lavoro, Structural Change and Economic Dynamics, and the co-authors.

A special thanks to the participants at the workshop and conferences for comments and lovely discussions on the topics addressed in the book: Workshop “Readiness for the 4th Industrial Revolution in the European Union” (in cooperation with the European Association for Comparative Economic Studies, April 5-6, 2019, Szeged, Hungary); the XXIV International Accounting Congress, Administration and Information Technology (Ciudad Universitaria, Mexico City, October 9-11, 2019); the ARS’19 Seventh International Workshop (October 29-31, 2019, Vietri sul Mare (SA), Italy); the two workshops on “The impact of digital transformations and the USMCA” (January 23, 2019 and January 5-6, 2020, organised by Canacintra, Mexico City, Mexico); the kick-off meeting of the project “Digital Transformation in the Automotive Supply Chain in Mexico (TAID) (Programa de Apoyo a Proyectos de Investigación e Innovación Tecnológica (PAPIIT) IN309620 (2020-2022), February 6, 2020, at UNAM, Mexico City, Mexico); the GERPISA Colloquia (Groupe d’Études et de Recherche Permanent sur l’Industrie et les Salariés de l’Automobile) (Paris, France, 2019, 2020 and 2021 online); the session “Automobiles and the Fate of Nations: a Green Restructuring of the World Car Industry?” (organised by INET at the Festival of Economics, Trento, Italy, September 24-27, 2020); the session on “Macroeconomic and Industrial Policies” in the 4th International Astril Conference on “The Reshaping of Economic Policies, Work Organisation and the Welfare State after the Covid-19 Pandemic Crisis” (December 10, 2020); the XXXVII. c.MET05 Policy Research Meeting (Bologna, March 31, 2021), the conference on “L’industria dell’auto e gli investimenti della Cina nell’era dell’auto elettrica e della mobilità sostenibile” (organised by the University of Modena and Reggio Emilia, July 2, 2021); session on “Advances in Multilayer Network Analysis: Methods and Applications” in the 5th European Conference on Social Network EUSN 2021 (Naples September September 7, 2021); the workshop in honour of Professor Annamaria Simonazzi (organised by the Sapienza University of Rome, Department of Economics and Law, October 15, 2021); the web-conference on “New Worlds of Work in the Manufacturing Sector? Productive Models and Industrial Relations in the Digital Transformation” (May 24, 2022, organised by the Institute of Economics–Sant’Anna School of Advanced Studies, the Sant’Anna School node of ARTES 4.0 (Advanced Robotics and Enabling Digital Technologies & Systems) and GERPISA).

Thanks also to the companies that kindly invited us to visit their facilities and granted us interviews that were extremely useful for our research: BOCAR, Eurotranciatura México, GKN Driveline Celaya, META SYSTEM, MTA Automotive Solutions México, PEASA Autopartes, RASSINI BYPASA. The Directors and officials of the Asociación Mexicana de la Industria Automotriz, A.C. (AMIA), the Cámara Nacional de la Industria de la Transformación (CANACINTRA), the Industria Nacional de Autopartes (INA) Ciudad de México, the Italian Trade Commission (ICE) in Mexico, the Japan External Trade Organization (JETRO) Ciudad de México, offered their support in the implementation of the empirical analyses; the Mexican Statistical Office INEGI.

Professors Monica Casalet (Facultad Latinoamericana de Ciencias Sociales, FLACSO, CdMx), Julio Castellanos (UNAM), Huberto Juárez (Universidad Autónoma de Puebla, BUAP), Johannes Kern (Baden-Wuerttemberg Cooperative State University, DHBW, Lörrach, Germany), Carlo Panico (UNAM), Alex Covarrubias (The College of Sonora, Mexico), Dr. Inés González (Friedrich Ebert Stiftung Mexico), Dr. Armando Sánchez (Director Instituto de Investigaciones Económicas, UNAM).

2. The Establishment of the Automotive Industry in Mexico

2.1 From Import Substitution to Export

Since the first half of the 20th century, industrialisation was seen as the path to follow to develop underdeveloped countries. Raul Prebisch (1950, p. 1) remarked that in “the outdated schema of the international division of labour”, there was no place for the industrialisation of the new countries and that in the academic discussion, it was wrongly assumed that the benefits of technical progress tend to be distributed alike over the whole community, either by lowering the prices or by raising the corresponding incomes. The argument against industrialisation was that the countries producing raw materials obtained their share of these benefits through international exchange and did not need to industrialise. Prebisch, however, argued that in the case of the periphery of the world economy, facts conclusively demonstrated that it was false (ibid. p. 26). Following this idea, development required State intervention and implementation of economic policies aimed at developing a modern industry. The fall in international prices of agricultural and mining products (including oil) made industrialisation a “right” and an “inescapable requirement” (Prebisch, 1987, p. 26). Development was to be driven by the government, and the new industries were to be protected.

The automotive industry played a fundamental role as a driver of industrialisation in Mexico. Like most modern industries, it started with foreign companies investing in the country; the technology and financing they brought were essential to industrialisation. The history of foreign direct investment in Mexico’s automotive industry goes back to the aftermath of the 1910 Revolution when foreign companies were incentivised to establish in the country. American company Buick started assembling vehicles in Mexico in 1921. In 1925, Ford Motor Company opened a new subsidiary company in Mexico City, and a few years later, it began to build its first assembly plant in the country. Among other benefits, the Mexican government offered Ford a 50 per cent discount on import duties on inputs, rail freight tariff concessions, and a very significant promise: that there would not be any problem with labour unions. The other two big sisters, General Motors Corporation (GM) and Chrysler, followed in the next years. GM began manufacturing trucks in 1937 and assembling automobiles the following year; Chrysler installed its first assembly plant in 1938; simultaneously, several facilities to produce auto parts began to emerge (Castellanos, 2016).

With the consolidation of a civil, strong, and profoundly nationalist government in the late 1930s and the 1940s, import substitution industrialisation policies were implemented to chart a path toward industrialisation and control foreign companies that invested in Mexico. Economic nationalism and State interventionism were strengthened with the economic and social reforms carried out by President Lázaro Cárdenas (1934-1940)–among these, the nationalisation of the oil industry and the creation of state-owned Petróleos Mexicanos (Pemex). Besides nationalisation, another strategy followed was “Mexicanization”, which required foreign capital invested in private firms to own only a minority stake; the majority stake had to be owned by Mexican private capital (Benneth & Sharpe, 1981, p. 389). In the case of the automotive industry, the aim was to increase “national integration” of the supply chain to ensure that the manufacture of automobiles, or at least that of the vital parts that integrate them, be carried out in Mexico, as well as to gain control over productive capacity and keep it in Mexican hands (Navarrete, 1963, p. 156). The policy was justified since it would allow for “fair and balanced development” and “consolidate the economic independence of the country” (Comercio Exterior, 1973, pp. 16-25).

Thus, the development of the automotive industry in Mexico after World War II took place under the protective mantle of the ISI policies and with the support of a series of promotion measures that fostered the sector’s development, transforming it from a simple assembler of CKD (Completely Knocked Down) kits2 that imported most of the components3, to a significant producer of auto parts and finished vehicles. The fundamental objective of these policies was to increase “national integration” of the supply chain to ensure that car manufacturing, or at least the vital parts that integrate them, was carried on in Mexico and to get control of productive capacity and keep it in Mexican hands (Navarrete, 1963, p. 156). Such policy was justified since it would allow for “fair and balanced development” and “consolidating the economic independence of the country” (Comercio Exterior, 1973, pp. 16-25).

2 A knock-down kit, also known as a CKD (Completely Knocked Down) kit, is a set of unassembled parts and components packaged and shipped to another location for final assembly. In the automotive context, a knock-down kit refers to a package of parts needed to assemble a vehicle.

3 In 1940, 95% of automotive components were imported (Ochoa, 2005)

The main guidelines of the industrial policy for the automotive sector were implemented through various decrees4: The first, called the “Integration Decree,” was issued in 1962, and the latest was issued in 2003 when NAFTA entered full force. In 1960, local content in motor vehicle production was less than 20 per cent (Moreno-Brid, 1992, p. 260). The 1962 Decree established the minimum local content at 60 per cent, prohibited imports of finished vehicles, and subjected the imports of components to licence requirements. Its main objective was to promote the development of a domestic auto parts industry by establishing a minimum degree of integration. Following the 1962 Decree, firms in the automotive industry were forced to move from simple assemblers to making vehicles, engines, parts, and components locally.

4 In Mexican legislation, the decrees are written resolutions of a normative nature issued by the head of the Executive Branch, in use of his legislative powers, or by the Legislative Branch. Within Congress, the decree contains a bill approved by the Plenary of one or both Congress chambers. Its provisions are regularly of a particular nature. Its validity is limited in space, time, places, corporations, and/or people, unlike the law that contains general and abstract provisions (Art. 70 of the Political Constitution of the United Mexican States). (Diario Oficial de la Federación, 1962, 1972, 1977, 1983, 1989, 2003; Ruiz, 2016; U.S. Congress, OTA, 1992)

The protectionist policy led to considerable production growth in the automotive industry: the number of vehicles assembled increased from 96,781 in 1965 to 250,000 units in 1970 (Vicencio, 2007, p.216). However, there needed to be better quality levels, and due to the obsolescence of productive infrastructure, costs were higher than in other countries. The domestic demand for motor vehicles in Mexico grew relatively slowly and needed more scale; too many different car models were assembled to achieve scale economies in each and make production profitable. This extreme fragmentation of the automotive market made it imperative to raise the industry’s efficiency by cutting down the number of firms operating in the country, most of them foreign-owned, despite the Mexicanisation attempts (Moreno Brid, 1992, p. 260).

Table 2.1. Motor Vehicle Manufacturing Companies in Mexico in 1965

Source: Solís Sánchez, 2009, p. 212.

The limited growth of domestic demand slowed down the take-off of the automotive industry. In 1914, Henry Ford implemented the five-dollar-a-day pay for his workers and gave a decisive push to the nascent automotive industry. As Lee Iacocca put it in his autobiography: “It wasn’t their standard of living he cared about. Henry Ford never hid his real reason for the $5.00 day: he wanted his workers to earn enough so that they could eventually buy his cars. In other words, Henry Ford was creating a middle class.” (Iacocca, 1980, p. 157). In the 1970s, in Mexico, a similar demand boost would have been convenient; however, neither the government nor the industry leaders were ready to accept the cost of a pay raise, and much less, the income distribution revolution needed to create a domestic market ample enough to absorb the auto production at a level that would have made scale economies profitable for the industry. Instead, policymakers turned their attention to export markets, and the most viable one was in the U.S.

This narrowness of the Mexican market could have been compensated with exports; however, by the end of the 1960s, exports were almost null, and the automotive industry showed a growing deficit. The Mexican government integrated domestic market protection with a more export-oriented policy to remedy this. On one hand, production quotas were linked to the company’s balance of imports and exports; on the other, the “maquiladora” program was created. This program allowed businesses to set up manufacturing plants in Mexico with temporarily imported machinery, whatever its cost, if it exported the totality of its products. Alternatively, companies could reorient the production of existing industrial plants devoted to supplying the domestic market, either partially or entirely, to export. In December 1965, 12 such firms were employing 3,087 workers. In 1971, maquiladoras increased to 209 and employment to 29,000. By December 1974, there were 516, employing 56,253 workers (Bustamante, 1975, p. 185).

The maquiladora program aimed to increase employment at the frontier, improve the income of the border population, and promote technology transfer by training workers. The program showed slow growth in its first decade of existence due to the closure of several firms; managers of the maquiladoras blamed the recession of the U.S. economy and the loss of competitiveness of Mexico compared internationally due to wage increments and the absence of incentives and stimulus policies that other countries did offer to multinational businesses (Bustamante, ibid.). Wages in Mexico had been growing since the end of WWII. As Figure 2.1 shows, the minimum wage in Mexico grew constantly from the 1950s until the end of the 1970s, when a constant decline started. The growth of wages coincided with the post-war period (1950-1973)–the years of the “Mexican Miracle”–when 6 per cent growth rates supported social stability. Market protection made automotive production growth in Mexico possible during the 1970s, even if quality levels were low and production costs were above those in other countries; however, domestic demand grew at a too-slow pace, and the obsolete production infrastructure hindered export growth. Production of automotive parts in the maquiladoras – wire harnesses, seat covers, electrical components, plastic parts, brake parts, heating, ventilation, and air-conditioning components – took off after 1980, driven mainly by the collapse of the Mexican peso (the exchange rate went from around 26 pesos to the dollar to nearly 3,000 pesos between 1982 and 1987). In 1980, almost 13 thousand labourers were employed in parts and components production in 41 maquiladora plants, approximately 8 per cent of total employment in all the maquila. By 1993, there were 90,000, 16.5 per cent of jobs, in 122 plants (INEGI, IMMEX) that competed in labour-intensive production, challenging to be automatised; the type of work that could be performed by low-skilled and poorly trained labour.

Figure 2.1. Minimum Wage Index 1976=100

Source: Garavito, 1990, p.261

Even if the protectionist policies were kept in place during the 1970s, the inflow of foreign investment was considered an essential factor in fostering industrialisation. An attempt to regulate it was made in 1973 with the Foreign Investment Law (“Ley de Inversiones Extranjeras”) that limited to a 40 per cent share of foreign investment in companies producing parts for automotive vehicles. It came as a complement of the National Council of Science and Technology (CONACYT), created in 1970 under the conviction that the government needed to help Mexican companies develop the required competencies. This was to be achieved by investing in education and workers’ training, incentivising scientific and technological development, and granting financial credits to promote exports (Romero & Berasaluce, 2018, pp. 103-106). A decade later, in 1982, the “Law Regarding the Control and Registration of Technology Transfer and the Use and Exploitation of Patents and Trademarks” came as a further attempt to regulate foreign investment.

In 1977, the government admitted that the ISI showed signs of exhaustion and issued an automotive decree that prioritised exports over import substitution for finished products. The decree required assemblers to balance imports of inputs with exports and comply with a 60 per cent regional value content. The decree established strict control over the commercial balance of the firms present in Mexico.

The discovery of large oil fields in Mexico in 1978 heralded a period of prosperity. However, the boom was short-lived despite having generated great expectations, and the Mexican economy entered a period of recurring crises with constant fluctuations in international oil prices 5. The oil boom prompted plans by the government to transform Mexico into a highly competitive exporting country, and public expenditure and debt grew accordingly. However, the domestic market remained relatively small, and most industries needed help to achieve supply chain integration. Figure 2.2 shows that the Mexican economy would have been permanently in deficit had it not been for oil exports, and most of the trade deficit was due to the general industry’s intermediate goods imports.

5 Due to the oil embargo imposed by OPEC members in 1973 and the Iranian Revolution in 1979, the crude oil price in international markets went from approximately US$3.39 in 1970 to US$14.99 in 1978; it peaked in 1980 at US$37.42 and started going down from 1981 (US$35.75) till 1986 (US$14.61), after the oil market became oversupplied, resulting from decreased global demand and increased production capacity.

Figure 2.2. Mexico: Trade Balance.
Millions of Dollars.
Red Line: Imports
Blue columns: Exports, including oil
Grey columns: Exports without oil

Source: INEGI. Banco de Información Económica (BIE)

The 1980s started with a discouraging landscape for the Mexican economy. The U.S. entered a recession, and the Federal Reserve’s reaction to the crisis–raising interest rates to combat inflation–contributed to the economic downturn. Paul Volcker’s tight monetary policy and the bust of oil prices pushed the Mexican economy downhill. The oil boom of the 1970s was over. With the collapse of oil prices in international markets, the wage increases and high growth rates of the post-war period (1950-1973)–the “Mexican Miracle” years–and the “management of affluence” of President López Portillo (1976-1982) ended abruptly, mainly due to dependence on oil exports as the primary source of foreign currency for the country. Reduced revenues, rising interest rates worldwide and extensive Mexican fiscal deficits resulted in a debt crisis. Debt rose from 22.3% of GDP in 1970 to 79.4% in 1982 (Table 2.2), and foreign liabilities represented 43% of GDP in 1982 (Romero et al., 2018, p. 57). The mounting debt–the “Mexican Mistake” (Rodríguez, 2006, p. 344)–was made possible by the urgency of international banks to lend the flood of liquidity coming from the petrodollar market (Simonazzi, 1984; Ros, 2013; Romero & Berasaluce, 2018).

In August 1982, the Mexican government under President López Portillo announced that it could not meet its scheduled debt payments, reflecting a deep financial crisis: private banks were nationalised, being accused of making excessive profits and concentrating the granting of loans in the upper segments of society, and a controlled exchange regime was established.

Table 2.2. Mexico: Government Debt as a Percentage of GDP

Source: Romero, 2018, p. 57

Multilateral agencies and the U.S. Treasury made debt restructuring conditional on opening the country to FDI and foreign competition, implementing market-oriented reforms, and cutting government expenditure and budget deficits (Ros, 1985; Ruiz, 1985; Garrido & Quintana, 1990). With foreign debt destabilising the exchange rate, inflation approaching triple-digit levels, and capital flights provoking balance of payments and currency crises, the government had no choice but to comply. In December 1982, a few months after the nationalisation of the banking system, the new government under President Miguel de la Madrid (1982-1988) was forced to sign an agreement with the IMF–the “Acuerdo de facilidad ampliada” (Expanded Facility Agreement)–which, in exchange for restructuring the enormous debt inherited by the López Portillo administration, it mandated the classical Washington Consensus adjustment measures. The agreement was conditioned to keeping the fiscal deficit under control, stabilising the exchange rate, and holding down the prices of public services and wage increments. The government implemented the “Programa Inmediato de Reordenación Económica” (Immediate Economic Reorganization Program), which lowered the average tariffs on imports and marked the beginning of the dismantling of the import-substitution policy and the gradual establishment of a free market regime. In July 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT) in compliance with what the U.S. Treasury and the IMF prescribed.

The peso devalued (the exchange rate went from 26 to the dollar to around 3,000 to the dollar between 1982 and 1987), and the austerity policies implemented to overcome the crisis caused a contraction of the Mexican economy. The gross domestic product fell 0.5 per cent in 1982 and 5.3 per cent in 1983; the automotive GDP fell almost 27 per cent in 1982 and 41 per cent in 1983. Economic and financial instability were common problems, not exclusive to Mexico; between 1980 and 1989, Latin America became a net capital exporter, transferring nearly 2.7 per cent of its annual GDP to the central economies (Rodríguez, 2006, p.344).

Figure 2.3. Mexico: Gross Domestic Product Growth index 1981=100 (constant pesos of 1980) (blue columns for the entire economy, grey for the manufacturing industry, Lines for automotive industry growth, motor vehicle production and parts and components growth).

Source: INEGI. 1984, 1986, 1991, 1992, 1993, 1994, 1998.

In 1983, a new Automotive Decree (“Decree for the Rationalisation of the Automotive Industry”, DOF, 1983) marked a shift in the direction and intent of the economic policy from protectionism towards export-led industrialisation. It allowed carmakers to gradually reduce the number of models produced at their Mexican assembly plants from 3 to 2 and then down to 1 by 1987. Domestic content requirements for finished vehicles increased, but imports were allowed if balanced by exports. The 1983 Decree symbolises the turning point in the industrialisation process in Mexico; the inward growth stage was abandoned, and, in its place, the Mexican government directed its efforts to develop an export economy–outward growth – that required that the productive infrastructure was modernised. Eventually, a new government decree in 1989 reduced domestic content requirements and lightened import restrictions, allowing imports of new cars to complement local production.

During the 1980s, assembly plants in Mexico either produced parts internally or outsourced production to trusted suppliers near the assembly facilities, often owing their existence to strategic alliances with major U.S. auto parts manufacturers. Several foundries could produce complex castings at competitive cost and quality. Original equipment manufacturers (OEMs) opened plants to produce engines: they were easy to ship though not labour-intensive, and components like pistons and valves had low shipping costs or could be imported. Even though the industrial policy during the 1970s and 1980s consisted mainly of providing state assistance to companies to reorganise their productive activities–in most cases, it helped producers to acquire machinery to lower production costs -after the shift towards an export-oriented economy, the industrial policy adopted an approach based on systemic competitiveness that emphasised the development of regional and local capabilities and competencies. It also encouraged cooperative networking between the firms and the institutions in charge of carrying on research and technological assistance–such as the programs created by the National Council for Science and Technology (CONACYT), the Ministry of Economy, the government banks Nacional Financiera, and Bancomext, or by regional systems, to promote research, training and standard certification systems–represented the efforts to create conditions at a regional level to cope with the new demands that the internationalisation of production placed on companies.

However, it would be hard to understand the development of the auto parts industry in Mexico without the heterodox policy that adopted the systemic competitiveness approach and shifted the emphasis on the development of regional and local capabilities and competencies, setting the basis for the creation of regional clusters of automotive companies that fostered a new kind of intercompany coordination and giving a more relevant role to the development of regional agglomerations of small and medium-sized companies (SMEs). The automotive parts industry in Mexico saw a profound transformation with the growth of two separate segments: the maquiladoras, producing parts for re-export, and another segment–more connected with the assemblers–selling either original equipment used directly in the production of new vehicles or spare parts used in repairs, both for the Mexican market and export.

The new industrial policy changed the orientation from product markets to factor markets, applying indirect instruments, diminishing the role of the State, and creating a new institutional environment in which deregulation and demand support substituted the welfare system established with the ISI policy. The main idea was that these new policy instruments promoted the development of tacit knowledge and the informal learning processes at the base of the entrepreneurial and organisational culture.

When the industrialisation process was redirected away from nationalism under the state’s guidance to opening the economy and reducing the state’s control on productive conditions, the development of the automotive industry ended up depending upon the strategies set by multinational companies and the needs of the U.S. market. This change highlighted the issue of the industrialisation process that, from then on, would depend on global actors and the existence and intensity of their links with the local economy, in addition to the emergence of local companies, the transfer of knowledge and the role local institutions and organisations played in supporting and improving domestic suppliers. Likewise, the geographical distribution of the automotive industry was determined by several factors, such as the market reconfiguration due to global competitiveness faced by the Detroit-3, the restructuring of productive processes based on technological innovation and the reorganisation of work. Labour costs and the decrees aimed at urban and industrial decentralisation6 also drove the relocation of plants from central Mexico to the North, closer to the U.S. border, even though most of the population inhabited Central Mexico. Daily wages in Coahuila were between Mx$90 and Mx$98, compared with Mx$450 in Mexico City. Labourers in the north were younger and had less union experience, and “protection labour contracts”7 shielded foreign companies from demands to raise wages. Unlike before, the new plants implemented the latest organisational and production techniques learned from Japan. For example, the Ford/Mazda assembly plant established in 1986 at Hermosillo, in the northern State of Sonora, adopted lean production techniques from the outset and was rated one of the best by the MIT team (Womack et al., 1990). Its cost rounded the 500 million dollars, allowing it to save between 33 to 50 per cent of what it would have cost in the U.S. The workforce of 1,600 proved to be as efficient as those in the U.S. Their wages, benefits, and taxes were about US$2 an hour, or US$7 million a year, while a comparable workforce in a U.S. Ford plant would have cost US$30 an hour, nearly US$100 million a year (Moody, 1995). Cars produced there were sold at the same price as comparable U.S.-produced models, and Ford had a huge profit margin. The greater participation of Northern Mexico in the economy was reflected in the increase in the number of firms, which grew from 16,877 in 1980 to 54,966 in 2013, a 3.6 per cent annual growth rate. In that same period, employment in the northern regions grew from 20.9 per cent of all manufacturing activities in the country to 36 per cent (Carbajal et al., 2018, p.35). GM’s assembly plant in Coahuila8 was designed to produce 500,000 six-cylinder engines per year; Chrysler’s plant in Coahuila was planned to produce, in the first stage, 270,000 engines, 220,000 of which were to be exported to the U.S. (Castellanos Elías, 2016).

6 Three types of decentralisation processes are distinguished: a) spatial decentralisation, intended as a process of distributing activities and urban population to regions away from large urban agglomerations; b) market decentralisation, or economic liberalisation, where there is a shift in favour of market structures against statal planning; c) administrative decentralisation, defined as the transfer of planning, administrative, and fiscal responsibilities to local or regional governments. In Mexico, there were several efforts towards decentralisation during the 1970s and the 1980s embodied in the Decree for the Industrial Decentralisation (Decreto de Descentralización Industrial, released in 1971) and the National Urban Development Plan (Plan Nacional de Desarrollo Urbano, from 1978) (Casalet, 1999, p. 1101; Carbajal et al., 2017)

7 The so-called “protection contracts” are collective agreements signed between management and state-allied unions (official unionism) long before a plant is opened. In practice, they function as company contracts; when a plant opens, and workers are hired, they face a union and a contract they did not vote for or know about. In addition, companies are allowed to define work rules and labour compensation at the plant level. Hence, workers’ unions cannot counteract the “race to the bottom” regarding wages, neither at the company level nor the regional level (Covarrubias, 2020, p. 336).

8 GM has three plants in Mexico: Toluca, in the State of Mexico; Ramos Arizpe, in Coahuila; and Silao, in Guanajuato. Together, these three plants produce more than 300,000 engines.

The opening of the economy exposed it to changes in the global sphere, which were characterised by technological transformations, market reconfiguration, and regionalisation of production. Japanese firms were leading in disrupting the market by introducing lean production and smaller, more efficient, and economical vehicles that invaded the United States and Mexico markets. The pressure of Japanese competition on United States automobile manufacturers made them see Mexico as a low-cost productive capacity (OTA, 1992).

The disruption provoked by Japanese competition and the adoption of lean production by plants in North America also affected non-U.S. automakers in the U.S. Such was the case, for example, of the VW mass-production assembly plant in Pennsylvania (established in the 1970s), which was operating at 50 per cent of capacity in 1987 (VW, 2014). VW closed the plant, transferred the presses, and moved the Jetta and Golf models’ production to Puebla, where it could continue producing with mass-production techniques thanks to low labour costs and simultaneously defend its standing in the Mexican market. Meanwhile, in the U.S., it could adopt lean production techniques. Conversely, Renault sold its U.S. facilities– which it had bought from American Motors in 1979 – to Chrysler and abandoned Mexico in 1986.

The shock that hit the U.S. automotive industry and the changes in the strategies of the U.S. OEMs profoundly affected the Mexican industry. Until the mid-1970s, the five “legacy” automakers – Ford, GM, Chrysler, Nissan, and Volkswagen – formed an oligopoly in the small Mexican domestic market, protected by high entry barriers. Local content and trade balance requirements forced carmakers to develop a local network of suppliers of parts and components. However, these plants operated on a low-volume, kit-assembly framework. Parts producers lacked the economies of scale and the expertise to invest in developing new products and technologies. They remained dependent on the strategies OEMs’ top management decided in core countries. The insufficient development of the domestic value chain, in terms of coverage of the various stages and technological and qualitative capabilities, was a difficult challenge to face (Castellanos et al., 2010; Carrillo, 2018; Arteaga et al., 2019)

Once the economy’s liberalisation process started, the aim of industrial policy went from market protection to the attraction of foreign direct investment (FDI); the industrialisation process changed its orientation and rationale from nationalism under state guidance to the strategies that multinational companies and the needs of the U.S. market determined. This was achieved through wage-growth containment and reducing “risks”9 for investors; if the financial discipline the International Monetary Fund prescribed was followed, the country should become an attractive destination for FDI. Incomes and imports diminished, and the trade balance moved to surplus. The outcome of the liberalisation process was positive in the case of the automotive sector. After the crisis of 1982, it rapidly recovered, based on the expectation of exporting cheap cars to the North American market (Womack et al., 1990), and achieved high growth rates, in coincidence with the opening of the economy. In 1983, the number of motor vehicles produced was nearly 285,500; by the time NAFTA was signed in 1993, it had reached almost 1.06 million vehicles (Figure 2.4)10. On average, the number of motor vehicles produced between 1983 and 1993 grew by 77 thousand per year. The share of manufacturing value-added rose from 4 per cent in 1970 to 12 per cent in 1991 and 15 per cent in 1997 (INEGI, 1980, 2000).

9 “Country-risk” and “country-cost”, the first conceived as macroeconomic instability, i.e., inflation, interest rates and exchange rate volatility, and the second as the cost of production, mainly wage increases.

10 Between 1983 and 1993, the production of cars rose from 207 thousand to 835 thousand and the production of trucks from 78 thousand to 220 thousand; this was before NAFTA. During the NAFTA period, the production of cars was 856.6 thousand in 1994, which peaked at almost 2 million in 2016. Trucks went from 241 thousand in 1994 to 2.6 million in 2016 (Figure 2.4). Based on the Corporate Average Fuel Economy (CAFE) and greenhouse gas (GHG) regulatory definitions, all two-wheel drive SUVs under 6,000 pounds GVW are classified as cars. In comparison, most SUVs with four-wheel drive or above 6,000 pounds GVW are considered trucks. SUV models less than 6,000 pounds GVW can have car and truck variants, with two-wheel drive versions classified as cars and four-wheel drive versions classified as trucks.

Figure 2.4. Production of Motor Vehicles in Mexico. 1983-1993
Columns: total production; thick line: trucks & buses; dotted line: cars. Units of vehicles

Source: INEGI; https://www.inegi.org.mx/sistemas/bie/#D10900540

The industrial policy towards the automotive sector aimed to transform it into a critical element in the country’s modernisation and globalisation; however, infrastructure obsolescence and the Mexican automotive industry’s high dependence on imported inputs and technology hampered its achievement of this role (Figure 2.5).

Figure 2.5. Mexico: Imports of Consumption, Intermediate and Capital Goods 1980-1992
(millions of dollars)

Source: INEGI. Banco de Información económica (https://www.inegi.org.mx)

The opening of the economy and the reduction of state control over the productive conditions led to industrialisation dependent on global players, leaving the issue of who benefited from it. The cost of liberalisation fell on the working population: five years after the 1982 crisis, real minimum wages had fallen by 42.5 per cent (see Figure 2.1). Between 1980 and 1987, the wage earners’ share in the GDP decreased by 10 points, while the share allocated to profits increased by 3 points (Garavito, 1990, p.254).

The concept of the State as an entity external to the socioeconomic system, capable of consciously apprehending it and imbuing it with a rationality that it does not possess by itself (Rodríguez, 1981, p. 11), and by which it is possible to develop an industrialisation process and to create an internal market as a mechanism for the expansion of effective demand–the “inward growth” -, was gradually abandoned. In its place, the idea of a global free competition-led development took place. Liberalisation, deregulation, and free-market “revolution”, driven by international financial pressures, were also propitiated by the ascent in Mexico of a generation of foreign-educated technocrats who embraced neo-liberal ideas. The demise of the ISI strategy gave way to an open-market approach that assigned greater weight to the market in allocating resources, encouraged foreign direct investment and allowed 100 per cent foreign ownership of plants. The new rules simplified administrative procedures, deregulated the financial sector, and reformed the tax system, reducing tax rates for companies and individuals (Banco de México, 1991, p.4).

Figure 2.6. Mexico: Automotive Sector – Exports 1980-1992
Millions of Dollars

Source: INEGI, 1980-1985, 1990, 1991, 1992, 1993, 1995, 1997, 1999

Figure 2.7. Mexico: Automotive Sector – Imports 1980-1992
Millions of Dollars
Source: INEGI, 1980-1985, 1990, 1991, 1992, 1993, 1995, 1997, 1999

Figure 2.8. Mexico: Automotive Sector – Trade Balance 1980-1992
Millions of Dollars

Source: INEGI, 1980-1985, 1990, 1991, 1992, 1993, 1995, 1997, 1999

Figure 2.9. Mexico: Automotive Sector – Cars, Engines, and Parts – Trade Balance 1980-1992
Millions of Dollars

Source: INEGI, 1980-1985, 1990, 1991, 1992, 1993, 1995, 1997, 1999

2.2 The United States: from Mass Production to Lean Production.

Until the 1960s, a framework based on an oligopolistic regime prevailed. One that effectively guaranteed high business profits and an agreement between management and labourers that provided favourable labouring conditions based on a large-scale technological framework. Under the leadership of GM, the Detroit-3 shared the market, with none going too close to 50 per cent for fear of antitrust legislation. They enjoyed high entry barriers and were vertically integrated since OEMs made themselves engines, transmissions and parts and managed their dealership networks. However, they were exposed to imports of small cars from Europe11 and Japan. In 1960, imports from outside North America accounted for 7 per cent of total sales in the domestic market. The share rose to 13 per cent in 1970 and almost doubled between 1976 and 1980, soaring from 14.8 per cent to 26.5 per cent in just four years (Klier & Rubenstein, 2020, pp. 57-58). Behind this performance stood Japan, which displaced Europe: in these same four years, its participation in the U.S. market grew from 9.3 to 21.1 per cent, and in 1980, it accounted for 77 per cent of U.S. imports (it was 85 per cent in 1990) (ibid.).

11 In the early 1970s, European carmakers accounted for 64 per cent of US imports, with Renault leading in 1959 and VW between 1960 and 1974 (Klier & Rubenstein, 2020, p. 57).

The two oil shocks (in 1973 and especially in 1979) redirected demand toward compact cars, which increased considerably. Japanese cars were more fuel-efficient and reliable, and their production costs were about 25 per cent below the cost of a similar car made in the U.S. Quality, reliability, and cost were the factors that resulted in the Japanese firms overcoming the Detroit-3.

Figure 2.10. Oil Price and United States’ Economic Growth, 1970–1993*

Source: U.S. Davis, 2022

* More relevant economic events during the period:

1970–Regulated prices

1978–Fed raised and lowered rates

1987–OPEC added to supply

1974–OPEC oil embargo ended

1979–Iran-Iraq War, fed rate 20%

1990–Gulf War

1975–Stagflation

1980–Iran oil embargo

1991–The Strategic Petroleum Reserve released oil

1976–Economy recovered

1981–Reagan cut taxes

1977–Fed raised and lowered rates

1982–Recession ends inflation

1994 – Under NAFTA, cheap oil imported from Mexico

Source: Amadeo, 2022.

The U.S. industrial leaders had good reason to worry: “In a period of five months in 1979, the small-car share of the market rose from 43 per cent to nearly 58 per cent–a swing of 15 per cent” (Iacocca, 1984, p. 195). Things got complicated for traditional car-making, and the Detroit-3 had to close some of their plants, mainly in Michigan and lay off thousands of blue-collar and white-collar workers. In the 1970s, the manufacturing belt lost about one million manufacturing jobs (Norton, 1986; Secrest, 1981). The metaphor of the boiled frog illustrates the laissez-faire policy facing the “systematic capture” of the industrial and technological base of the American automobile industry (Iacocca, 1984, p. 343) due to a “poor adaptation to increasing threats to survival” (Senge, 1998, p. 34), it does not realise the danger until it is too late, as happened with the Detroit-3. In the first 1960s in the U.S., the presence of Japanese companies in the automotive market was not perceived as a threat to the survival of American automakers, and it was only until the 1980s that they began to “look critically at their practices and core assumptions” (ibid.). Production of motor vehicles between 1970 and 2000 in the United States grew by 150 thousand per year on average, a growth below that of sales, which grew by 200 thousand per year (see Figure 2.11).

Figure 2.11. United States. Motor Vehicles Production
Thousands of Units

Source: WardsAuto.com, Motor Vehicle Facts & Figures, (Southfield, MI: Annual Issues), pp. 3 and 17.

Figure 2.12. United States. Motor Vehicles Sales
Thousands of Units

Source: WardsAuto.com, Motor Vehicle Facts & Figures, (Southfield, MI: Annual Issues), pp. 3 and 17.

The 1981 U-turn in monetary policy and the deregulation wave initiated in Gerald Ford’s (1974-1977) and James Carter’s (1977-1980) administrations and pursued by Ronald Reagan (1981-1989) changed the context. Domestic firms responded to the Japanese assault in various ways: lobbying for protection, adopting labour cost-cutting measures, imitating the Japanese just-in-time (JIT) and lean-production techniques, combining managerial and process innovations, and through joint ventures with Japanese companies. The voluntary export restraint (VER), negotiated with the Japanese government to set a limit to Japan’s exports to the U.S., ended the growth of imports of finished vehicles, opening the way to the “transplants”12. Between 1982 and 1987, all the leading Japanese carmakers established plants in the U.S. (Table 2.3). By 1990, the share of Japanese imports in the US market had declined to 22 per cent.

12 Japan-based firms established in the U.S. were called “transplants”.

However, converting an industry plagued with inefficiencies—amply described by, among others, Lee Iacocca—where the comfort of oligopoly profits and stable market shares invited sloppy management (Smitka & Warrian, 2016, ch.10) proved difficult. In the first years of Japanese import penetration, Detroit’s executives blamed the workers for poor quality and expected the Japanese transplants to face the same problems (ibid.).

Table 2.3. North American Passenger Car Assembly Plants, 1992

Source: U.S. Congress, Office of Technology Assessment (1992).
(a) joint venture with Chrysler dissolved in October 1991.
(b) Ford purchased a 50 per cent share in 1992; (c) Dissolved in 1996.

The “golden handshake” with the unions (Smitka & Warrian, op. cit.) meant high worker pay and job security, which proved unsustainable when companies were forced to downsize. OEMs negotiated major wage concessions and looser restrictive rules from the unions or moved south to “right-to-work” states13 or further south, to Mexico. Between 1968 and the mid-1980s, the minimum wage in the U.S. diminished by one-third in real terms (U.S. Congress OTA, 1992, p. 89). GM and the others turned to the maquiladora operations for labour-intensive items, such as wire harnessing. When, finally, the influential research funded by the MIT International Motor Vehicle Project (Womack et al., 1990) convinced top executives in the U.S. (and Europe) that change was needed, Fordist mass production methods were superseded by “lean production” (Smitka & Warrian, 2016, ch. 10). However, it took time for the new organisation of production to set in, and specifically for the long-term, close relationship between automakers and their suppliers to be secured (Helper, 1994).

13 The term “right-to-work” refers to a policy or legal framework that allows employees to work in a unionised workplace without being required to join or financially support a labour union as a condition of employment. In a right-to-work state or jurisdiction, if a labour union represents a group of workers in a particular workplace, employees can decide whether to become union members or pay union dues.

U.S. parts suppliers bore the brunt of the increasing competition from Japanese imports, directly and indirectly. First, the U.S. did not have minimum domestic content rules, and foreign firms bought only simple, low-valued-added parts – such as gaskets and hoses–from independent U.S. suppliers. Later, as Japanese suppliers of parts and components followed their keiretsu14 to the U.S. – in 1992, there were about 300 plants (“transplants”) in the US and Canada (U.S. Congress OTA, 1992, p. 142)–the new more efficient plants put pressure on older facilities owned by U.S. firms, who saw their market share decline as their traditional customers – the Detroit-3 – lost sales to Japanese automakers. Moreover, Japanese suppliers at home and their transplant suppliers in the United States benefited from the new lean production techniques. When the U.S. automakers adopted the just-in-time organisation of production, their suppliers were often forced to adopt “JIT delivery without JIT production”; that is, as a supplier put it, “JIT only transfers inventory responsibility from customers to suppliers”, with all the associated inventory costs (Helper & Sako, 1995, p. 84; Harrison, 1997, p. 152). Foreign-owned and independent firms employed new, young workers with lower wages and pension and health care costs. They had no retired employees to support and paid lower medical insurance than the Detroit-3 (Table 2.4). Moreover, to encourage migration and attract investments, local governments in Southern (non-union or “right-to-work”) states provided generous incentive packages on top of lower wages (U.S. Congress OTA, 1992, p.142).

14 The Japanese word “keiretsu” describes a business network or a group of interrelated companies; a form of corporate structure characterized by close relationships and financial links between a parent company (often a major corporation) and its affiliated companies. These affiliated companies, in turn, may have cross-shareholdings and financial interests in one another.

Table 2.4. Comparative Wage and Benefit Levels in the U.S. Automotive Industry, 1986

Source: U.S. Congress OTA, 1992, p.142.

Between 1978 and 1987, total employment in the U.S. automotive industry fell by 200 thousand, from 1 million 311 thousand to 1 million 131 thousand workers. By 1991, it was barely above one million and 36 thousand workers. The new geography of production and the shift away from in-house component manufacturing increased the share of the industry operating outside of traditional union structures–two-thirds of the employment in independent parts’ supply and production was in non-unionised plants (U.S. Congress OTA, 1992). In this transition period, as manufacturers worldwide started to shift from Fordist mass production to the new lean production introduced by Japanese carmakers, there were various combinations of conflict and collaboration between companies and unions, OEMs and their suppliers, and U.S. companies and Japanese competitors. What seemed to be, in the 1990s, a massive overcapacity crisis was described by Womack et al. in the new edition of The Machine that Changed the World as “an acute shortage of competitive lean-production capacity and a vast glut of uncompetitive mass-production capacity” (Womack et al., 2007, p. VII).

3. The North American Free Trade Agreement

3.1. The Debate on NAFTA

In 1965, in the North American region, the Canadian automotive sector was integrated with the U.S. through the Canada-US Automotive Free Trade Agreement (known as the Auto Pact), while in Mexico, under pressure from the U.S. government, President Carlos Salinas (1988-1994) focused his government policy on completing the liberalisation process, reviewing the industrial policy in various sectors and negotiating a trade agreement similar to the Auto Pact. The trade liberalisation policies in multiple industries that started to be reviewed and negotiated by the federal government were not a surprise. Towards the end of 1989, the government issued the “Decree for the Promotion and Modernisation of the Automotive Industry”, and then, in that same year, the “Decree that Grants Exemptions to Compact Cars for Popular Consumption” was issued to promote the production and sale of small and cheaper cars and grant tax exemptions to compact models that were enlisted in it.

With these decrees, the government sought free automotive trade by allowing the gradual imports of new cars if compensated with exports and establishing national integration rules. The liberalisation of the Mexican economy was intended to incentivise foreign direct investment and make intermediate inputs and capital goods more accessible to the Mexican industry, thus lowering production costs and increasing the competitiveness of industrial production. The North American Free Trade Agreement was the culmination of this process. It established free market access and defined new rules for markets, investments, intellectual property, services, and dispute resolutions. It also included the elimination of all tariff and non-tariff barriers to automotive imports from Canada and the United States. The proportion of exported vehicles grew faster than the share destined for the domestic market.

The opening of Mexico’s domestic market to international trade and competition, its integration into globalisation and the policies implemented by the government of Mexico since the 1980s collided with the nationalistic policies that it had pursued for decades, and a period of dimensioning of the state and its intervention in the economy ensued. In 1992, there were two leading positions among the negotiators of NAFTA; some argued that the Agreement would mean higher economic growth and increased prosperity for the three signatory countries, the United States, Canada, and Mexico, while others worried that closer links between Mexico and the U.S. would bring out the worst in each. U.S.-based firms would move to Mexico to take advantage of wages and benefits that averaged roughly one-seventh of U.S. levels, and the shift of investment to Mexico would be at the expense of U.S. workers without accelerating development in Mexico.

Two main arguments—allocative efficiency and scale economies—underpinned the case for free trade. The first argument was based on factor endowments. The three countries would complement each other’s economies if the United States and Canada specialised in producing capital-intensive goods and Mexico made labour-intensive ones; then all would benefit from free trade. The second argument focused on creating a large integrated market to reduce costs and increase productivity. The conclusion was that NAFTA would improve efficiency in the area and raise living standards in Mexico.

Conversely, the other position feared brutal competition due to low wages and worsening working conditions in the three signatory countries. The leading exponent of this position on the U.S. side was the AFL-CIO, who warned that what was at stake was not trade with Mexico but the nature and quality of that trade15. Cost-cutting efforts by US corporations had already produced a shift of production facilities from the Rust Belt to Northern Mexico. The Treaty could increase the rush to cheap Mexican labour, leading to deindustrialisation and technological stagnation in the US without benefiting workers in Mexico. The think-tank created by the U.S. Congress–the Office of Technological Assessment–joined the sceptical voices, warning that market forces alone were not likely to produce the social and economic rewards the heads of the three states promised from a free trade agreement (U.S. Congress OTA, 1992, p.3). Trade liberalisation had to be accompanied by significant changes in U.S. and Mexican policies to yield substantial rewards. In Mexico, the government was counting on a closer market integration to sustain the development of the domestic automotive industry, perhaps underestimating the problems associated with its control since the unsatisfactory performance of the automotive industry and its trade deficit had forced the government to abandon the import substitution model and change its industrial development strategy, directing it towards the promotion of exports and trade liberalisation.

15 In 1991, Thomas Donahue, secretary-treasurer of the AFL-CIO, said: “A free trade agreement will only encourage greater capital outflows from the U.S., bring about an increase in imports from Mexico, reduce domestic employment, as the U.S. moves deeper into a recession, and accelerate the process of deindustrialisation that has confronted this country during the 1980” (Moody, 1995).

The optimistic view prevailed, and the Agreement was signed in 1992 by Canada, Mexico, and the United States to take effect on January 1, 1994. It provided for a gradual reduction of the trade barriers of the import substitution period and the complete elimination of all duties and tariffs16 by 2004. The 1989 Automotive Decree had already marked a decisive moment in the transition of Mexico to an open economy. It permitted imports to account for 20 per cent of sales in Mexico if the value of exports exceeded that of imports by at least 75 per cent (Brincks et al., 2018, p.8). With NAFTA, the minimum domestic content for duty-free exports was set at 62.5 per cent. The threshold was raised from a 50 per cent requirement to keep foreign automotive producers (particularly Japanese carmakers) from using Mexico as an export platform for selling into the United States (Klier & Rubenstein, 2017)although it\nhas no automakers of its own. During the more than two decades under the North American Free Trade\nAgreement (NAFTA, entered into by the United States, Canada, and Mexico. Similarly, in 1989, the rules that governed the Law of Foreign Investments had already been modified substantially, eliminating all restrictions to the inflow of FDI, and the same was done with the few sectors that had been left out of this exemption soon after. Foreign ownership was completely liberalised and extended to parts and components plants.

16 The tariff concessions made by Mexico were more significant than the benefits obtained. Indeed, although liberalisation had started long before NAFTA, the average Mexican tariff was still 10%, compared with 2.1% in the US. Half of the Mexican exports were exempted from US tariffs under the Generalised System of Preferences (GSP) and the maquiladora program; the rest paid an average tariff slightly above 4%. After the agreement, in 1996, the average tariff in Mexico was 2.9%, compared with 0.61% in the US; not only was the US reduction modest, but it should have applied in any case following the Uruguay Round. The Mexican authorities also expected that a trade agreement would remove the non-tariff barriers widely used by the U.S. to restrict imports of competing goods.

The liberalisation of the Mexican economy resulted in considerable foreign trade growth. In only three years, from 1989 to 1992, the value of imports plus exports went from US$48.3 billion to US$108.3 billion. Economic openness17 in 1980 was 17 per cent, and it went up to 29.8 per cent in 1992. Exports of automotive products jumped from US$1.5 billion in 1989 to almost US$3.4 billion in 1992. However, the trade balance presented a persistent deficit from 1993 to 2005 except for the years 1995, 1996, and 1997 because of the 1995 deep crisis that affected the whole economy and caused a decrease in imports (Figure 3.1).

17 Measured as the proportion of imports plus exports (data from INEGI) to GDP (data from World Bank Data Catalog https://datatopics.worldbank.org) in current U.S. dollars.

Figure 3.1. Mexico: Trade balance 1993-2005 Total Imports and Exports
Imports of Consumption Goods, Intermediate Inputs, and Long-Term Capital goods
Millions of Dollars

Source: INEGI. Banco de Información Económica. www.inegi.org.mx

Figure 3.2. Trade Balance
Millions of Dollars

Source: INEGI. Banco de Información Económica. www.inegi.org.mx

The import demand for intermediate inputs generally determined a chronic deficit in the country’s trade balance (Figure 3.3). The automotive sector’s dependence on imported parts, mainly for assembly, resulted in a trade deficit in the parts and accessories industry, evidencing that the supply chain needed strengthening. Those responsible for the economic policy considered that foreign investment was the solution to reduce the deficit and acquire the capability to produce the goods necessary to fill the gaps in the supply chains. While the trade balance in the case of passenger vehicles (code HS 870318–Motor cars and other motor vehicles for the transport of persons) showed a growing surplus (Figure 3.4), the trade balance for the parts and accessories industry (8706 Chassis fitted with engines, 8707 Bodies for the motor vehicles, and 8708 Parts and accessories for motor vehicles) was in deficit until 2015 (Figure 3.5).

18 The Harmonized System is the standardised numerical method of classifying traded products, used by customs authorities around the world to identify products when assessing duties and taxes and for gathering statistics.

Figure 3.3. Mexico: Trade Balance in the Automotive Sector
8703–Automobiles and other Mechanical Vehicles Designed Primarily for the Transportation of Persons
Columns: trade balance red dotted line: imports; blue dashed line–exports
(Millions of dollars)

Source: Banco de México. https://www.banxico.org.mx/SieInternet/

Figure 3.4. Mexico: Trade Balance in the Automotive Sector
8708 – Parts and Accessories for Motor Cars and other Mechanical Vehicles Designed Primarily for the Transportation of Persons
Columns: trade balance red dotted line: imports; blue dashed line–exports
(Millions of dollars)

Source: Banco de México. https://www.banxico.org.mx/SieInternet/

Given the weakness of the supply structure, the automotive industry required the import of many parts and components necessary for the final assembly of vehicles, most of the production machinery, and, in general, the technology. Free trade advocates argued that a drastic removal of protectionist measures did not increase imports’ income elasticity and, therefore, liberalisation should not be blamed for driving the economy to a trade deficit. One possible explanation is that domestic income, import permits, and licences determined Mexican imports’ growth rates and levels, which had remained relatively stable immediately before NAFTA. However, it is more likely that the low elasticity of Mexican imports to their relative prices was due to the small scale of the domestic market and its scant influence on variables determined by the U.S. market. This would instead confirm the high dependence on the U.S. market and the failure of Mexican policy in creating a self-sustaining domestic market.

The government reduced its fiscal deficit by privatising resources and industry, thus reducing the dominance of the government sector. With the liberalisation of the economy, manufacturing exports became more critical, but the economy was still in deficit even though it was less dependent on oil exports (Figure 3.5). Automotive exports were to have an increasing weight in the trade balance, mainly exports to North America, and oil exports a decreasing one.

Figure 3.5. Mexico: Trade Balance with and without Oil Exports
Millions of dollars
Columns: total imports;
Lines: dashed -intermediate goods | dotted -capital goods | solid–consumption goods

Source: INEGI. Banco de Información Económica, www.inegi.org.mx

Together with the opening of the economy, the government privatised state-owned companies. The telephone state monopoly, airlines, steel mills, mining companies, ports and airports were sold. A drastic move was needed, and this was, together with the privatisation of banks, the signing of free trade agreements that would bring inflows of FDI. Romero and Berasaluce (2018, p. 159) argue that the agreement aimed basically at promoting FDI, given that the advantages of lower tariffs for exports to the U.S. were meagre compared with those granted by Mexico. In 1993, before the agreement entered into force, the average tariff paid by U.S. exports was 10 per cent, while Mexican exports paid 2.1 per cent. Half of Mexican exports to the U.S. were tax-free under the Generalized System of Preferences GSP, of which Mexico was the primary beneficiary–and the maquiladora program. The rest of Mexican exports paid an average tariff above 4 per cent.

The entrance of capital in the early 1990s had mixed results; between 1990 and 1993, foreigners sent US$91 billion into Mexico. Trade liberalisation, deregulation and financial liberalisation led to increased exports and imports and a considerable inflow of financial capital returned from abroad through the capital account. However, most of the capital inflow was in the form of portfolio investment; two-thirds of the money was used to buy highly liquid bonds in the Mexican equity markets rather than long-term direct investments in the Mexican industry19. By opening its economy, Mexico became vulnerable to fast liquid capital movements when conditions changed, and most foreign money entering Mexico during this period could exit in a short time, thus generating great uncertainty. Figure 3.6 shows the high volatility in monetary flows in the 1990s in Mexico. During the financial crisis of 1995, a large outflow of capital contributed to the deepening of the fall in the value of the Mexican currency and the increase in the domestic interest rates. Keeping the nominal value of the peso pegged to the dollar at a time when inflation rates remained higher than in the U.S. meant that Mexican authorities were subsidising consumers and sacrificing domestic production in favour of imports. The peso depreciation led to a significant increase in the prices of imported goods, and inflation ensued. The financial crisis afterwards has been one of the worst in Mexican history.

19 In 1993, 64% of capital inflows into Mexico went into portfolio equity, 22% was composed of direct investment, and 14% was in the form of long-term debt (Kaplan, 1998)

Figure 3.6. Balance of Payments. Financial Account, Portfolio Investment, Liabilities, Public Sector, Money Market.
Quarterly flows: millions of dollars

Source: Banco de México. Balance of Payments 1980-2001.

The policy measures adopted to reconduct the economy from crises became a test for liberal economic theories brandished by policymakers who studied and received PhD at prestigious U.S. universities. The financial instability that characterised the 1990s in Mexico determined a lower-than-expected performance of the economy and FDI. The GDP in the production of motor vehicles showed a steep decline (-18.2 per cent) in 1995, as it did for the entire economy (-6.3 per cent). (Figure 3.7).

Figure 3.7. Mexico: Gross Domestic Product Growth
Columns–Total Gross Domestic Product (% growth);
Continuous line–Production of Cars and Trucks (% growth);
Dotted line–Production of Automotive Parts (% growth);
Percentage variation based on 2013 constant pesos.

Source: INEGI. Mexico National Accounts.

One possible explanation for the delayed response by foreign investors and the slow production growth in Mexico during the 1990s is found in the geographic reorganisation of the industry at the global level. In 1993, right after the Trade Agreement was signed by the leaders of the three North American countries, the leading OEMs consolidated their spatial strategies. In the North American macro-region, the Japanese producers had opened their plants in the U.S. back in the 1980s to counter the protectionist policies of the U.S. government; conversely, German carmakers (BMW and Mercedes-Benz), while opening plants in the U.S. in the 1990s, continued to serve the market mainly through exports. The different strategies of Asian and European OEMs were reflected in the different reliance on imports into the United States. Even in 2017, Japan-based carmakers were still importing from Japan 25 per cent of the vehicles they sold in the United States; Europe-based carmakers imported 59 per cent of their U.S. sales from Europe, and Korea-based carmakers (Hyundai had opened a plant in 2005) 48 per cent of their U.S. sales from Korea. The new plants adopted the latest technology and became interchangeable with those in the United States and Canada.

A similar process of restructuring and geographical reallocation was taking place in Europe. In the 1980s, the looming threat from Asian vehicle producers scared industry leaders and policymakers. Sales of Japanese imports were subject to quotas. Tokyo agreed to monitor its exports to the European Union, allowing them to increase gradually. In 1992, as Europe moved toward a more open market, European trade officials agreed to gradually allow the Japanese to have a more significant portion of the market. Still, when sales slumped the following year, and European carmakers feared a permanent loss of market share, Japan was forced to accept slower growth. In exchange, Europe agreed to lift all restrictions by 2000. In addition, Japanese cars built in Europe had to contain 60 per cent of parts made in Europe. Finally, a European system of car dealerships almost as highly regulated as the one in Japan made it virtually impossible for the Japanese to sell through existing dealers. The effectiveness of this protection is demonstrated by the cross-country difference in the Japanese market share: in Italy, for example, where Fiat struggled to stay in the race, the Japanese share had been held to about 5 per cent; in France, where automakers Renault and Peugeot effectively lobbied the Government for protection, it was less than 4 per cent. In relatively open markets, the Japanese share was much higher: 24 per cent in Switzerland, 37 per cent in Ireland, 29 per cent in Finland, and 26 per cent in Denmark (Tagliabue, 1995). Concern also grew over Korean automobile imports, with French carmakers setting off alarm bells about the risk of a Korean tidal wave. Korean carmakers circumvented the protectionist measures by opening plants in Eastern Europe.

3.2. Trade Agreements and Foreign Direct Investment

The NAFTA aimed to create a vast market shielded from foreign competition by tariffs and regional content requirements. The latter mainly affected non-US automakers, who had to set up domestic production of the parts and components previously imported from their home country (Germany and Japan especially)20. On the Mexican side, there was also the hope that the Agreement would attract non-US firms eager to export to the North American market. However, in the aftermath of NAFTA, except for Honda and Toyota, foreign investments mainly concerned legacy automakers (GM, Ford, Chrysler, Nissan, and VW) and parts and components suppliers.

20 The regional content requirement was applied gradually to avoid the closure of facilities at Puebla (VW), Cuernavaca and Aguascalientes (Nissan).

After joining NAFTA, Mexico signed 13 other free trade agreements with 52 different countries, which increased the attractiveness of the Mexican location, offering duty-free exports and cheap labour. In particular, a treaty with the European Union, signed in 2000 “despite the resistance of American firms” (VW de México, 2014), gave Europeans the same conditions enjoyed by the Americans. Smitka and Warrian (2016) provide the example of Audi. As a producer of premium vehicles, if located in the U.S., Audi would pay a 10 per cent tariff on its European exports. If the plants were located in Europe, they would have to pay tariffs on exports to the U.S. and other countries. The location in Mexico allowed tariff-free exports to both regions. Moreover, with the development of modular architecture, Audi could share components with Volkswagen, its parent company, which had developed a vast network of parts suppliers. Audi located its new plant at San José Chiapa, in the State of Puebla, 30 km from the largest VW plant outside Germany.

Mexico’s geographic position offered a further advantage in terms of location: close to the vast American market and the world’s main consumption centres, measuring distance by maritime days. Despite these advantages, the markets outside the NAFTA area did not represent a concrete alternative to the almost monopsony of the United States on Mexican production. In 1993, 85.5 per cent of all manufacturing exports and 81 per cent of automotive exports went to the U.S. In 2005, manufacturing exports to the U.S. increased to 87 per cent, and automotive exports to 90 per cent. In comparison, Europe accounted for only 5 per cent and has remained around that figure ever since.

The regional free trade agreements signed by Mexico after NAFTA were part of a new regulatory, economic order promoted by the central regions that began to unfold during the Uruguay Round and concluded in 1994 with the establishment of the World Trade Organisation, almost simultaneously with NAFTA. Further market liberalisation, tariff reductions, and the Trade-Related Investment Measures (TRIMS) paved the way towards more free access for goods and services across borders and for less discriminatory investment environments. One of the most notable changes introduced by the WTO was the Dispute Settlement Understanding (DSU), which provided mechanisms to enforce trade rules and compliance with WTO agreements. Together with the General Agreement of Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the WTO expanded its scope beyond trade in goods to enforce rules concerning trade in services and intellectual property rights. The Single Undertaking Clause was essential to the WTO’s decision-making process21.

21 The Single Undertaking Clause states that in multilateral trade negotiations, all member countries must agree to the entirety of a negotiated agreement or package; the outcome of negotiations is, consequently, a comprehensive agreement that covers multiple areas and issues rather than allowing countries to opt in or opt out of specific provisions selectively (https://www.wto.org).

In the case of the TRIPS, considering that the peripheral countries are mostly consumers and not producers of knowledge, the extension of the periods of duration of patents implied a greater flow of rents towards the intellectual oligopolies in the central regions and a diminished capability of the peripheries to introduce technological innovations. (Torres & Ahumada, 2022, p. 36, Chang, 2011, pp. 135-139). Also, the TRIMS implied that there would be a restricted capability of employing industrial policies to regulate FDI. The main reason the peripheral countries, and Mexico as a signatory of the NAFTA, agreed to these policy restrictions was that the central regions–the U.S. in the case of Mexico–were the main destination of their exports.

Dependency theories arising from Latin American structuralism and neo-structuralism of the ECLAC considered underdevelopment not an early stage of the process to reach development but an inherent consequence of the capitalist system (Rodríguez, 2006, p.53). Underdevelopment, it was argued, is not a mere “anomaly” or a previous stage relative to the developed industrialised economies but rather a “way of being” of the whole capitalist system (Rodríguez, op.cit.). In this sense, Mexico was not exactly what could be called a “late-comer” into industrialisation, at least not in the automotive industry, given that this sector has been present in the country since the beginning of the twentieth century. Theotonio dos Santos synthesised this concept: “Thus, underdevelopment, far from constituting a state of backwardness prior to capitalism, is rather a consequence and a particular form of capitalist development known as dependent capitalism” (Dos Santos, 1969, p. 76).

The role of Mexico in the international order that arose with the creation of the WTO, within the vision of Latin American Structuralism, fitted in the centre-periphery concept (Prebisch, 1981, pp. 37-49), which denoted a specific relationship between dominant and dominated countries that characterised a whole global dynamic of economic, political, cultural and social dominance. As Kim Moody (1995) put it: “[Capital] has linked workers from different nations together in joint production systems under the umbrella of a single employer, either directly or through a chain of contractors”. In his view, multinational corporations replaced the U.S. (and other core countries, we could add) in the international geopolitical arena as the central regulator of the world economy.

According to the neo-structuralist concept of development, progress in the peripheral countries implies that the society’s main objective is the accumulation process, and the diversification and sophistication of consumption are conditions and incentives for this accumulation. Conversely, accumulation is indispensable for achieving diversified and sophisticated patterns of consumption. The high value given to foreign goods consumption also has cultural implications, leading to the concept of cultural dependence. Latin America’s neo-structuralists propose to promote endogenous development. As Celso Furtado wrote: “... endogeneity is none other than the capability that a human community has to order the accumulation process according to priorities defined by itself” (quoted by Rodríguez, 2006, p.308).

From an economic point of view, the possibility of endogenous and autonomous development is conditioned by the capability of appropriation of economic surplus and the revitalisation of domestic markets. However, it is argued that no market mechanisms exist–neither spontaneous nor corrected by economic policy–capable of enforcing the proportionality conditions between labour productivity, surplus and real wage growth rates. This lack of proportionality results in a distributive struggle that drives prices and wages upward, thus producing inflation. The fundamental reason is that the system is not only economical but simultaneously social and political and includes the State and its participation in those areas. The crisis, it is argued, is inherent to the system’s internal logic. The actual crisis of democracy in the periphery is that pro-democracy movements or regimes have exerted redistributive pressure, and when this comes to its economic and political limit, chaos and social disintegration come in (Rodríguez, 2006, pp. 313-320).

On the opposite side, governments in most of Latin America during the 1990s converged towards a broad and articulated approach to neoliberal ideas around the “Washington Consensus”, which perceived the inflow of foreign capital as fundamental, and other dimensions of economic policy were considered secondary. This convergence was reinforced by returning capital registered as an inflow of FDI into the economy (Figure 3.8). From the perspective of the U.S. government, after the “Super 301” piece of legislation was passed, there was a new emphasis on bilateral agreements22. On the liberal side, the school of rational expectations proposed that economic agents could correctly predict the consequences of government policies and adopt adequate strategies to neutralise their effects. This would drastically limit the role of economic policy: assuming that the markets were competitive and could adjust to any emerging disturbance, they would be, most of the time, close to “Paretian optimality” (Rodríguez, 2006, p. 352).

22 Super 301 was a trade law passed by the U.S. government in 1988. Its purpose was to address trade practices by other countries considered unfair and that harmed American businesses and industries. Specifically, it focused on issues related to intellectual property rights, such as patents, copyrights, and trademarks.

Figure 3.8. Mexico: FDI Inflows by Sector.
(Millions of Dollars
(1980-1993) 23

23 The FDI data between 1980 and 1993 were collected following a methodology that did not adhere to the international standards established by the IMF since the data on new investments, accounts between companies, and reinvestment of profits were not disaggregated. Consequently, there is no total coincidence with the data of the following years (Secretaría de Economía, Dirección General de Inversión Extranjera, https://www.gob.mx/se/).

Figure 3.9. Mexico: FDI Inflows by Sector
(Millions of dollars)
(1994-1998)24

24 Includes the investments between 1994 and 1998 notified to the National Registry of Foreign Investment (RNIE) that materialised in each period. To this item was added an estimate of the new investments that still needed to be notified to the RNIE. This methodology adhered to the international standards established by the IMF since it considered new investments, accounts between companies and reinvestment of profits. The data on accounts between companies and reinvestment of profits did not include estimates by country of origin, economic activity or federal entity. Therefore, for this period, the breakdowns only consider the amounts reported to the RNIE as new investments and the value of fixed asset imports made by maquiladora companies. (Secretaría de Economía, Dirección General de Inversión Extranjera, https://www.gob.mx/se/).

Source: Secretaría de Economía. Dirección General de Inversión Extranjera.

3.3. Automotive Production in Mexico.

Vehicle production in Mexico grew in stages: in the initial stage, in the first years of NAFTA between 1993 and 2000, when it still had not entered into full force (complete liberalisation of trade was agreed to happen until 2003), it doubled, from 1 to almost 2 million vehicles. During the next stage, after the slowdown in 2001, growth was negative, and it was not until after the 2008 crisis that it could grow again at fast rates (Figure 3.7)25. The lack of response by new OEMs might be the reason why in 2003, a year before full liberalisation, a new decree26 was brought in to encourage FDI, streamlining registration of new OEMs and relaxing constraints on imports if they committed to invest in physical infrastructure, training, and transfer of technology to their suppliers.

25 Passenger car production increased from 835.3 thousand in 1993 to 1.28 million by 2000; Truck production went from 219.9 thousand in 1990 to 648.2 thousand by 2000 (INEGI, BIE, Comunicaciones y Transportes).

26 The “Decree to Support the Competitiveness of Terminal Automotive Industry and Impulse the Development of Domestic Market for Automobiles” (2003) aimed to a) stimulate the inflow of investments to build or expand assembly facilities and cut costs of imports through tariff reductions in Mexico; b) allow registration of new OEMs in Mexican territory for investments that were higher than US$100 million and were to produce at least 50,000 vehicles per year during a three-year term; c) lift tariffs on imports of cars for values equal to 10% of the production of the previous year; d) allow greater volumes of vehicle imports on condition that firms increased their investment in infrastructure, training and R&D programs, develop local suppliers and transfer their technologies to first and second-tier suppliers.

Three full-scale assembly plants were opened in Mexico in the early 1990s (one each by Chrysler, GM, and Nissan). The “legacy” producers would remain the only OEMs active in Mexico until 1994, when Honda and Toyota began production in Mexico – at small-scale plants in El Salto (in 1995) and Tijuana (in 2004), respectively – to meet NAFTA’s requirements that some production be located in Mexico to be able to import vehicles (Klier & Rubenstein, 2017)although it\nhas no automakers of its own. During the more than two decades under the North American Free Trade\nAgreement (NAFTA, entered into by the United States, Canada, and Mexico.

Figure 3.10. Mexico: Production of Motor Vehicles. 1993-2005.
Columns: total production;
thick line: trucks & buses;
dotted line: cars
number of vehicles produced

Source: INEGI; https://www.inegi.org.mx Reg. Administrativo de la Industria Automotriz

A third stage of vehicle production growth in Mexico began after the 2008 crisis. In the post-crisis period, production took off, doubling between 2007 and 2018 from 2 to 4 million (Figure 3.11). With domestic demand stagnating27, exports became the predominant part of automotive production, reaching 84 per cent in 2018, and the trade balance turned into an increasing surplus (from 5.1 billion dollars in 1993 to 78.6 billion in 2019), mainly due to exports of finished vehicles. Most exports headed to the United States28; Mexico had become an export platform integrated with the United States. After 2004, when the liberalisation process agreed with NAFTA was complete, several assembly plants were built by BMW, Daimler Benz, Hyundai Motor Group, Mazda, and Volkswagen-Audi.

27 The severe currency and financial crisis in 1994 depressed the economy for many years. A further blow to the domestic market for cars was delivered by President Vicente Fox, who, in a political move to gain votes, liberalised the import of used cars. Almost 4 million used cars were imported between 2006 and 2008 (Brincks, 2018), depressing demand for new vehicles until after 2010.

28 Mexico’s weight in US imports of automotive and parts is increasing continuously, as is the U.S. bilateral deficit. In 2012, Mexico ranked 3rd in U.S. vehicle imports, after Canada and Japan, and dominated in the auto parts segment, with a 35% share, followed by Japan and Canada, with 13.12% and 13.05%, respectively (Dussel & Gallagher, 2013).

Figure 3.11. Mexico: Production of Motor Vehicles in Mexico. 2005-2020
Columns: total production;
thick line: trucks & buses;
Dotted line: cars.
number of vehicles produced

Source: INEGI. Registro Administrativo de la Industria Automotriz

The “Strategic Program for the Automotive Industry 2012-2020” was implemented by the federal government in n 2012. Even though Mexico had advanced in its position as a global producer and exporter of vehicles and auto parts–the value of its exports grew 108% between 2000 and 2011–and ranked as the eighth producer and the fourth world exporter of vehicles and with the leading global vehicle manufacturers in its territory, it had not developed its full potential. Since the country was not yet a centre of technological R&D, ensuring long-term, relatively independent development was necessary. Upgrading its position as an integrated periphery within the global production network required a coordinated strategy to take advantage of the areas of opportunity that its privileged relationship with the U.S. and Canada granted.

Table 3.1. Assembly Plants in 1999

Source: Rico et al. 1999.

In Mexico, the general industrial policy guidelines adopted by the federal government with the Strategic Program 2012-2020 were based on the following strategies:

1) Strengthen the internal market through credit for purchasing new vehicles and regulating the importation of used cars.

2) Build a business environment to encourage the productivity of the automotive industry and the formation of a national network of world-class suppliers.

3) Promote technological development and innovation to strengthen the link between the academic sector, the automotive industry, and the government.

4) Access to new export markets through treaties and trade agreements with various economic blocks and regions.

However, the need for coordination and specific actions regarding these decrees and programs at the federal and state levels prevented a synchronised advance in the automotive industry. The result has been that the Federal States compete to attract global companies and their capital. At the same time, the leading companies in the automotive industry have organised themselves in automotive clusters created under the legal figure of civil associations, intending to unite their efforts to promote the development of the sector and growth and competitiveness in the region, involving governments and educational and research institutions in this initiative.

These intermediate organisations–the Automotive Clusters- aim to organise the individual efforts of companies to create synergies reflected in the increase in growth and competitiveness of the automotive sector in the region in which they are located. They involve high education institutions by creating academic and training programs that train specialised labourers and research and development processes. The local government acts as a facilitator of programs and instruments through the required industrial policy actions. Currently, most of the automotive industry in Mexico is grouped into eleven Automotive Clusters, located mainly in the north of the country, on the border and in some central states.

4. The Transformation of the Automotive Industry

4.1. Globalisation and Regionalisation

The globalisation of economic activity was the result of complex and contradictory factors. In parallel to this process, regionalisation processes integrated low-factor cost regions’ economic systems with those of more advanced economies. Some of these processes of globalisation and regionalisation stand out, such as NAFTA in North America, the incorporation of Central Eastern European countries into the European Common Market, and the emergence of the Asian region as a global economic power.

The establishment of the NAFTA region was part of a more significant transformation that impacted the production structure, financial system, and international trade and gave rise to a new form of governance based mainly on the strategies of multinational corporations. It encompassed the automotive industry, which experienced a shift towards globalisation as critical players began to produce and sell vehicles, parts, and components across multiple markets (Smitka & Warrian, 2017). A considerable amount of FDI was attracted to the NAFTA region, having broad repercussions for world trade. Within the automotive sector, foreign firms -mostly Japanese-based–trying to circumvent the protectionist policies of the United States invested in factories in North America to produce price-competitive, high-quality cars that increasingly competed directly with the core products of the Detroit Three (Figure 4.1). The strategy Japanese multinational companies (MNCs) followed included integrating their suppliers in locations near the assembly plants and implementing just-in-time management. According to Smitka & Warrian (2017, p. 45), by 1990, Japanese suppliers had set up or acquired over 300 factories in the U.S. Likewise, European-based suppliers had built or acquired another 300 factories.

The production of motor vehicles is characterised by bulk gaining, meaning that it fabricates a product that is heavier and occupies a greater volume than its inputs. This makes automotive production highly agglomerated as it tends to be located near consumers. This characteristic of automotive production implied that the leading suppliers followed the OEMs to the locations where assembly plants relocated, increasing the agglomeration of production in clusters, especially of Tier-one suppliers.

Increased consumer expectations and stricter government regulations have had an essential role in the transformation of the automotive industry, leading to increased market competitiveness that demanded more product differentiation and mass customisation; the result was a market where monopolistic competition prevailed (Smitka & Warrian, 2017, p. 30): a multiplication of segments and models with personalised characteristics regarding automated internal controls, connection to the Internet, GPS, and the first hybrid vehicles that appeared in the market. Government regulations, mainly in aspects related to safety devices and environmental requirements, also influenced the development of the industry and forced OEMs and other automotive companies to adopt diverse strategies to cope with the changes.

Figure 4.1. Foreign Direct Investment in the United States: Financial Transactions Without Current-Cost Adjustment29–Investment in Transport Equipment Manufacture.
Millions of dollars
Inflows (+), outflows (-): Negative values in transactions may indicate either asset disinvestments or discharge of liabilities

29 A current-cost adjustment is made to measure direct investment income on equity at current (replacement) cost in the International Economic Accounts. The current-cost adjustment is also applied to the reinvested earnings component of income. The adjustment includes adjustments to the depreciation and depletion charges reported in the financial statements of affiliates. It adjusts depreciation to reflect current-period stocks of tangible capital and prices, and it excludes depletion charges. Without current cost adjustment, it measures the value of direct investors’ equity and net outstanding loans to their affiliates in which the direct investors’ investment is valued at book value. (https://www.bea.gov/system/files/2023-06/iea-concepts-methods-2023.pdf).

Source: U.S. Bureau of Economic Analysis. https://www.bea.gov/international/di1fdibal

Beyond the market changes and increased regulation, the technological and organisational transformations pioneered by Japanese companies, prominently Toyota, shook the industry in North America. The Detroit 3 had to adapt to meet Japanese companies’ competition to survive. Some strategies were of an organisational character, such as the just-in-time (JIT) inventory system and total quality models. These implied the subcontracting (outsourcing) of increased supplier responsibility and flexibility in production. Other strategies, more of a technological nature, were the production of vehicles on platforms and modular systems that allowed for the generation of economies of scale in design and manufacturing. A third set of strategies with profound consequences was relocating production activities, mainly manufacturing, to different countries.

Automotive companies sought to acquire capabilities through alliances, mergers, and acquisitions and made significant R&D investments to develop new energy technologies. The latest technologies and organisational systems made it possible to reorganise the automotive industry, reduce the number of suppliers, and arrange the remaining ones into tiers (Simonazzi et al., 2022). Technological and organisational advances such as the lean business model had far-reaching implications for production technology and companies’ internal organisation and interrelationships.

Car manufacturers invested in peripheral countries to exploit labour costs, fiscal concessions, proximity to large markets, and other comparative advantages. They also resorted to global sourcing, given the technological and organisational changes that made the reorganisation of the automotive supplier industry possible. Production and trade moved from countries originally at the centre of automotive production (the U.S., Japan, Germany) to countries integrated under various pattern configurations of dependency and specialisation (Russo et al., 2023).

By the end of the twentieth century, the motor vehicle industry had become global in terms of ownership of carmakers. At the same time, it was highly regionalised in production and sales, organised in macro-regional clusters of production networks, such as USA-Canada-Mexico in North America, Germany-southern and eastern European countries in Europe, Japan-China-Korea and East Asian countries in Asia, and Brazil-Argentina in Latin America (Simonazzi et al., 2022, p. 10). Although all leading companies produced and sold vehicles in more than one region, less than 10 per cent of vehicles were made in one world region and shipped for sale in another (Brincks et al., 2018). However, cross-region trade in parts and components increased (Russo et al., 2021).

The automotive industry is highly concentrated and has traditionally gathered around its core areas; however, since the late twentieth century, it has embraced global sourcing, with peripheral areas taking on more prominence due to the profit-seeking strategies of companies seeking to exploit differences in factor costs. Regional value content requirements in the NAFTA area and the request to “follow sourcing” (meaning that suppliers followed OEMs to the locations where they relocated) increased clustering around assembly plants and value chains nested within the most prominent firms’ global organisational structures and business relationships. As a result, OEM assemblers and suppliers were present in all major markets, organised in sizeable regional production networks (Russo, 2023).

Some theoretical interpretations of the changes in the global organisation of the automotive industry are given within the framework of core-periphery relations, in which the periphery is classified into two sub-categories: the integrated periphery and the semi-periphery (Simonazzi et al., 2022; Smitka & Warrian, 2017; Mordue & Sweeney, 2019). With its joining to NAFTA, Mexico and the central and eastern European countries fit the description of integrated peripheries–less developed countries located in peripheral areas surrounding traditional core regions of automotive production, which have small domestic markets and assemble export-oriented inexpensive mass-market models and components; foreign companies own and control assembly plants and Tier-1 suppliers; labour costs are lower than in core countries and semi-peripheries; only a few strategic functions are carried out, and the activation of domestic suppliers is weak. The integrated peripheries reflect the rise of the global industry, with centrally developed platforms using a standard set of materials and components worldwide (Simonazzi et al., 2022).

The category semi-periphery “applies to wealthier automotive-producing countries that, unlike ‘core nations’, lack a domestically headquartered automaker like General Motors, Volkswagen or Toyota” (Mordue & Sweeney, 2019, p.34). However, they might be the location for large automotive parts suppliers’ headquarters. Semi-peripheries, unlike the integrated peripheries, have a well-educated, relatively high-cost workforce; their automotive production levels are still significant but declining, and they have had little success in attracting significant investments into automotive research and development areas or technologically advanced and knowledge-intensive functions. Empirical studies on the automotive industry found that R&D activities tend to concentrate in locations proximate to corporate headquarters (Mordue & Sweeney, 2017, p. 37). With globalisation, the semi-peripheries’ competitive advantage diminished; assembly plants and Tier-1s migrated offshore, and the value chains in these countries risked collapsing.

Semi-periphery and integrated periphery concepts refer to a new form of understanding dependency from the main capitalistic centres; they are meant to contribute to understanding the hierarchical regionalisation of production, trade, and dependence in the 1990s and the twenty-first century. However, it is necessary to limit the scope of these concepts: even though they are helpful to understanding the relative positions of different countries within the regional clusters of automotive producers and the way the decision-making centres within the supply chains are determined or may shift from one player to another, they do not constitute a theory that explains underdevelopment from a historical point of view. This classification offers a first-instance overview of the regional structure of integration and dependence relations; however, said structure varies among the different regional clusters (Simonazzi et al., 2022).

The dynamic clustering of international trade signalled the creation of a hierarchical regionalisation of production and trade (Simonazzi et al. op. cit.). Production facilities in Europe and North America have been increasingly located in peripheral regions – Central Mexico in North America and countries in Central Europe – and the consequences on production and employment in the core countries have varied substantially. Differences in the strategies of firms and governments in the core country affect the quality of relations with their peripheries and their development and explain the change in the positions of, for example, Japan and Germany relative to the United States and the inversion in the relative positions of Mexico and Canada in their trade with the U.S.

The analysis of the transformations of the automotive industry requires identifying a point of reference for the configuration of the industry before these changes began. Russo, Alboni, et al. (2023) propose a model of trade multilayer networks30 that allows the definition of the changing configurations of automotive trade networks in the past three decades preceding the recent turbulence to analyse the changes in the regional structure of international trade. Instead of studying the automotive global value chains focusing on the geographical regions and countries, they consider the contribution of countries’ bilateral trade in components in structuring the subnetworks of countries and their specific role in the overall trade network from 1993 to 2017. The aim is to overcome the limits of network literature and address the analysis of the complex networks generated by trade by focusing on detecting multilayer meso-level entities given that meso-scale entities of complex networks cannot be disentangled by categorical partitions, such as grouping the countries according to their geographical position and components and parts according to their relative technological homogeneity. Relaxing the assumptions on predefined regional groups of countries and products and relying on an algorithm of community detections leads to different results (Russo, Alboni et al., 2023, pp. 99-101).

30 The Infomap algorithm treats a network as a flow of information. It identifies clusters or communities in the network, interpreted as groups of nodes that are more densely connected with each other than with nodes in other clusters. It has been extended to handle multilayer networks, which are networks composed of multiple layers or interconnected networks.

This model can consider additional levels of complexity and identify the clusters of countries that define the trade networks based on the pattern of countries’ bilateral trade flows. The aim is to identify the clusters without referring to conventional geographical areas but rather the pattern of recurring interactions in countries’ bilateral trade flows in the various components. Also, to assess the contribution of countries and automotive components in determining the relative importance and structure of the various clusters over time. Finally, to analyse the changes in the relative positions of countries within and across clusters and in their specialisations in multilateral exchanges. The Infomap multilayer analysis employed singles out which components and parts determined the relative positions of countries in the various clusters, the changes over time in their relative positions, and their specialisations in multilateral trades. (Russo et al., op cit. p. 99). Based on this analysis, “regionalisation” and “globalisation” emerge as properties of the clusters of countries and trades and not as a priori attributions of countries in their geographical position, highlighting the relative importance of the clusters of countries and individual countries over time.

The set of skills, wage levels, regulations, innovation ecosystems, and absorptive capacity determine the structure of the supply of automotive parts and components, which also depends on other production specialisations in the country, the location of domestic and foreign plants, and the role assigned by carmakers to supply from that country their global supply chains. The supply of components and parts is embedded in the relationships between automotive firms, with their different ramifications for assembly plants in the various final markets and their networks of supplier companies in several countries. Regional trade agreements affect the centrality of countries by stimulating demand in a specific trade and promoting changes in technologies and the organisation of industries (Russo et al., 2023, p. 101).

In analysing the technical and geo-political changes that have determined the evolution of the automotive industry, the study of international trade has been addressed, focusing on the contribution of countries’ bilateral trading in components and parts as structuring forces of the subnetwork of countries and their specific position in the overall trade network. The research focuses on such subnetworks as meso-level structures emerging in trade networks. To identify the clusters of countries and their specific trades in the automotive international trade network and to highlight the relative importance of each cluster, the interconnections between them, and the contribution of countries in the production and trade of parts and components in the several macro-regions, the research team used the Infomap multilayer clustering algorithm and draw the data from the UN Comtrade database of directed export and import flows of 30 automotive components and parts among 42 countries that account for 98 per cent of the world trade flows of those items.

Table 4.1. Export and Import of Automotive Components and Parts and Motor Cars and other Motor Vehicles, 1993, 2003, 2013, 2017
(billion USD at current price)

The values for each year are the three-year average of trade in the year in analysis, the year before, and the following year. Components & Parts (SITC rev.3 codes): 6251, 62551, 62559, 62591, 62592, 62593, 62594, 69915, 69961, 76211, 76212, 77812, 77823, 71321,71322, 71323, 77831, 77833, 77834, 7841, 78421, 78425, 78431, 78432, 78433, 78434, 78435, 78436, 78439, 82112
Vehicle (SITC rev.3 code 781: Motor cars and other motor vehicles principally designed for the transport of persons (other than public-transport type vehicles), including station wagons and racing cars 42 countries: ARG, AUS, AUT, BLR, BEL, BRA, CAN, CHN, HKG, CZE, DNK, FIN, FRA, DEU, HUN, IND, IDN, IRL, ITA, JPN, MYS, MEX, NLD, PHL, POL, PRT, KOR, ROU, RUS, SGP, SVK, SVN, ZAF, ESP, SWE, CHE, THA, TUR, UKR, ARE, GBR, US

Source: Russo et al., 2023 (b) p. 4; data from UN Comtrade

The data source used in the model is the UN Comtrade International Trade Statistics Database. The authors adopted the same items used in previous literature, in particular, the same list of 30 items within the Standard Trade International Classification (SITC Rev. 3), proposed by Amighini and Gorgoni (2014), whose careful selection avoids the inclusion of components and parts that do not belong the automotive industry. The characteristics of the clusters in 1993, 2003, 2013 and 2017, a period of 25 years, are compared by focusing on four main statistics: the number of state nodes (i.e., the projections of each country in the trade networks of import and export for each SITC code, that are the layers in the multilayer model), the number of links and countries; the connections generated by trades within the cluster (measured by the Infomap “flow within”) and the connections of each cluster to all the other clusters (measured by the “exit flow”) (Russo et al., 2023b, p. 17).

The set of (gross) bilateral export and import flows in 1993, 2003, 2013, and 2017 are analysed since these years allow for a comparison of the impact of NAFTA (signed in 1992) after 10 and 20 years, and the latest year available for data analysis when this research was conducted. The analysis considers a three-year average data (the year under analysis, one before and one after). For each year and each flow (import and export), shares of trade flows of the various components and parts are computed. The focus is placed on the trade relations of the top 42 reporting countries31 with all the countries in the UN Comtrade database, which represent, respectively, in 1993 and 2017, 98.1% and 97.1% of the total exports of 30 SITC items (Russo et al., 2023, p. 101). The items considered for the study by Russo et al. (2023) were grouped into four main categories: Electrical and Electric Parts, Rubber and Metal Parts, Engines and Parts, and Miscellaneous Parts. In 1993, the exports that accounted for most of the trade were Miscellaneous Parts, which represented almost two-thirds, and Engines and Parts, with 19 per cent; the main items traded among these were Internal Combustion Engines.

31 List of countries considered in the model: Argentina (ARG), Australia (AUS), Austria (AUT), Belarus (BER), Belgium (BEL), Benelux Union (Belgium, the Netherlands, and Luxembourg), Brazil (BRA), Canada (CAN), China (CHN), Czech Republic (CZE), Denmark (DNK), Finland (FIN), France (FRA), Germany (DEU), Hong Kong (HKG), Hungary (HUN), India (IND), Indonesia (IDN), Ireland (IRL), Italy (ITA), Japan (JPN), Malaysia (MYS), Mexico (MEX), Netherlands (NLD), Philippines (PHL), Poland (POL), Portugal (PRT), Romania (ROU), Russia (RUS), Singapore (SGP), Slovakia (SVK), Slovenia (SVN), South Africa (ZAF), South Korea (KOR), Spain (ESP), Sweden (SWE), Switzerland (CHE), Thailand (THA), Turkey (TUR), United Arab Emirates (UAE), United Kingdom (GBR), Ukraine (UKR), United States (USA). The 1993 data (1992–1994) refer to Belgium-Luxembourg, while for the following years, there are only the data for Belgium.

Table 4.2. List of Automotive Components and Parts by Group and their Export Share in 1993, 2003, 2013, and 2017.

Source: Russo et al., 2023, p. 102.

Changes in the relative position of each country within its network configuration are shown in the graphs in Figure 4.2. Each country in the dataset constitutes a physical node, and every layer studies the trade relations of a category of components. The size of the nodes is proportional to their participation in the trade exchange, that is, exports plus imports of vehicles (respectively, dark and light green) and exports and imports of parts and components (respectively, red and orange), out of the total country’s trade exchange. The thickness of the link is proportional to the volume of its trade flow, compared with the maximum share over the 4 years (1993, 2003, 2013, 2017). The colour of the connection lines represents the distribution of the participation shares for each year.32 The export and import flows between any couple of countries each year are equally thick but in the opposite direction (Russo et al., 2023. 102).

32

The different strategies of automotive firms determined a change in the position of Japan and Germany, on the one hand, and of Mexico and Canada, on the other, relative to the U.S. By protecting their market from import penetration, the U.S. attracted FDI and competition home and to confront this threat, carmakers resorted, among other strategies, to offshoring labour-intensive operations to the Southern States and Mexico. Graphs in Figure 4.2 highlight a clear structure of subnetworks of trade flows with an evident geographic base: a subnetwork centred in Europe, where the expansion towards the east of the European Union allowed the leading European OEMs, mainly German (represented to the left of each graph), to exploit the creation of the Common Market and face Japanese competition first, and Korean later; and a second subnet, in the Pacific zone, embracing several countries in East Asia, the United States and Canada and is represented to the right of each graph.

Graphs 4.2.1, 4.2.3, 4.2.5, and 4.2.7 show that Japan, the U.S., Germany, France, and Canada were the leading exporters in 1993, accounting for 67.3 per cent of total exports. However, these countries saw their shares gradually decrease to 44.8% in 2017; only Germany managed to maintain its share. Meanwhile, emerging economies —Mexico, South Korea, China, and the Central and Eastern European (CEE) countries— increased their share from 7 per cent in 1993 to 33.5 per cent by 2017. Between 1993 and 2003, China and Mexico entered the international scene with increasing trade shares, while the U.S. gradually lost its prevailing position. Graphs 4.2.2, 4.2.4, 4.2.6, and 4.2.8 show each country’s relative shares in the trade of parts and components (red for exports, orange for imports). China increased its presence after it joined the World Trade Organisation in 2001, and the Mexican position grew slightly due to NAFTA’s full entry into force in 2003.

Figure 4.2. Bilateral Export and Import Trade of Vehicles (SITC Rev.3: 781) and Automotive Components and Parts (30 items, SITC Rev.3)
In 1993, 2003, 2013 and 2017, 42 countries
The eight graphs shown were taken from Russo et al. (2023 (a), p. 104).
Shares of vehicle exports and imports are represented with arrows (dark green and light green, respectively).

Graph 4.2.1. 1993–Cars

Graph 4.2.2. 1993–Parts and Components

Graph 4.2.3. 2003–Cars

Graph 4.2.4. 2003 – Parts and Components

Graph 4.2.5. 2013–Cars

Graph 4.2.6. 2013 – Parts and Components

Graph 4.2.7. 2017–Cars

Graph 4.2.8. 2017 Parts & Components

Source: Russo et al., 2023, p.104

Considering the distribution of parts and components export shares, the group comprising “Miscellaneous Parts” represents the most extensive portion, with nearly two-thirds of all exports. In 1993, “Other Parts and Accessories of Bodies” (SITC 78432) and “Other Parts and Accessories of the Motor Vehicles” (SITC 78439) accounted, respectively, for 35 per cent and 11 per cent of total trade; the group “Engines and Parts” accounted for almost 19 per cent -within this group, the main item was “Internal Combustion Engines”- and the group “Rubber and Metal Parts”, which represented 9.3 per cent of trade in 1993, saw its share decrease in 2003. “Electrical and electronic parts” have maintained a similar share over the 25 years. Within this last group, the share of “Electric accumulators” increased to almost six per cent of total trade, while “Sealed-beam Lamp Units” fell to one-third (Russo et al., 2023, p. 101).

Table 4.3. List of Automotive Components and Parts by Group and Export Share in 1993, 2003, 2013, and 2017.

Source: Russo et al., 2023, p. 102.

Turning to imports, the imbalances in Japan’s trade, compared with Germany’s, suggest different responses by companies to globalisation and different strategies targeting the U.S. market. The U.S.’s importer weight has declined slightly, Canada’s role has decreased both as an importer and an exporter (Russo, 2023, p.101), and Japanese OEMs have followed a strategy aimed to integrate with their suppliers in locations close to the assembly plants to enhance the Just-in-Time feature of their lean production model. This explains the scant imports of parts and components and why its exports decreased while investments in assembly plants abroad grew (Russo, 2023, p.101).

The multilayer model, instead of examining separately and then comparing the trade networks of each product or group of products, allows for consideration of additional complexity levels. In these models, a pair of nodes can be related by one or more types of interactions or relationships. Each interaction type (directed weighted trade flow, i.e., import or export value for each product) is mapped into a “layer” of description. A layer collects all the pairwise interactions of the same type. Within each layer, nodes (i.e., countries) are usually referred to as “state nodes” (for example, what is being considered when referring to the exports of the U.S. to other 41 countries in the layer “brakes” is the state node “US-exporting brakes in a given year”). Connections between state nodes define intra-layer connectivity (for example, all the bilateral trade flows of brakes in a given year). The set of all state nodes corresponding to the same node defines their physical node. Connections between state nodes of the same physical nodes or between state nodes of distinct physical nodes define inter-layer connectivity (Russo, 2023, p. 104). The Infomap multilayer module detection algorithm identifies mesostructures (clusters) that are intermediate between the network as a whole and the individual countries (nodes) with trade relationships with other countries. Each country in the dataset constitutes a physical node, and every layer studies the trade relationship of a category of components. Trade data was considered at the most disaggregated level available in trade statistics, resulting in 60 layers (imports and exports of 30 components and parts) for each of the four years and 42 nodes (countries) (Russo, 2023, p. 104).

In interpreting the Infomap multilayer algorithm, it must be considered that a country might belong to more than one cluster according to the specific bilateral trade involved and that each cluster’s internal composition in terms of countries and trade has changed over time. Some countries are simultaneously present in several clusters due to their bridge role in the automotive components trade. Some of these countries prefer to direct their trade flows towards some specific countries. They can balance their exchanges with the various clusters they belong to or receive most of their flows from only one cluster and a specific branch of parts and components.

Multilayer clustering allows focusing on the structural determinants when analysing trade networks and changes in the position of different countries within constantly mutating cluster agglomerations. In this multi-layer conceptualisation of the automotive world trade, more complex economies tend to be more embedded in the international trade of various classes of components. In contrast, less complex ones are more specialised. A country’s level of embeddedness in the overall network reflects the economic complexity of its automotive sector (Russo, 2023, p.105).

The first result of the analysis is the identification of clusters of countries in the world trade of automotive components and parts. This allows the flow to be decomposed in terms of the underlying layers (components and parts) and nodes (countries) within and between the detected clusters of countries. The flow used to compute the modules also provides a metric to assess the relative importance of the clusters detected and the contribution of the individual countries and their links (weighted bilateral trade) in determining those clusters.

The second result of the Infomap multilayer analysis shows that the structure of international trade flow has changed: the number of multi-layer clusters in the automotive industry decreased from 39 in 1993 to 16 in 2003, the main three clusters became more prevalent, and the third top cluster had only a few countries. Several clusters that characterised the network in 1993 merged into major clusters with increasing concentrations of trade flows and cross-cluster connections generated by these clusters.

The third result is that the multilayer algorithm yields a spatial distribution of clusters associated with the geographical position of countries and singles out specific sub-clusters in those geographic areas and their characterising trade (the ones led by the Czech Republic, Thailand, Indonesia, and Turkey) (Russo et al., op cit., p. 106).

The fourth result refers to the consolidation of the overall importance of the three main clusters: the European, led by Germany; the North American cluster, which in 1993 was led by the U.S. and Japan and since 2003 by the U.S. alone, and mainly embeds the NAFTA countries, and the Asian cluster led by Japan in 1993 and later by China. The three main clusters’ flow of parts and components represented 93 per cent in 1993, 96 per cent in 2003, 93% in 2013, and 95 per cent in 2017 (Russo et al., 2023, p. 106).

Four dynamics of change in the clusters’ relative importance and internal composition were identified:

The cluster led by Germany remained the biggest during all four years.

The cluster led by the U.S. and Japan was the second-biggest group in 1993; however, after 2003, it was led by the U.S. alone, and its importance declined to become the third cluster in 2013.

The Asian cluster, led initially by Japan and later by China, became increasingly important, and in 2013, it emerged as the second-top cluster.

Two smaller clusters, one centred in Brazil and Argentina and one led by the Russian Federation, were increasingly important from 2003 to 2013 but declined in 2017.

The multilayer model allowed for the identification of the flows within and between the clusters, the patterns of import and export shares of the three main clusters and their satellites, and the changes in the relative weight of each one. Clusters have changed over time; in 1993, they were characterised by an “array of countries and components” (Russo et al., 2023b, p. 21); after 2003, only the three largest clusters shared this characteristic. In 1993, the central countries had a significant presence in more than one cluster; this feature was no longer significant in the following years when more distinct clusters appeared. The importance of the three main clusters increased, indicating the growing concentration of trade flows.

In Figure 4.3, the relative importance of the trade of parts and components within and between clusters is summarised, supporting the fifth relevant result: cross-cluster connections increased for most clusters, and the overall Infomap flow generated by those connections grew from 18.5 per cent in 1993, to about 30 per cent in 2017. The clusters are represented as circles with different colours: blue for the European cluster, led by Germany -the most significant cluster during the four years considered in the research. Grey, for the cluster led by the U.S. The U.S. and Japan initially led it, being the second-largest cluster in 1993. After 2003, when it was led by the U.S. alone, its weight in the world trade diminished, and it fell to third place, including the NAFTA countries. Orange for the Asian cluster, led initially by Japan and later by China. The relative importance of the orange cluster grew to emerge in 2013 as the second biggest cluster.

Each country’s contribution in determining meso-scale entities and their connections was assessed for 1993, 2003, 2013, and 2017. In 1993, the top ten countries accounted for 74 per cent of the total Infomap flow; in 2017, for only 62 per cent, growing significantly in other minor countries (Russo, 2023, p. 106). Connections across clusters highlight bridges across specific trades in components and parts that keep the whole network together. Significantly, those bridges can propagate shocks within and across clusters (depending on the nature of the shocks, e.g., a new trade agreement, a change in final demand due to new vehicle requirements, or supply chain disruptions (Russo, 2023, p. 107).

Figure 4.3. Infomap Flows within and between Clusters.
Clusters are drawn as circles and identified with different colours.
Dark blue – cluster led by Germany
Grey – U.S. led cluster;
Orange –Asian cluster
Green – small cluster with its core in Brazil and Argentina.
Circles are proportional to the Infomap flow generated within the cluster.
The thickness of links between clusters is proportional to the Infomap flow between clusters.
To make the figures comparable between clusters, countries, and parts and components, the relative shares in trade refer to each year’s total. The size of each cluster is proportional to the infomap flow generated within the conglomerates.

Source: Russo et al., 2023, p.109.

The analysis shows that some countries are present in multiple clusters due to their possible role as bridges in the world automotive components trade. Questions follow about their specific characteristics: whether they show preferred countries in the direction of their trade, whether they are balanced in trade with the different clusters to which they belong, or whether they receive most of their flow from a single cluster and a specific trade. Once the clusters and their determinants were identified, the results of the Infomap flows within and between clusters (i.e. a list of pairs of state nodes-from and -to) were processed, yielding information on export and import shares that can be associated with the various clusters.

Table 4.4. Percentage of Infomap Flow Generated within and between Clusters by Year.

Source: Russo et al., 2023, p. 109

Table 4.5 shows the patterns of export and import shares of the three main clusters. The prevalence of the three largest clusters increased, confirming the growing concentration of trade flows. At the same time, the number of connections between clusters generated by the three largest clusters (Europe, NAFTA, and Asia) grew from 15.1 per cent in 1993 to 32 per cent in 2017, with different dynamic patterns in each cluster.

Table 4.5. Export Shares of the Top Three Clusters, Generated within the Clusters and with other Clusters, by Year Germany has always led the first cluster; the second cluster was led by the US and Japan in 1993, by the US in 2003, and by China and Japan in 2013 and 2017; the third cluster was China-led in 1993, China and Japan-led in 2003, and US-led in 2003 and 2013.

Source: Russo et al., 2023, p. 108.

As shown in Table 4.5, the Germany-led cluster increased its share of global exports from 47.6 per cent to 49.9 per cent between 1993 and 2017. Over this period, it slightly increased its cross-cluster connections (from 7.0 per cent to 10.8 per cent of world exports). Since the 1990s, it changed its internal structure, integrating in 2003 a minor cluster of specific components trade led by the Czech Republic and composed of the East European countries that were once part of the Soviet Union before its collapse. In 1993, this small cluster was structured on trade with countries outside the Germany-led cluster. After the disintegration of the Soviet block and the enlargement to the east of the European Union, massive relocation of production allowed the leading European OEMs, and mainly German, to profit from the creation of the Common Market and face the threats that Japanese transplants, and later the Korean, posed (Brincks et al., 2018).

Table 4.6. Export Shares of the Top Three Clusters, Generated within and with other Clusters, by Year and Group of Components and Parts.

Source: Russo et al., 2023, p. 108.

Table 4.5 shows the export shares of the top three clusters, while Table 4.6 shows the export shares per group of parts and components. The largest contribution to cross-cluster connections seen from the perspective of parts and components trade comes from the China and Japan-led cluster, which developed cross-cluster connections for all groups of products, significantly for the Miscellaneous Parts (which accounts for almost 20% of the cross-cluster connections in 2017), half due to the China and Japan- led cluster, but also for Rubber and Metal parts, and Electrical and Electric parts. In second place is the German-led cluster, which contributed significantly to Engine and Parts.

4.1.1 The cluster led by Germany. The Germany-led cluster remained the biggest during all four years considered in the research. The integration of Eastern European countries’ automotive industries (Czechia, Hungary, Poland, and Slovakia) allowed them to maintain trade relations outside the region, strengthening the cluster’s connections with world trade. However, unlike in the United States, European processes reinforced the competitive position of the leading country and its “national champions”, that is, the OEMs of core countries, mainly Germany. In contrast to the Detroit-3, German companies relocated most components and small car production and kept a high share of assembly functions and high-end cars (Simonazzi et al., 2020).

Regarding the internal composition of the Germany-led cluster, the share of German exports remained practically stable. In contrast, the share of the four countries that structured this cluster in 1993 (France, Italy, Spain, and Great Britain) declined and was replaced with a growing share of Central and Eastern European countries (CEE: Czech Republic, Hungary, Slovakia, and Poland). The Western European countries saw their global participation fall from 21.3 per cent in 1993 to 12.7 per cent in 2017, while, at the same time, the participation of the CEEs went up from 0.5 per cent of world exports in 1993 to 11.4 per cent in 2017. The other 21 countries in this cluster maintained a stable share of world exports (around 10.4 per cent) (Table 4.7). In 1993, the share of imports of these 21 countries was larger (14.7 per cent) than in 2017, when it fell to 12.1 per cent (see Tables 4.7 and 4.8). Most of these countries were other European countries integrated into the cluster, and a minority of countries were also present in the clusters led by the U.S., China, and Japan (Russo, op. cit., p.109).

German exports made the most significant contribution to cross-cluster connections. The other four West European countries (France, Italy, Spain, and Great Britain) in the cluster contributed to exports on a smaller scale and at a decreasing rate (from 3.0 per cent in 1993 to 2.4 per cent in 2017), with slight differences among them (see Table 4.7). The reduction in these four countries’ share could not be entirely compensated by the exports of the CEE countries (which went from 0.1 per cent in 2003 to 1.6 per cent in 2017). Connections across clusters were made possible thanks to the imports of parts and components from countries outside the clusters (7.5 per cent in 2017), which were smaller than export connections and, in 2017, were at the same level as in 1993 (Table 4.7).

Germany increased its export share to the U.S.-led cluster and the cluster led by China and Japan, and to a lesser degree, towards other smaller clusters led by Brazil, Ukraine and Russia. German imports from other clusters were smaller and explicitly concentrated in the cluster led by China and Japan since 2003. Similar dynamics can be observed for the rest of the countries within this cluster.

Table 4.7. German-led Cluster. Overall Export Shares and Composition by Group of Countries, Year, and Export Orientation.

Source: Russo et al., 2023 (b) p. 26

Table 4.8. German-led Cluster. Overall Import Shares and Composition by Group of Countries, Year, and Export Orientation.

Source: Russo et al., 2023 (b) p. 26

4.1.2. U.S.-led Cluster. In 1993, it was integrated into one group; after 2003, it split into two distinct commercial areas, one in Asia and one in North America, made up of the NAFTA countries and led by the U.S. In 1993, Japan was part of this cluster with a world export share of 17.7 per cent, while the U.S. share was 16.2 per cent; the other two NAFTA countries – Canada and Mexico – participated, respectively, with 7 per cent and 4.4 per cent. The remaining 16 countries in the cluster hold a 3.5 per cent share of exports (Table 4.9). The cluster has gradually lost its importance in world trade. The share of parts and components traded worldwide by the cluster led by the United States and Japan in the Pacific area was 50.3 per cent (48.8 per cent from the US and Japan-led and 1.5 per cent from the China-led clusters) (see Table 4.5). In 2003, the Pacific area – which, in 1993, was embedded in the second biggest cluster (number 2 in Table 4.5)–appeared to be split into two distinct trade areas, the Asian and the American. The U.S.-led cluster, which was second in size in 2003, became the third cluster in 2013 and 2017, contributed lowly to cross-cluster connections: 3.1 per cent in 2003, 2.8 in 2013 and 3.5 in 2017, while that of the China and Japan-led cluster (which became the second cluster from 2013) contributed increasingly from 12.6 per cent in 2003 to 17.8 per cent in 2013 and 17.7 per cent in 2017 (Table 4.5).

A considerable amount of foreign direct investment, mainly from Japan, was attracted by NAFTA to the United States, Mexico, and Canada after 1992. The Pacific Region cluster began to be led by the U.S. in 2003 and included the three countries in the Treaty. Canada and Mexico traded mainly inside the cluster; their export shares were 2.6 per cent and 6.9 per cent, respectively, and their import shares were 4.4 per cent and 4.3 per cent. While US exports declined (from 15.6 per cent in 2003 to 10.2 per cent in 2013 and 10.4 per cent in 2017), the importance of Mexico’s increased over time (up to 7.7 per cent in 2017) at the expense of Canada (whose participation fell to 2.7 per cent in 2017). Regarding imports, in 2003, U.S. trade with other clusters represented 10.5 per cent of the world’s total, and imports within the group represented 8.6 per cent (see Tables 4.9 and 4.10). In 2013, the proportions were similar.

Table 4.9. U.S.-led Cluster. Overall Export Shares and Composition by Group of Countries, Year, and Export Orientation.

Source: Russo et al., 2023 (b) p. 27

Table 4.10. U.S.-led Cluster. Overall Import Shares and Composition by Group of Countries, Year, and Export Orientation.

Source: Russo et al., 2023 (b) p. 27

4.1.3. Asian Cluster. Its place in world trade has become increasingly important. In 1993, it was led by Japan. However, later, China grabbed the leadership, and in 2013, the Asian cluster emerged as the second most important, with growing participation from China and South Korea and, to a lesser extent, from Thailand, India, Indonesia, and Malaysia. China exploited the advantage of joining the World Trade Organisation in 2001 and its solid production relations with global OEMs and Tier-1s, attracted by its policy of forming strategic alliances. This created strong production links with the European and American markets. Regarding exports, the U.S. and other countries, such as Brazil and Argentina in America and Korea, Thailand, and Indonesia in Asia, became important partners with China; Russia partnered with several countries in the cluster. Minor countries within the cluster (Thailand, Hong Kong, India, Indonesia, and Malaysia) maintain different commercial participation patterns and, since 2003, have moved to more balanced trade positions concerning the clusters led by the U.S. and Germany.

In Figure 4.3, two smaller groups, one centred in Brazil and Argentina and another led by the Russian Federation, were increasingly important from 2003 until 2013 but diminished in importance in 2017. The trade dynamics of the three main clusters differed regarding parts and components exchange. In contrast, the European cluster kept its share of imports and exports relatively stable (within the cluster as with other clusters), while the other two clusters behaved differently, especially in the Miscellaneous Parts category. Table 4.13 shows the ten most important items that contributed to connections between clusters, with a more than 0.1 per cent participation in world trade for the three main clusters. “Other motor vehicle parts and accessories”–a miscellaneous group–in 2017 contributed 8.9 per cent of all inter-cluster exports (in 1992, this was 4.9 per cent), with the China and Japan cluster accounting for 5.1 per cent. The cluster led by Germany and the one led by China and Japan contributed to cross-cluster connections with exports of “Motor vehicle gearboxes” with a similar export share (respectively 1.8 per cent and 1.5 per cent) and “Other body parts and accessories (including cabins) for motor vehicles” with a share of 1.4 per cent. The fourth item is “Rims, tyres, new, of the type used on motor cars (including light trucks)”, for which the cluster of China and Japan is three times larger than that led by Germany (respectively 1.6 per cent and 0.5 per cent of the exports). In the case of “Compression Ignition Piston Engines (Diesel or Semi-Diesel)”, the cluster led by Germany maintained the highest cross-cluster connection in 2013 (Russo et al., 2023, p. 111).

Table 4.11. – China and Japan-led Cluster: Overall Export Shares and Composition by Group of Countries, Year, and Export Orientation

Source: Russo et al., 2023 (b) p.28.

To measure the potential effects of the transition to electric vehicles, that is, which countries and which bilateral trade flows will be most negatively affected, attention needs to be focused on the components that connect the engine to the wheels and are represented by the six SITC codes in the Engines and Parts group. The participation of these four groups of automotive components and parts in total exports has remained relatively stable; however, although they continue to constitute the largest part of total trade, their participation within the internal trade of the clusters decreased (from 15.4 per cent in 1993 to 12.6 per cent in 2017) (Russo et al., 2023, p. 112). The dynamics of the subgroups in the Engines and Parts categories vary considerably, reflecting the changes in the location and the sector products exchanged in the period.

Table 4.12. – China and Japan-led Cluster: Overall Import Shares and Composition by Group of Countries, Year, and Export Orientation

Source: Russo et al., 2023 (b) p.28.

The impact on trade of the transition to electric vehicles will first affect the countries with the largest participation in exports. In 2017, the total exports of engines and their parts were generated in six countries: the United States, Germany, Japan, Mexico, Hungary, and China. Although most exchanges occur within clusters, almost a third of those exports go to countries in other clusters. This means that the transition threatens to disrupt much of the transactions within each cluster, especially those led by the United States and Germany.

From an import standpoint, in 2017, the United States was the largest importer of engines and parts from countries in other clusters (1.7 per cent) and imported a similar amount from within its cluster. In contrast, Germany imported more from countries within its cluster than from countries in other clusters, and Japan imported only small portions from other countries, mainly from the German-led cluster.

Table 4.13. Contribution of the top 10 components and parts to cross-cluster connections: export shares by cluster and year. Components and parts are ranked according to their total export shares in 1993.

4.2. The Technological Challenge

With the changes in the regionalisation of production and trade in the automotive sector came an intensification of competition. Creating new brands and product segments expanded the number of vehicle models, bringing down margins per vehicle and sales. The growth of the small car market challenged the Detroit Three oligopoly in the U.S. Profits from selling smaller cars are less than for expensive cars, so it requires a high volume of sales. (Smitka & Warrian, 2017). European, Japanese, and Korean firms competed successfully with compact cars when the oil crisis hit the demand for big fuel-consuming cars, reaching a considerable size of the U.S. market; consequently, the U.S. government implemented protectionist policies. The Big Three faced significant competitive pressures given the slow growth of light vehicles sold from the late 1980s and the beginning of the twenty-first century (Neil Bailey et al., 2005, p. 27). At first, Toyota, Honda and Nissan impacted the market with their fuel-efficient and inexpensive cars; after that, process innovation, higher efficiency and quality became a characteristic of their entry-level and luxury models. German OEMs led the market in the luxury and performance sectors, with Daimler and BMW as the leaders. Later, Korean OEMs, such as Hyundai, joined in the assault on the U.S. market with low-cost products.

The entrance of new, more productive players into the U.S. market forced the Big Three to raise productivity. In research conducted by McKinsey (Neil Bailey et al., 2005), it was found that between 1987 and 2002, the effects on company and sector productivity of decisions taken by Ford, Chrysler, and GM in response to competition from Japan-based OEMs and competitors based in Germany and Korea were primarily responsible for the increase in productivity33 in U.S. production of motor vehicles. The main drivers for productivity growth were innovations and, far more important than these, the capability of rolling out process innovations across the companies. The Big Three improved process efficiency mainly by adopting lean production techniques pioneered by Japanese OEMs, which took ten to fifteen years to learn, adopt and implement (Neil Bailey et al., 2005, p. 11). “Management-by-stress” was called this process by critics (Moody, 1995, p.97); the “machine that changed the world” was the name given to this business model by the International Motor Vehicle Project, the seminal research conducted at MIT that convinced the management of the Big Three that they had to join the change (Womack et al., 2007, p. VIII). The process through which the Big Three adopted lean production proved difficult, and the time it took for each one of them to catch up with the Japanese OEMs depended mainly on the competitive pressure and their perception of it. The path followed by the Big Three in their learning and adoption process is undoubtedly a reference to the technological transition that the new ACES trends (autonomous driving, connectivity, electrification, and shared mobility) impose.

33 The authors define productivity in terms of real value added per hour.

Fewer hours to produce a vehicle because of improved labour productivity and rises in value-added per vehicle because of product innovations are the main paths to higher productivity. Most of the auto manufacturing productivity achieved–measured as hours per vehicle saved–came from adopting lean production to improve plant production processes. According to the study by McKinsey (Neil Bailey et al., 2005, p. 39), total value-added growth was due, on one hand, to the contribution of market share shifts from lower to higher value-added models (light trucks)–25 per cent–and to increases in the value of existing models through added functional features, improved quality, and higher performance–15 per cent -, and, on the other hand, 45 per cent growth of value added was due to the diffusion of process improvements within existing plants (adoption of lean production). The 15 per cent remaining is due to the shift to more efficient producers and changes in the production mix (Neil Bailey et al., 2005, p. 67). The diffusion of innovation occurred through product innovation, i.e., the development and introduction of new models and new, improved features and designs, and process innovation that allowed for labour, capital, and input saving. The leadership in the light truck market helped the Big Three to mitigate the impact of competition. Added functional features, improved quality, and higher performance were the main factors contributing to the change in the model mix from lower to higher value-added car models.

GM’s OEM assembly plants provide an example of efficiency gains: as mentioned before, most of the contribution was made by lean production–59 per cent due to process innovation. Assembly tasks outsourced to suppliers accounted for a 17 per cent improvement. Introducing new products–mainly light trucks–and adopting new common platforms accounted for 16 per cent of efficiency improvements. Newly added or improved features diminished the overall efficiency. Another 10 per cent was due to the closure of plants, adding up to 100 per cent (Neil Bailey et al., 2005, p. 39).

The new production system introduced by Japanese companies was based on waste reduction, smoothed out manufacturing process irregularities such as fluctuating volume or unexpected errors, and balancing the load of the process along the value chain. Lean production combines several techniques, some of them from total quality control (TQC), such as just-in-time inventories (JIT), empowering labourers in the workshop to stop production when a problem appears, forming small clusters to perform quality control activities and self and mutual development, implementing higher quality of design so that actual products conform to quality of design and thus ensuring that ease of manufacture is taken into account when parts and components are designed (Ishikawa, 1985, p. 103).

Japanese transplants also implemented the Keiretsu concept, meaning that the suppliers are tied to their primary customers for planning, product development, and cost control. While the big American automotive manufacturers based their management on command and control–which was why they integrated their suppliers vertically, buying them and incorporating them as parts of their companies–the Japanese companies linked suppliers economically into one management system (Drucker, 1999, pp. 30-33). Still, this organisation was based on power; the Keiretsu was not a partnership of equals but a subordination of suppliers. Japanese companies that became global players, for their part, had to go through a learning process to adjust to work with non-Japanese counterparts and adapt their organisational knowledge-creation process. They had to become flexible enough to adjust their organisational and productive processes to Western approaches to organisational knowledge creation. An example of Japanese companies’ approach to organisational knowledge creation outside Japan and how they coped with the difficulties of adjusting to work in different environments is provided by Nonaka and Takeuchi (1995) in the case of Nissan’s Primera Project. The decision to position the car as a high-performance global car implied complying with several qualifications: it had to be manufactured both in Japan and Britain, it had to have 80 per cent of its components emanating from Europe, and it was to be sold primarily in the European market, the U.S. and Japan. To carry out the project, Nissan had to acquire tacit and explicit knowledge about the European automobile market, culture, and road conditions. This was accomplished through “cross-cultural socialisation”, a time-consuming and costly process to create organisational knowledge across national boundaries. Two rounds of socialisation were carried out. In the first round, Nissan sent hundreds of Japanese engineers to Europe during the early stages of the project to gain tacit knowledge about the European car market. In the second round, Nissan sent 300 British engineers and technicians to Japan to gain tacit knowledge about manufacturing practices. The case shows the importance of mobilising employees and externalising the tacit knowledge internalised over a long time at Japanese plants. It also shows the importance of a new approach to product development and how a Japanese company created knowledge organisationally (Nonaka & Takeuchi, 1995, pp. 209-212).

The result was a growing gap in quality and productivity between the Japanese and the Detroit Three. General Motors’ market share dropped from 50 to 17 per cent and that of the Detroit Three from 85 to 46 per cent in 2010 (Smitka & Warrian, 2017). The Japanese integration model with their suppliers close to assembly plants abroad explains the scant quantity of components imported to Japan and the progressive decline in exports (Russo et al., 2023). Faced with the challenge posed by foreign transplants in their home market, U.S. companies resorted to offshoring labour-intensive operations to southern non-unionised states in the U.S. and transferred assembly plants to Mexico. Lean production represented “the joining of flexible workforce deployment, the latest technology, increased outsourcing and subcontracting to lower-cost facilities, and the unification of the system through just-in-time delivery of components at the final assembly point” (Moody, 1995, p. 97).

Stiff competition from German and Japanese OEMs’ transplants in the U.S. provoked a reduction in the Big Three’s sales share and financial positions. Given that over half of a vehicle’s value comes from parts, the need to improve productivity was present in the final assembly process and the parts industry. Quality improvement along the supply chain determines success in increasing productivity, and added functional features increase the average value per vehicle. A large part of the efficiency improvements introduced with lean production was due to “cross-function management”, in which there is an intertwining of vertical and horizontal functions, including quality assurance, quantity control, cost (profit) control, new product development, control of subcontracting, sales control and so on. Ishikawa (1985, p. 114) illustrates this organisational system as “woof and warp” in weaving. Cross-functional management included subcontracting and supplier management. JIT and design-for-manufacturing required developing suppliers’ skills and offering long-term business relationships. Ford established a common ground for learning with Toyota such that the Japanese firm developed its production system learning from Ford’s worker involvement programs–the kaizen system–and it was easier for Ford to learn the cross-functional approach (Neil Bailey et al., 2005, p. 79). The success of products and process improvement programs depended on the quality of parts suppliers and the relationship that OEMs established with them.

4.3. Automotive Trade in North America

Cheap labour, geographic proximity to large markets, membership in regional trade agreements, and investment incentives lie behind the growth of the automotive industry in peripheral countries and the simultaneous restructuring in traditional core regions and old integrated peripheries in Western Europe and North America. As the industry became more global, car companies represented a smaller share of the value chain, and suppliers accounted for most of the production costs and manufacturing jobs. Assemblers provided only 20 per cent of the industry’s total value added (Smitka & Warrian, 2017).

The Big Three Detroit companies were under financial pressure as their returns to shareholders underperformed, partly because they tried to compete by cutting prices as they lagged in quality and durability and partly because of disadvantages in cost (Neil Bailey et al., 2005, p.31). Higher compensations paid to unionised labourers and outstanding health care and pension liabilities burdened the Big Three. Improvements in the parts industry and transferring to Mexico of the most labour-intensive sectors were part of the solution to the profitability loss. There was also a shift in employment from assembly to parts manufacturing, where non-union parts suppliers paid substantially lower wages (Neil Bailey et al. 2005, p. 58). Given the long period required to learn and fully implement lean production techniques, the Big Three opted for vertical disintegration and spinning off their parts manufacturing divisions. The labour share of parts manufacturing in the total hours needed in new vehicle production increased from 43.4 per cent in 1987 to 56.5 per cent in 2002 (Neil Bailey, et al. 2005 p. 111).

Regarding the regionalisation of parts and components production, the results of the analysis conducted by Russo, Alboni, Simonazzi, et al. (2023) support the hypothesis that there is a twin dynamic in the clustering of international trade: increasing connections within the main clusters and increasing connections among clusters. In the U.S.-led cluster, the structural changes determined a switch in relative importance between the two main partners, Canada and Mexico. A hierarchical regionalisation of automotive production and trade was created, and assembly plants were established in the South of the United States and Mexico. The parts and components were outsourced from the suppliers that followed them and from other low-cost countries, including China. In the NAFTA area, this regional hierarchisation and reorganisation of the supply chains led to an inversion of the relative positions of Mexico and Canada in their trade with the U.S. While in Mexico, the production of motor vehicles more than doubled from 2005 to 2018, in that same period production in Canada halved (Figure 4.3).

Figure 4.4. NAFTA: Production of Motor Vehicles
Blue thick line: USA; red dotted line: Canada; green dashed line: Mexico
Millions of units

Source: OICA

The definition of semi-periphery fits the case of Canada, which has strived to attract automotive R&D, that is, the nodes in the supply chain where power resides. However, unlike parts and components suppliers, these activities tend to concentrate in locations proximate to corporate headquarters. Consequently, Canada has largely failed, though its participation in the automotive market has remained strong. Panel A of Figure 4.5 shows that even though the U.S. imports of Canada-manufactured passenger cars grew from US$14.5 billion in 1992 to US$36.4 billion in 2005, as a percentage of all U.S. imports of passenger cars, Canadian participation fell from 31 per cent to 29 per cent in the same period. At the same time, U.S. imports of passenger cars produced in Mexico grew from US$2.6 billion to US$10.8 billion, from 5.5 per cent to almost 9 per cent.

The gradual displacement of Canada from the U.S. market is more evident in the case of parts and accessories for motor vehicles34. In 1992, the U.S. imported US$5.4 billion from Canada, which represented 34 per cent of total parts and accessories imports from around the world; in 2005, US$11.9 billion, 28.7 per cent. From Mexico, in 1992, the U.S. imported US$1.9 billion (12 per cent of total parts and accessories imports); in 2005, imports amounted to US$7.8 billion (19 per cent of total imports) (Figure 4.4.B.).

34 Includes all 8708 chapter: bumpers and parts, safety seat belts, windshields, and other windows, parts and accessories for bodies, brakes and servo-brakes, mounted brake linings, gearboxes, drive axles with differential, non-driving axles and parts, road wheels and parts, suspension shock absorbers, radiators, mufflers and exhaust pipes, clutches and parts, steering wheels, columns and boxes, safety airbags and parts, parts and accessories NESOI.

Figure 4.5.A. United States. SITC 8703 Motor Cars & Vehicles for Transporting Persons. Imports from Canada and Mexico (1992-2005)
Millions of dollars, left panel, as a percentage of all passenger cars imports, right panel.

Figure 4.5.B. SITC 8708 Parts & Accessories for Motor Vehicles. Imports from Canada and Mexico (1992-2005)
Millions of dollars, left panel, as a percentage of all passenger cars imports, right panel.

Souce: U.S. Census. https://usatrade.census.gov

The lack of regional assets that define a core country–such as an OEM with headquarters in the country (a “national champion”) or managerial and R&D functions–has consequences as to the capacity of semi-peripheral countries to make strategic decisions regarding technological development and know-how appropriation (Simonazzi et al., 2022, p. 10). With the reorganisation of supply chains and with assembly plants and their satellites of Tier-ones moving offshore, entire branches of these chains are being dimensioned or even stemmed out. Production in countries in integrated peripheries grew considerably, especially of components and parts, while traditional core countries like Canada and several in Europe–except for Germany–lost ground in domestic car production and suffered a process of delocalisation of many production phases. These countries represent the semi-periphery.

When Mexico signed into NAFTA, not only its efforts to conduct the path to be followed by the automotive industry installed in its territory were abandoned, but its integration into the North American block implied giving up the possibility of an independent policy and integrating under a high dependence on the U.S. market, notwithstanding all the free trade agreements signed with numerous countries35. In 1993, manufacturing exports to the U.S. amounted to US$35.5 billion while total manufacturing exports amounted to US$41.1 billion; that is, 85.5 per cent went to the U.S. In 2005, total manufacturing exports amounted to US$175.2 billion, a 326 per cent increase in twelve years at a 12.8 per cent compound annual growth rate (CAGR), of which US$152.8 billion went to the U.S., that is, 87.7 per cent, a 335 per cent increase at a 13 per cent CAGR. In the case of automotive exports, it was a similar development: in 1993, total exports amounted to US$10.2 billion and US$45.8 billion in 2005, a 351 per cent increase at a 13.4 per cent CAGR, while to the U.S. went US$8.2 billion in 1993 and US$41.1 billion in 2005, a 400 per cent increase at a 14.4 per cent CAGR (Figure 4.5).

35 Mexico has a network of 14 Free Trade Agreements (FTAs) with 50 countries, 30 Agreements for the Promotion and Reciprocal Protection of Investments (APPRIs) with 31 countries or administrative regions, and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association. The most important are the USMCA between Canada, the United States and Mexico; the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zeeland, Peru, Singapore, and Vietnam; the Free Trade Agreement between Mexico and the (TLCUEM); the Southern Common Market (MERCOSUR) which includes: Argentina, Brazil, Paraguay, Uruguay, Venezuela, Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Surinam. Pacific Alliance–Chile, Colombia, Mexico, and Peru. The Latin American Integration Association (ALADI)–Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Panama, Paraguay, Peru, Venezuela, and Uruguay.

Figure 4.6. Mexico. Manufacturing and Automotive Exports–Total and to the U.S.
Millions of dollars.

Source: INEGI. Banco de Información Estadística.

In 2001, 11.4 million units of cars and commercial vehicles36 were produced in the U.S. and 10.9 million in 2019; domestic sales37 were 14.3 million in 2001 and 13.7 million in 2019. Imports covered the difference between sales and production. During the 2008-2009 crisis, production fell from 10.8 million in 2007 to 8.7 million in 2008 and 5.7 million in 2009, a 47 per cent slump in production in two years. Sales fell from 12.7 million in 2007 to 7.9 million in 2009, a 38 per cent slump in sales in the same period. The crisis almost bankrupted many OEMs, triggering restructuring and closure of plants (Figure 4.7).

36 Commercial vehicles include trucks under 10,000 pounds GVWR, such as compact and conventional pickups, sport utility vehicles, minivans and vans, and trucks and buses over 10,000 pounds GVWR (Gross Vehicle Weight Rating).

37 Domestic sales include U.S. sales of cars produced in U.S. Canada, and Mexico. Sales from previous year’s inventory can contribute to sales numbers exceeding production.

The crisis also hit European producers hard, although with different severity. An agreement for a gradual reduction of production capacity in Europe, as advocated by Fiat CEO Sergio Marchionne, was impossible because many States were involved, each determined to defend its industry and its jobs and, above all, due to the fierce opposition of German OEMs, which had been able to overcome the crisis thanks to the rise of exports of their premium brands to China and the United States. The expansion of the Chinese market and the stagnation of the European market were essential factors that affected the new localisation strategies of OEMs.

The search for alliances, acquisitions and mergers characterised the industry’s consolidation to rationalise production and guarantee presence and variety in global markets. Multinational companies began investing in China in the 1980s when the automotive industry became one of the “seven pillars” of its development. Citroën, American Motors and VW invested in joint ventures with Chinese companies. While the first two eventually closed, VW expanded to account for 80 per cent of the domestic market (Smitka & Warrian, 2017). During the first decade of the 21st century, joint ventures produced automobiles designed abroad, assembled under the management of foreign companies, and marketed through their dealer networks (ibid.).

Figure 4.7. United States. Production and Sales of Motor Vehicles
Production of Motor Vehicles–Passenger Cars and Commercial Vehicles–left.
Sales of Motor Vehicles–Passenger Cars and Commercial Vehicles–right

Source: https://www.bts.gov/content/annual-us-motor-vehicle-production-and-factory-wholesale-sales-thousands-units

Due to the crisis, the NAFTA region lost 32.4 per cent of its production (from 12.9 to 8.7 million vehicles). The US carmakers had to be bailed out by the government. Thanks to a government-managed reorganisation of Chrysler and General Motors in 2009, the two carmakers emerged from bankruptcy protection with lower labour costs, higher capacity utilisation, and a more concentrated geographic distribution of assembly plants (Klier & Rubenstein, 2013). While several plants closed, especially in the traditional automotive zone in the United States, others opened, the new industrial zones in Mexico being the most favoured. Nine plants (out of eleven in the North American macro-region) opened in Mexico between 2010 and 2020. Of these, only one was constructed by a Detroit 3 OEM (specifically Chrysler, in 2013). Five were Asian automakers–Mazda and Nissan (2013), Honda (2014), KIA (2016), and Toyota 2020 – which invested in Mexico to sell in North America. The remaining three were German luxury auto manufacturers: VW’s Audi (2016), Daimler’s Mercedes-Benz (in conjunction with Nissan’s Infiniti) (2017), and BMW (2019) (Klier & Rubenstein, 2017, Table 11)although it\nhas no automakers of its own. During the more than two decades under the North American Free Trade\nAgreement (NAFTA, entered into by the United States, Canada, and Mexico. The Big Three received nearly US$80 billion through government assistance (Klier & Rubenstein, 2013, p.3).

Several programs aimed at reviving the auto industry were implemented, such as the Car Allowance Rebate System (commonly known as Cash for Clunkers), which provided credits to purchase a new vehicle in trade for an older vehicle or low-interest loans to improve energy efficiency offered by the Department of Energy. The reduction of labour costs and production capacity were critical strategies by which the competitiveness of the Big Three was to be improved. To lower labour costs, employment had to decline, from 250,639 in 2007 to 169,966 in 2009; the hourly workforce declined from 174,000 to 115,000, and the salaried workforce declined from 75,000 to 55,000, reflecting in declining union membership (Klier & Rubenstein, 2013, p. 7). Parts-making divisions were turned into independent companies, and between 2007 and 2010, the Detroit Three closed or announced the closure of 16 assembly plants, including 14 in the U.S., one in Canada and one in Mexico (Klier & Rubenstein, op. cit. p. 9). As plants were closed or clustered in the “Auto Alley”38, the importance of Mexico and Canada increased.

38 The “auto alley” is where a significant proportion of the North American automotive industry has been clustered. It extends from north to south, from southern Ontario in Canada, passing between the Great Lakes and the Gulf of Mexico to the interior of the United States and, to a lesser extent, across the border and connecting with central Mexico.

In 2001, 11.4 million units of automobiles and commercial vehicles were produced in the U.S. and 10.9 million in 2019; domestic sales39 were 14.3 million in 2001 and 13.7 million in 201940. Imports covered the difference between sales and production. As a reflection of the automotive sector crisis in the U.S. in 2008, the effects on automotive production in Mexico began to be felt due to its integration with North American countries, the consequences of which were more severe during the first half of 2009. The automotive companies in Mexico reduced the operating costs to face the drop in sales with technical stoppages, temporary and unskilled labour, reduced wages during technical stoppages, thinning of inventories, and reduced working hours and production volumes, among the most severe. According to Covarrubias (2014), in 2008, several mechanisms were implemented to limit imports of used cars from Canada and the U.S. based on their vehicle characteristics to maintain restrictions on imports of used vehicles, which would disappear gradually.

39 Domestic sales include sales in the United States of automobiles produced in the United States, Canada and Mexico. Sales from the previous year’s inventory can increase sales figures exceeding production.

40 Commercial vehicles include trucks under 10,000 pounds GVWR, such as compact and conventional pickup trucks, sport utility vehicles, minivans and vans, and trucks and buses over 10,000 pounds GVWR (gross vehicle weight rating).

In January 2009, the federal government implemented several programs to face the effects of the crisis and support the automotive industry in Mexico. Among them were the Program for the Preservation of Employment, the Emerging Support Program for the Automotive Industry–which aimed at financial intermediaries and automotive distributors to cushion the impact of the reduction in automobile sales in the Mexican market – and the Vehicle Renewal Program–aimed at owners of automobiles with age equal to or greater than ten years.

In 2023, there were twenty motor light vehicle assembly plants in Mexico belonging to 12 OEMs, with nearly 84 thousand employees and a productive capacity of over 5 million vehicles (Table 4.14). In addition to the assembly plants, there were ten plants to manufacture engines and seven to manufacture transmissions. Engines’ productive capacity is nearly 5.7 million units, employing 11,534, while seven plants manufacturing transmissions have a productive capacity of nearly 2.4 million units and employ 8,400 (Tables 4.15 and 4.16)41. Regarding the parts and components industry (NAICS 3363), 44.8 per cent of the US$80.8 billion of FDI accumulated from 2006 until the first half of 2023 for the whole Transport Equipment sector (NAICS 336) went to their manufacture, that is, US$36.2 billion; US$39.2 billion went to cars and trucks manufacturing (NAICS 3361) (Figure 4.8). There are more than 600 Tier 1 parts manufacturers in the country, and almost every important supplier company in the world is present. The relocation of assembly plants and outsourcing of parts and components created an “explosion” (Covarrubias, 2014) of the automotive industry in Mexico. The Mexican government and private companies explained this exceptional growth in terms of the competitive advantages of skilled labour, an established supply chain, the benefits of free trade agreements, the free trade zones created within its borders, and its geographical position (Covarrubias, 2013, p. 3).

41 (https://amia.com.mx/about/plantas_ensamble/)

Table 4.14. Motor Vehicle Assembly Plants in Mexico, 2023.

Source: AMIA. https://amia.com.mx/about/plantas_ensamble/

On the one hand, a country’s set of skills, wages, regulations, innovation ecosystems, and absorptive capacity shape the structure of the supply of automotive components and parts, which also depends on other production specialisations, the location of domestic and foreign car makers’ plants in the country, and on the role assigned by carmakers to supply from that country for their global supply chains (Russo et al., 2023, p.101). On the other, at least in the case of Mexico, the need to relocate and outsource some links of the automotive value chain that the crisis in the core country of the block–the United States–provoked was at the root of the expansion of the automotive industry in many countries in the integrated periphery.

Table 4.15. Engines for Motor Vehicle Manufacturing Plants in Mexico, 2023

Source: AMIA. https://amia.com.mx/about/plantas_ensamble/

Table 4.16. Transmission Manufacturing Plants in Mexico, 2023

Source: AMIA. https://amia.com.mx/about/plantas_ensamble/

In addition to regional reorganisation, a second factor lay in the intensification of monopolistic competition in a saturated market, which resulted in a proliferation of models, lower volumes, and declining profitability. The introduction of modular architecture allowed for the sharing of core components across vehicles and their differentiation while sharing one chassis, thus reducing costs, and companies attempted to create standard production protocols for their factories and suppliers. Modularity and body-on-frame allowed not only for greater variety but also for greater flexibility in the location of production and in the choice of the country from which to serve the market: a particular product could be made only in one country and exported elsewhere, a process whose advantage is most significant where tariffs are zero or very low.

One critical contribution to the productivity growth in the auto industry of the Big Three was linked to product innovations such as light trucks. (Neil Bailey et al., 2005, p. 25). The development of Sports Utility Vehicles (SUVs) and minivans helped in the competition in the North American market, attracting consumers looking for large vehicles with a product that global competitors arrived in the U.S. could not offer in the short term—light trucks allowed for increased productivity by raising the value added per vehicle. Low fuel prices and the regulations concerning environmental and safety standards played an essential role in the decision by the Big Three to opt for the shift towards light trucks. The delay of the Big Three in catching up with the technological and managerial innovations introduced by foreign competitors and the ability of these to develop SUVs based on car platforms (CUVs)–where the Japan and Germany-based OEMs had advantages and manufacturing know-how–instead of truck platforms eroded their advantage (Neil Baley et al., 2005, p. 36).

Figure 4.8. Mexico. Foreign Direct Investment in the Automotive Sector
Millions of Dollars
Columns–FDI in the entire Transport Equipment Sector (NAICS 336)
Dashed line: FDI in Motor Vehicle Manufacturing (NAICS 3361)
Dotted line: FDI in Parts and Components Manufacturing (NAICS 3363).

Source: Secretaría de Economía. https://www.gob.mx/se/acciones-y-programas/competitividad-y-normatividad-inversion-extranjera-directa?state=published

The U.S. regulation to limit greenhouse gas (GHG) emissions treated trucks more favourably, thereby creating an incentive to transform large “cars” into “trucks”42 (Smitka & Warrian, 2017); consequently, U.S. sales of cars declined, and sales of light trucks soared. Regulation, especially concerning environmental and safety features, increased the cost of production and, hence, the prices of vehicles. CAFE and emissions regulations favoured smaller, fuel-efficient vehicles. However, light trucks were subject to less stringent fuel economy standards. While light vehicles were traded tariff-free within North America if their regional value content (RVC) was at least 62.5 per cent, the production of pickup trucks and cargo vans within the U.S. was protected. Imports were charged a tariff of 25 per cent (the “chicken tax”) (Klier & Rubenstein, 2020, p. 56).

42 The Corporate Average Fuel Economy (CAFE) set fuel efficiency standards regarding emissions and imposed heavy fines on manufacturers whose cars exceed emissions limits. However, the standards were more relaxed for trucks. Two-wheel drive SUVs under 6,000 pounds GVW are classified as cars, while most SUVs with four-wheel drive or above 6,000 pounds GVW are considered trucks. SUV models that are less than 6,000 pounds GVW can have both car and truck variants, with two-wheel drive versions classified as cars and four-wheel drive versions classified as trucks (U.S. Department of Transportation, Federal Highway Administration, Bureau of Transportation Statistics).

Figure 4.9. Oil Price and United States’ Economic Growth, 1993–2020

Source: U.S. Davis, 2022

1994–NAFTA allowed cheap oil from
Mexico

1978–Fed raised and lowered rates

2014–The dollar rose 15%

1999–Prices doubled

2007–Banking crisis

2015–U.S. shale oil increased

2001–Recession and 9/11

2008–Financial crisis

2016–The dollar fell

2002–Afghanistan war

2009–Great Recession

2017–OPEC cut oil supply to keep prices stable

2005–Hurricane Katrina

2012–Iran threatened Straits of Hormuz

Source: Amadeo, 2022.

During the 2008-2009 crisis, sales of light vehicles suffered a deep drop (Figure 4.7), worsened by the steep rise in oil prices (Figure 4.8). The fall in the price of oil and the recovery from the crisis stimulated sales and gave rise to a change in the product mix; production of subcompact and compact cars decreased, and sales of SUVs and CUVs increased. The shift in the demand in the United States affected the product mix in Mexico: in 2017, the production of light trucks was higher than that of cars, and it kept growing. While in 2005, the production of light trucks represented 52.6 per cent of cars, in 2022, it accounted for 402.8 per cent of cars, the production of all types of cars accounted for only 25 per cent of the production of light trucks (658 thousand cars vs 2.65 million light trucks) (Figure 4.10).

Figure 4.10. Mexico: Production of Light Vehicles. Automobiles and Light Trucks
units of vehicles

Source: INEGI. Registro Administrativo de la Industria Automotriz de Vehículos Ligeros (Administrative Registry of the Automotive Industry of Light Vehicles).

Production of compact cars in Mexico peaked in 2016 at 1.5 million units, and it fell to 423.2 thousand in 2022; likewise, production of subcompacts in 2017 was at its highest at 494.8 thousand units, and it fell to 171.3 thousand in 2022. After 2015, the domestic market of subcompacts was served mainly through imports, the same as with light trucks (Figure 4.9). Stellantis suspended the production of compact cars in 2011 and does not produce subcompact cars. Ford suspended the production of compact cars in 2021 and subcompact cars in 2020. GM produced a minimal quantity of compact cars in 2020 (9,047) and 2021 (8,135) and suspended production of subcompact cars in 2018. The production of small cars is left to Japanese-based and Korean-based OEMs, as well as Volkswagen. Given the limited size of the Mexican automotive market, the Big Three are shifting production towards light trucks and premium cars to serve the U.S. market with vehicles that are more profitable than small cars, and the domestic market is increasingly supplied with imports.

5. Wages and Employment

The automotive industry has been one of the most significant growth engines for the developed countries of Europe and North America. It has played a leading role in globalisation beyond its impact on trade and the productive sphere, bringing significant changes in the financial environment. With globalisation came financialisation, which determined a new commercial and productive dynamic of automotive corporations and a new financial climate. Accumulation patterns of corporations have adapted to the new conditions imposed by the growing dominance of capital markets over banking financing systems and an increase in the political and financial power of the financial sector. With profits flowing through financial channels and not through trade and commodity production, MNCs had, as a strategic priority, to increase shareholders’ value, thus determining the corporative governance. This brought greater control by shareholders and, consequently, the implementation of strategies that increased the price of shares through the reduction of costs by contracting employment and the growth of wages in the productive sector; this implies that layoffs are, in general, good news in financial markets (Marcial, 2019, p. 95). Financialisation shifted the power balance between capital and labour, favouring capital (Marcial, op. cit., p. 114). Performance was redefined: the short-term interest of shareholders prevailed over the balance of interests with customers and employees.

The management of MNCs changed with globalisation: instead of having subsidiaries in other countries, each operating as separate companies, big carmakers have one company run out from a core country and making decisions at a global or continental level. They are managed as a worldwide system in which the headquarters organise different functions, such as research, design, engineering, or development. The country is not the “business unit” anymore; it is only a “cost centre”, a complication rather than the unit for the organisation or the unit of business and strategy (Drucker, 1999, p. 36); the global value chains have substituted it.

As seen in Chapter 4, the organisational and technological changes introduced by Japanese companies in North America and Europe achieved productivity increases and cost reductions, forcing a redefinition of Detroit’s Three global corporative strategies. Returns for shareholders of these firms underperformed because of competition from foreign companies and healthcare and pension liabilities considerably higher than their competitors’ (US Congress OTA, 1992; Neil Bailey et al., 2005). In this context, NAFTA aimed to promote consolidating the continental automotive industry to face the Asian challenge (Marcial, 2019, p. 95). With the elimination of tariffs in regional trade by NAFTA, labour cost differentials were the major factor expected to guide the reallocation of production and labour and lead to the convergence of wages.

Since the end of the twentieth century, the Big Three have faced higher pension and healthcare liabilities than their competitors, which forced them to outsource much of the parts production. Although employment levels in the industry remained relatively stable (between 1987 and 2002 at 1.1 million workers), assembly operations of the Big Three fell by about 190,000 jobs while parts employment increased. Transplants nearly doubled their employment from 15,000 to 29,000 workers in locations different from the Big Three plants’ locations. Between 1987 and 2002, only 38 per cent of workers in the sector belonged to the autoworkers union, and non-union parts suppliers paid substantially lower wages. Given that the assembly of a complete vehicle accounts for only about 15 per cent of the total manufacturing process and the bulk of the process involves engineering and fabricating more than 10,000 parts and assembling these into 100 major components–engines, transmissions, steering gears, suspensions, and so forth (Womack, 2007, p. 57), the share of employment in assembly operations fell while the share of parts employment rose (Neil Bailey et al., 2005). The reorganisation of production and employment weakened workers’ negotiating power and made it possible to reduce wage growth in the auto industry.

Wages in the auto sector did not fare well in the U.S. According to data provided by the U.S. Bureau of Labor Statistics (Figure 5.1), the real hourly earnings of productive and non-supervisory labourers in manufacturing grew at an average of 0.14 per cent between 1990 and 2018, real hourly earnings of the same type of labourers in motor vehicle manufacturing decreased minus 0.65 per cent real compound growth rate in the same period. Not only did the Agreement fail to lead to a convergence in wages – in 2019, the average hourly wage in the U.S. was still eight times the wage in Mexico – but dragging wages down became an entrenched feature of the industry in the NAFTA region. The United States and Mexico record the lowest growth (strictly negative) in wages. Mexico is the most cost-competitive (i.e., low-cost) manufacturing country amongst the leading ten export economies (lower than the Chinese and Brazilian ones and higher only than India’s). At the same time, the United States occupies the fourth place, after China and South Korea (Covarrubias et al., 2020, p. 472).

Figure 5.1. United States: Evolution of Productive, Non-Supervising Labourers’ Earnings from 1990 to 2020
Panel A. Average hourly earnings of production and nonsupervisory employees, manufacturing, not seasonally adjusted–current dollars and constant CPI-adjusted dollars
Panel B. Real Growth Rate of hourly earnings of production and nonsupervisory employees, manufacturing
Panel C. Average hourly earnings of production and nonsupervisory employees, motor vehicle manufacturing, seasonally adjusted–current dollars and constant CPI-adjusted dollars
Panel D. Real Growth Rate of hourly earnings of production and nonsupervisory employees, motor vehicle manufacturing.

Source: authors’ calculations on Bureau of Labor Statistics data.

Whether the blame for falling wages should fall specifically on NAFTA or be imputed to a general trend caused by the pressure exerted by outsourcing production and jobs at the world level is debatable. On one count, the conversion from mass to lean production implied that a substantial fraction of the workforce would not be needed in a highly competitive marketplace. Conversely, the threat represented by lower-cost locations has been used to prevent wage increases across the entire production network. Delocalisation, interplant competition and threats of relocation of production have also put pressure on higher-wage core countries, such as Germany, where shifts in jobs to low-wage countries have resulted in concession bargaining at many automotive supplier locations to prevent relocations or gaining new products for the plant. Competition over labour costs and government incentives have been an essential driver of the dynamic nature of a nation’s competitive position within the automotive production networks (Simonazzi et al., 2020).

As the U.S. saw its trade share in manufactured goods and position in foreign direct investment fall, the search for productivity-increasing innovations and cost reductions through the new flexible, productive management became essential. Adopting the new production systems was simultaneous with the shift to lower-wage areas in the southern states and Mexico. With Japanese “transplants” and European companies competing within the U.S. market and the Big Three expanding their productive facilities south to lower-wage regions, North American labourers saw their benefits and prerogatives obtained since the mid-twentieth century greatly reduced. Then, the crisis in 2009 was a hard blow: the democratic government moved in to help Detroit and her historic companies with devastating modalities for the union tradition. The consolidated guaranteed system was upended, the welfare drastically dimensioned, and a substantial differential between the wages of base labourers and the seniors was introduced (Berta, 2019). Restructuring the automotive industry in the U.S. after the 2008-2009 crisis implied reduced labour costs and production capacity.

As an example of this restructuration, GM’s North American bill for hourly labour declined from US$16 billion in 2005 to US$5 billion in 2010, and it was obtained through three strategies:

1. Employing fewer workers (as mentioned in Chapter 4), resulted in the actively working UAW membership dropping by 30 per cent from 500,000 in 2007 to 350,000 in 2009.

2. Reducing wage premiums and transferring the Health Care costs of retired union workers to VEBA (a workers’ union pension fund). Between 1960 and 2005, hourly wages at the Detroit Three rose from US$2.63 to US$27.42 nominal, considerably above the increase among the entire U.S. manufacturing workforce from US$2.26 to US$16.56. By 2005, the hourly wages paid by the Detroit Three were 66 per cent higher than the average for all manufacturing workers. The gap between Detroit Three and others was higher when benefits were included. Total labour costs, including health care and pensions from the Detroit Three, increased (in nominal dollars) from around US$15 per hour in 1977 to US$25 in 1987, US$45 in 1997 and US$78 in 2007 (Klier & Rubenstein, 2013, p.7).

3. Higher capacity utilisation. The assembly of vehicles is a capital-intensive process; an assembly plant could cost hundreds of millions of dollars; it employs several thousand workers at full capacity and can produce more than 200,000 units yearly in normal operation conditions (Klier & Rubenstein, 2013, p. 8). In January 2009, the production utilisation capacity of light vehicles was 25.9 per cent, while it was 77.6 per cent between 1972 and 2007 (Klier & Rubenstein, 2013, p.7).

The MNCs’ strategies have been based mainly, although not exclusively, on the level of wages in the three countries and much of the employment loss in the United States and Canada became gains in Mexico. In 1995, 84 per cent of the light vehicles sold in the United States were assembled in one of the three North American countries. In 2016, the share was still as high as 78 per cent, but the production distribution within the macro-region had changed considerably. Mexico’s share of North American production increased from 8.8 per cent in 1999 to 20 per cent by 2015; production in the USA declined from 74 per cent in 1999 to 67 per cent in 2015, and Canada from 17 per cent to 13 per cent. In 2022, the production shares were 68 per cent in the USA, 24 per cent in Mexico, and 8.3 per cent in Canada.

The most detailed information on wages and employment in Mexico comes from the National Institute for Statistics and Geography (INEGI) and its various surveys and censuses. The authors who deal with the subject resort to different sources of information and calculation methodologies, so their estimates are not strictly comparable (Covarrubias, 2014, p.25; Hernández, 2017). In our case, we use information regarding employment in the automotive industry from the Mexican Association of the Automotive Industry (AMIA) webpage (www.amia.com.mx) and the Economic Censuses by INEGI (Figure 5.2). Data on employment in the U.S. were taken from the Current Employment Statistics Survey of the Bureau of Labor Statistics (https://www.bls.gov/ces/) and for Canada, Statistics Canada https://www150.statcan.gc.ca. Surveys in Mexico are collected on a probabilistic sample of households with representativeness at the federal entity level, but they contain information from less than half a million registers. The Economic Censuses provide more detailed information, allowing us to distinguish economic activities at a five-digit level of NAICS.

Figure 5.2. Mexico: Employment–Number of Employees
Source: AMIA, with data from INEGI–Monthly Manufacturing Industry Survey.

Figure 5.3. Mexico: Employment – Number of Employees.
Data from INEGI, Economic Censuses 2003, 2008, 2013, 2018

Source: INEGI. Economic Censuses 2003, 2008, 20013, 2018.

Figure 5.4. United States: Employment–All employees, Motor Vehicle Manufacturing, Seasonally Adjusted
(thousands)

Figure 5.4. Canada: Employment–All Employees, Motor Vehicle Manufacturing, Seasonally Adjusted

Source: DOI: Statistics Canada. Labour force characteristics by industry https://doi.org/10.25318/1410002301-eng

Table 5.1 shows that employment in transport equipment manufacturing in Mexico grew much faster than in the entire manufacturing. Between 1988 and 2018, the number of employees in the sector increased tenfold to 1.3 million43, with its share in total manufacturing growing from 5.1 to 20 per cent. After peaking at the turn of the century, US employment fell by almost 500 thousand persons in the following decade, rising only to its level in 1990 (Figure 5.3). The loss of jobs in the United States from the end of the 1970s (from 1.5 million to 953,000 in 2017) hit membership of the UAW, which dropped from 1 million to 355,000 by 2016 (Covarrubias et al., 2020, p. 473).

43 Between 1988 and 2018, employment in manufacturing trebled from 2,782 to 6,493 thousand. In 2013, 718,600 persons were employed in manufacturing cars and trucks and 592,000 in the parts and components industry. In 2019 the figures were 1,055,300 and 866,000 respectively. In 2016 Mexico had 61,100 workers in vehicle assembly and 674,372 in parts production; by comparison, employment in the U.S. motor vehicle industry totaled 760,800 in 2016 (180,900 in vehicle assembly and 579,900 in parts production (Klier and Rubenstein, 2017)although it\nhas no automakers of its own. During the more than two decades under the North American Free Trade\nAgreement (NAFTA, entered into by the United States, Canada, and Mexico.

Table 5.1. Employment and Business Units in Manufacturing (NAICS 31-32) and
Transport Equipment (NAICS 336). 1988-2018

Source: INEGI. Economic Census (1989, 1994, 1999, 2004, 2009, 2014, 2018)

The divergent trend in employment contrasts with the homogeneous trend in wages. Although Mexican wages in the automotive sector are higher than the average wage in manufacturing – the assembly sector pays more than twice the average wage in manufacturing, with parts and components coming slightly above it – their growth rate has been disappointing (Table 5.2). “Protection contracts” and “official unionism” have proved highly effective in containing the demand for wage increases and labour conflicts despite the skilled labour shortages. Evidence shows that labour retribution in Mexico is among the three lowest and highest profitability, and its trade unions remain dispersed and isolated (Covarrubias et al., 2020).

Several attempts to reform labour legislation and propose a new Federal Labour Law (Ley Federal del Trabajo) during this century were prevented by trade union resistance until 2012, when a legislative reform modified several principles of Labour Law, Individual Labour Law, and Collective Labour Law to create as many jobs as possible, establishing new forms of temporary contracts and diminishing the procedural costs of non-justified dismissals. Precepts defining outsourcing were added in individual labour law, regulating it less favourably for business companies than in the original text. Some modifications to the forms of temporary assumptions, such as the “trial contract” and the “initial training”, allowed the reduction of labour relations during an indeterminate period, affecting the stability of the employment principle. Regulation regarding the working day and hourly wages was intended to increase employment flexibility and limit the payment of past-due wages to 12 months. In the field of collective labour rights, the “Exclusivity Clause”44 was repealed, and the “Conciliation Boards” were suppressed.

44 The “exclusivity clause” (cláusula de exclusión) allowed trade unions to include in collective contracts and “law-contracts”, a clause by which the union could demand the employer to dismiss a worker who had been expelled from the union.

The Laboral Reform of 2012 aimed to increase employment and promote productivity and competitiveness by increasing labour market flexibility. It authorised outsourcing as a legal form of contract and allowed new fixed-term contracts to be introduced. Moreover, it supported the workers’ right to be hired and promoted and made labour training compulsory while cutting the cost of dismissal without legal cause.

Table 5.2. Average Annual Wages Paid in Manufacturing Industry in Mexico. 2003-2017
Wages paid in subsector 336 and industries 3361 and 3363 are percentages of the manufacturing sector’s average wage. Wages are calculated in current dollars at the FIX exchange rate determined by Banco de México.

Source: www.inegi.org.mx/sistemas/bie/

In Mexico, the number of motor vehicles produced grew almost four times (389 per cent) between 1993 and 2018, and the gross domestic product of the motor vehicles sector (in constant 2013 pesos) grew almost five times (492 per cent). Nevertheless, the number of motor vehicles sold in the domestic market grew one and a half times (146 per cent) (INEGI). In this same period, the real growth rate of per capita GDP (measured in constant 2017 international PPP dollars) was 128 per cent. (https://databank.worldbank.org/source/world-development-indicators). The low growth of the economy was reflected in the low growth of the domestic market and, together with the change of strategy of MNCs in Mexico and elsewhere, which reduced the production of cars, in particular small cars, and increased that of light trucks raising prices of vehicles, determined the failure to create a profitable domestic market in Mexico. The features added to the new vehicles, primarily SUVs, the higher quality and durability of components and a more precise assembly of vehicles allowed for higher prices and profitability. These improvements resulted in a higher value-added per vehicle and higher industry productivity. However, they could not be extended to low-price subcompact vehicles, which had been a great success in Mexico during the ISI period but could not absorb the cost increment resulting from these innovations. Until 2002, more than 50 per cent of the motor vehicles sold in the domestic market were locally produced; from this year on, the percentage of domestic sales has been primarily covered with imports (up to 65.5 per cent in 2019). In Mexico, automobile spending accounts for a large portion of the total consumer spending; in developed countries, this figure is around 10 per cent. In the U.S., in 2016, it was $8,427, representing 14 per cent of the total consumer spending. In Mexico, vehicle spending can be as much as a quarter of total personal spending (Covarrubias et al., 2020).

The technological transformation brought about by introducing the lean production model into the automotive industry sent shockwaves through the global value chain. Its repercussions were more profound on labour than other stakeholders since most adjustments befell them. The transition to electric and autonomous vehicles is shaking up the industry again. On the one hand, the enormous investments required to transition from internal combustion engines to EVs, the speed of innovation, and the urge to bring new ideas to market entail big risks. On the other, prospects of profit are attracting new investors from the most diverse sectors outside the automotive industry – such as tech companies, venture capital and private equity players, chemical industries, and battery producers. These players came to dominate investment in automotive, dwarfing the investment the OEMs could afford (Simonazzi et al., 2022, p. 13). Since EVs require fewer components, according to some estimates, the industry could shed 30 per cent of jobs, with more jobs lost and new skills demanded downstream in services and repairs. If battery production is considered, employment in the automotive sector is likely to be hit less hard than initially expected since BEV value chains are probably not significantly less labour-intensive than ICE ones. There is a shift in demand for labour and skills from metal and machinery workers towards researchers, engineers, and technicians with electrical, electrochemical, mechatronics, software, and industrial skills.

Traditional Tier-1 suppliers and their value chains are at the forefront of technology changes. While they find it challenging to incorporate the new skills, an ample supply chain segment connected with the internal combustion engine is expected to disappear. Producers of parts and components may also be called to bear the brunt of the monetary costs of the transition.

6. The End of NAFTA–A New Treaty, New Challenges

6.1. The USMCA

In 2020, after over a quarter of a century, NAFTA ended in an apocalyptic scenario of pandemics, trade wars, environmental destruction, social chaos, and disruption of the global value chains, all of which were worsened by the invasion of Ukraine by Russia. The main reasons given for the substitution of NAFTA with the USMCA were to address new challenges and changes in the economy and trade practices; to incentivise companies to keep jobs and production in the United States; to strengthen labour and environmental standards; protect intellectual property and digital trade and improve market access for U.S. agricultural products in Canada and Mexico. Differently from the historical moment in which NAFTA was ratified, when the security threat from the Cold War had receded, and the one from China was not yet present, the new global scenario in which the USMCA was ratified was characterised by geopolitical conflicts and turmoil in globalised markets and supply chains.

Officially, the United States requested new rules with expectations that a renewed treaty would promote the growth of domestic employment and real GDP and mitigate the risks associated with economic dependence on China. Implementing the USMCA was expected to provide businesses certainty and stability to invest in sustainable and resilient supply chains. Still, in the mind of its leading promoter, President Donald Trump, things were different: “NAFTA’s been very, very bad for our country. It’s been very, very bad for our companies and for our workers, and we’re going to make some very big changes, or we are going to get rid of NAFTA for once and for all. Cannot continue like this, believe me.”45 The new treaty negotiated by the U.S., Mexico, and Canada included stricter rules of origin and protection of intellectual property, together with improved consultation and dispute settlement procedures. However, most of all, the perception of higher risk from chronic supply chain disruptions and the need to ensure access to strategic resources led to managed trade instead of entirely free trade.

45 Daily News. https://www.nydailynews.com/news/politics/terrible-president-trump-nafta

At the outset of the new treaty, the U.S. International Trade Commission (USITC) expected that labour standards and rights would strengthen and promote higher wages and better labour conditions by improving labour standards. The USITC estimated that the treaty would increase the U.S. real GDP and employment and that workers of all levels of education were to see wage increases, with the most highly educated workers experiencing the most significant gains because of the currently tight labour market conditions for such workers. Also, the treaty would increase trade between USMCA partners and the world. The USITC also believed that labour obligation would have a significant effect if fully implemented and enforced, considering that Mexican wages were below productivity and that the economies of Mexico and the U.S. might not be at full capacity utilisation.

The Labour Chapter represents a significant departure from NAFTA, which addressed labour rights only in a side agreement. The Labour Value Content (LVC) rules require that 40 per cent of the total cost of passenger vehicles and 45 per cent of the costs of light trucks pay wages of at least US$16 per hour. Unlike in Mexico, in the United States and Canada, many plants in final assembly, engine, and transmission already pay the wage level required by the Treaty. Labour provisions are subject to the same dispute settlement mechanism as others in the agreement. It requires the parties to adopt and enforce the labour rights defined by the International Labour Organization. Another key provision of the labour chapter specifically applies obligations to Mexico: an annexe commits Mexico to recognise the right for workers to use collective bargaining. The annexe specifies, among other things, that this legislation must prohibit employer interference in union undertakings, provide for free union elections that occur using a secret ballot, and require that a majority of covered workers approve revisions to collective bargaining agreements.

The Mexican Congress approved a new Labour Law in 2020 to comply with these requirements. In addition to recognising the right for workers to use collective bargaining, it forbade labour outsourcing – a strategy companies use to reduce labour costs and avoid paying employee benefits–causing a political stir. The Law establishes rules that govern individual labour rights, collective rights (highlighting the free and secret vote of the members of union groups) and procedural reform, of which the intervention of the Judiciary stands out, before whom trials must be taken. This reform to the law arises from the requirements derived from compliance with Annexe 23-A of the labour chapter of the USMCA46. It guarantees gender equality, labour democracy, and the consolidation of various workers’ rights. The main changes regard outsourcing and agreement of termination by mutual consent; it prohibits deductions from wages except for the payment of trade union dues, and various obligations are imposed that must be implemented in the companies in agreement and in conjunction with the workers, such as a protocol to prevent discrimination based on gender and attention to cases of violence, harassment or sexual harassment, as well as to eradicate forced and child work.

46 ANNEX 23-A Worker Representation in Collective Bargaining in Mexico. “Pursuant paragraph 1 of Annex 23-A, Mexico is required to adopt and maintain the measures outlined in paragraph 2 of Annex 23-A, which are necessary for the effective recognition of the right to all aspects of collective bargaining, by enacting labour laws in accordance with such provisions and Mexico’s Constitution, to protect the enumerated rights of workers and prohibit activities aimed at interfering with any of such rights. This includes requiring legislation establishing an independent entity for conciliation and registration of unions and collective bargaining agreements, as well as independent Labour Courts for the adjudication of labour disputes.”

Another aspect of the USMCA is related to the view of China as a risk because it is a strategic competitor and a source on which the supply chains depend. Also, because of the fragility of global supply chains, given that business is often prioritised over efficiency and that just-in-time manufacturing and low inventories make supply chains vulnerable to disruption. These circumstances and job losses in manufacturing were the main drivers that led to the rules of origin (ROO) in the USMCA. Concerning the automotive sector, the ROO, representing more significant trade restrictions, were meant to increase employment. Still, they also lead to price rises of foreign auto parts, causing more parts to be produced in the United States and raising the costs of making motor vehicles. The new trade agreement requires more North American content (75 per cent vs. 62.5 per cent) of light vehicles. However, since parts are shipped back and forth across borders from Mexico to the U.S., it is not easy to know how many vehicles sold in the U.S. comply with the regional value content requirement (RVC) (Klier & Rubenstein, 2019).

There has been a surplus in the Mexican balance of transportation equipment as total exports and imports to and from Mexico grew after the 2008-2009 financial crisis when the Detroit Three were in deep financial distress. Two of them (GM, FCA) had to be rescued by the government through the TARP (Troubled Asset Rescue Program). At that time, US$700 billion were allocated to bailout banks and automakers, and the government took stakes in car companies and banks. While this happened, a shift in location strategies led to a surge in trade with Mexico. Total U.S. imports of transportation equipment from all over the world grew 88 per cent between 2002 and 2019; in this same period, imports from Mexico increased 251 per cent. Figure 6.1 shows the development of imports to the US from 2002 until 2019. The share of transportation equipment imported from Mexico within total imports worldwide grew from 17 to 32 per cent.

Figure 6.1. U.S. Imports of Transportation Equipment (NAICS 336)
A–Total imports from all over the world compared to imports from Mexico
B–Percentage of imports from Mexico over total imports
Millions of US dollars, CIF Import Value

A

B

Source: authors calculations based on data from www.census.gov

Compared with other countries, the growth of imports from Mexico has been outstanding: the compound average annual growth rate (CAGR) of Mexican-originated imports between 2002 and 2008 was 3.1 per cent. A surge in imports came with the recovery after the 2008 crisis: between 2009 and 2019, the compound average growth rate (CAGR) was 14 per cent; it went along with a considerable increase in FDI in Mexico. Imports from Mexico, France, Germany, Italy, United Kingdom, Japan, South Korea, and China together in 2019–US$304.2 billion–represented 73 per cent of all imports of transportation equipment to the U.S. Imports from Mexico were the highest among those from the main eight suppliers of the United States. In 2002, Mexico was second after Japan as a supplier of transportation equipment to the U.S.; in 2019, Japan went to second place with less than half (US$58,914 million) of imports of Mexican origin (US$129 million). There is a growing dependence on Mexican manufacturing in the automotive industry.

Figure 6.2. US Imports of Transportation Equipment (NAICS 336)
Total Imports from Several Countries Compared
Millions of dollars

Source: www.census.gov

Table 6.1. Countries of Origin of US Imports of Transportation Equipment
(NAICS 336)

Source: www.census.gov

The automotive trade between Mexico and the U.S. is considered critical for national security. According to the Brookings “USMCA Forward” 2023 report (Martin, 2023), the security threat from China has created a vulnerability for the U.S. due to the intersection between complex supply chains and national security. From this perspective, strengthening North American supply chains is a national security goal. Dispersed supply chains might be subject to disruptions that pose a potential security challenge. Though the three signatories of the USMCA have interests of their own, in the opinion of Bradley Martin–a Rand Corporation senior policy researcher–“there is a common interest in ensuring the availability of key materials and the resilience of supply chains” (Martin, 2023). However, a different point of view sees the introduction of USMCA as part of ex-president Donald Trump’s rhetoric “... revealing how behind the search for new trade rules and regional investment lie unresolved reactions to the loss of leadership in strategic industries such as auto manufacturing” (Covarrubias et al., 2019, p. 6).

Imposing tariffs and trade wars can disrupt global value chains and challenge free trade. Tariffs on intermediate inputs may ultimately be borne by upstream producers in the country imposing the tariff, thus affecting the competitiveness of domestic firms that must import them. Similarly, some producer-side benefits from trade protection enjoyed by local import-competing firms may be passed to foreign capital. However, if trade disputes are perceived as a symptom of an enduring geopolitical struggle for global economic dominance, they are likely to increase uncertainty. Global engaged firms’ strategic sourcing and foreign investment decisions require reasonably sure and long-term perspectives. By increasing uncertainty, trade disputes, even temporarily settled, are associated with greater volatility in equity markets, which may discourage investment (Simonazzi et al., 2020, p. 18).

Within the GVC production model, the costs and benefits of higher tariffs may extend well beyond the immediate ‘intentional’ targets to include countries and companies worldwide, including the very country that imposed the new protection at the outset. Given the complex calculation required by companies, which must respond to changes in the global economic landscape and the increasing uncertainty created by across-the-board trade disputes, there is good reason to believe that global firms may not respond as the importing country wants or expects.

The general goal of the USMCA is to increase the regional content of components of the vehicles produced in the region. To certify compliance with the USMCA requirements, the traceability of the products across the production processes along the entire supply chain becomes crucial47, making essential communication flows within the supply chain. That traceability is a critical issue, not only for compliance with the Treaty but also appears evident if one considers that the most significant transformation in the automotive industry has been the vertical disintegration of production, with the decentralisation of products in modules coordinated by Tier-1s. When entering the lean production model, firms must introduce many changes in the production lines (special vacuum cleaning of components and packaging, among others), and products must be fully certified for the assembler to use those components in its production line. These changes call for a general increase in the demand for devices and processes to secure effective traceability (Simonazzi et al., 2020, p. 21).

47 Traceability is the capacity to verify an item’s history, location or status using documented identification.

An essential step is represented by the digital twin of production processes48, which is expected to be the frontier of digital technologies. It is usually referred to as the digital version of the production process developed and enhanced for product and process planning. In the companies visited by the authors in 2018, it was observed that digital twin was used to obtain a digital representation of the ongoing production process, which the company could use for simulation and optimisation of its internal production organisation. Firms had added sensors along the many stages of their production processes to control operations and to have a digital representation of the analogic steps of the transformations (pressing, assembling, etc.); data could then be processed to optimise production flows, input consumption, labour utilisation, maintenance planning, and so on (Simonazzi et al., 2020, p. 21).

48 A digital twin is a dynamic and data-driven digital replica of a physical entity, which can be a product, a machine, a production line, or even an entire factory.

Adopting digital technologies to implement traceability effectively could start a sweeping transformation across the supply chain. It may represent efficient support to Tier-1s and Tier-2s in certifying their compliance with the Treaty’s requirements, achieving product quality control, and ensuring flexibility in the just-in-time programming of the flow of products.

Fulfilment of the requirements of the USMCA–in terms of the regional origin of components, level of wages, percentage of steel from the region, and so on – supports, or requires, the transformation of the technologies within the company. In this sense, product traceability is a driving channel to digital transformation. The question is whether Tier-2s and Tier-3s will be able to plan the transformation of their organisation to keep up with digital transformation. Companies that are unable to keep pace with traceability risk losing their customers. The managers of a Tier-1 company interviewed stated that they were ready to comply with the requirements (origin, labour, steel) in the short-medium term and, if needed, they would internalise the production processes that their Tier-2 and Tier-3 suppliers could not certify. However, once it has been reshored, production may not necessarily be outsourced again.

Digital technologies can also provide better quality control and a more fluid flow of information across the supply chain, improving the quality of the products and enhancing process and product innovation, as well as cost benefits passed on to their customers. Most innovation is grounded within the factories, on the shop floor. Suppliers producing better components, changing the component design, the material inputs, and the processes can obtain quality control of products, cost reductions, and product improvements.

Finally, digital technologies could provide the flexibility required to optimise the production process without relying solely on labour flexibility, which has been, so far, the primary source of adjustment (more shifts, work on Saturday and the weekend). Labour flexibility is no longer enough since the production organisation requires flexibility and control over all inputs to meet prompt delivery requirements and reduce costs. Cost reduction can come from better inventory management and better and more timely information, adjustment, and compliance with the daily or weekly changes their customers might require, improving customer services. Flexibility is mandated by the just-in-time, lean production organisation of the entire vertical chain, which must respond in real time to information provided by the dealers in the car markets. Within this scheme, the burden of adjustment is shifted down the value chain from the OEMs to Tier-1s and from these to their Tier-2 and Tier-3 suppliers.

The intensity and methods of application of digital technology differ not only between countries, sectors, and companies but also within companies. Digital transformation is local. In the interviews conducted by the authors, it was observed that smart factories presented different degrees of overall integration within the company and in the value chain. While foreign companies work with the latest technology, there is a significant number of small domestic, lower-tier producers that have difficulty in grasping the opportunities opened by the technology and equipping themselves with the required competencies and organisation, a problem common also in developed countries, as their governments are aware (Simonazzi et al., 2020, p. 22).

6.2. The Transition to New Mobility: the CASE Challenge.

The automotive industry is undergoing a radical transformation. The CO2 reduction targets established by the United Nations Climate Change Conference in Paris in 2015, the Green Policy of China in 2018, the EU Green Deal by the European Commission in 2019, and the new plans of the US Administration on Climate Change in 2021 were a fundamental impulse to the development of technologies that reduce the impact on the climate produced by the fossil fuels. Governments and private companies are committed to developing alternative pathways, such as hydrogen fuel cells, fully electric vehicles, and hybrid vehicles. These new technologies require the development of complementary technologies, including chemical compounds that improve the performance of batteries, electronic devices and software applications that improve the efficiency of energy consumption and engine performance, materials for the body and components of vehicles, and the design of vehicles. New agents and incumbents emerge, participating in diverse activities that do not belong to the traditional ones on which the automotive industry is based. If the control and power within the automotive supply chain have traditionally resided in I&D and design activities, the entrance of new players puts this governance status at risk. Technologies outside the automotive industry will likely impact companies and the whole industry the most. The assumption that the research activities within the company could produce everything that was needed and that everything that these research activities produced would be used in and by the industry is no longer valid. There is no specific and unique technology, but many technologies that intervene in the production process.

The transition towards the new electrified, autonomous, connected and shared mobility, as well as the environmental and geopolitical challenges, are bound to change the global structure of automotive production. A significant shift in the automotive industry – the accelerated rise of electric vehicles to cope with the increasingly stringent targets of CO2 emissions – runs against internal combustion engine vehicles, with all major car manufacturers announcing significant investments in electric vehicles. With the transition from the internal combustion engine (ICE) to the electric engine, the number of powertrain components could drop significantly, that is, the components that connect the engine to the wheels. The overall impact on trade of the transition from ICE to electric will affect the leading countries: in 2017, 56 per cent of the total export of Engines and Parts was generated by six countries: the United States, Germany, Japan, Mexico, Hungary, and China. Though the most significant part occurs within clusters, almost one-third of those exports go to countries in other clusters. This means that the transition risks disrupting a large part of transactions within each cluster, especially the ones headed by the U.S. and Germany (Russo et al., 2023, p. 112).

Increasing competition, digital disruptions, and new technologies related to connectivity, autonomy, sharing and electrification (CASE) threaten the established structure of the automotive industry and the countries’ comparative advantage in the macro-regions. Competition in saturated markets has forced OEMs to transform production processes to contain costs and better meet customer demands, increasing product variety and shortening production cycles. At the same time, the race to electric vehicles (EV) and autonomous vehicles (AV) demands vast investments, entailing significant risks. With electronics and software playing a major part in the vehicle’s value, the automotive industry is attracting new investors from outside the industry – such as tech companies, venture capital and private equity players. Leading manufacturers and automotive companies respond to the mounting risks by forming new strategic alliances.

The new technologies require skills that have yet to be among the core competencies of automotive engineering. Competition from new players, more adroit in the new technologies related to connectivity, autonomy, sharing, and electrification, threatened the established structure of the automotive industry. Traditionally, companies opted for mergers and acquisitions (M&As) to enter new markets, gain economies of scale or access new capabilities. Aware that the automotive industry, especially in the mass market, would have to restructure–concentrate in a few large groups, share knowledge, processes, costs, and risks, and take advantage of technological convergence–they engaged in M&As and horizontal alliances while structuring vertical networks with suppliers. Whether bringing together firms with complementary differences or pooling together firms with supplementary similarities, these new groups shaped the global automotive industry into distinct strategic blocks that became a basis for competition. With the disruption of the markets and the uncertainty resulting, there has been a shift towards cross-sector strategic alliances, mainly with technology companies, to access new technologies and acquire innovative technology start-ups (Simonazzi et al., 2020, p. 24). Tier-1 suppliers are also forging alliances with companies not traditionally engaged in the automotive industry since the decision on the technological solutions has been passed on to the component suppliers, who are at the forefront of technology changes.

Batteries are at the heart of the electric transition; East Asian companies dominate manufacturing. China invested in EVs in advance of traditional carmakers, and its battery makers have gained control over the critical strategic resources of the lithium-ion battery industry, structured the industry, and defined and controlled its competition rules. China’s production of motor vehicles, high domestic consumption, and its companies’ rapid learning processes and experience with other chains allow the country to start exporting automobiles on a large scale. With all major manufacturers rushing to launch BEV models, batteries have proved to be a significant bottleneck, and the technological path to be followed is still undetermined, whether it will be batteries, fuel cells or different, more ecological forms of fuels for traditional engines (Simonazzi et al., 2022, p.14).

Digitalisation and autonomous driving are the other frontiers of the automotive industry. The new digital technologies have lowered the previous high entry barriers that protected established ICE producers, allowing new entrants in the sector. Their international footprint differs fundamentally from that of other multinational enterprises: they can reach foreign markets with fewer assets and fewer employees abroad.

Competition between technologies creates an uncertain environment and opens a role for the State in fostering, regulating, and governing change. Since its May 2018 Strategic Action Plan for Batteries, the EU has stepped up efforts and financial support to encourage risk-taking and investment in research and innovation in the field, bringing together a set of measures to support national, regional, and industrial efforts to build a battery value chain in Europe, from raw materials to reuse and recycling, in derogation of the European state aid rules. The USA has joined in the game, combining regulation with incentives. While bestowing subsidies and incentives to attract new investments, Biden’s 1.2 trillion dollars Infrastructure Investment and Jobs Act, signed into law on 15 November 2021, introduced the country’s first national Local Content Requirements (LCRs) policy for renewables, essentially barring access to federal infrastructure financing unless the project uses US-produced materials The parallel Investment and Jobs Act, which passed the House in November 2021, provides that, by 2030, 50 per cent of the new vehicles sold in the USA must be EV or hybrid plug-in. It also offers US$7,500 tax credits for EVs made in the USA and US$4,500 for cars made with union labour.

Employment is critical in the auto industry’s transformation: electronics and software define a completely new product, requiring new components and skills that have yet to be among the core competencies of automotive engineering. Thus, advances in electrification and automation may bring changes in the quality and location of jobs gained and lost that go well beyond the automotive sector. The shift in demand in traditional markets and the need to invest in new markets, products, and technologies has put OEMs under severe pressure to gain flexibility and cut costs. Since the new products require less engineering, more software, and different refuel and mobility infrastructures, the burden of cutting costs has fallen on suppliers and labour. Since EVs require fewer components, parts producers for traditional engines risk being cast out. The industry could shed 30 per cent of jobs. Even if employment in the automotive sector is not impacted as hard as it seems, there will be a shift in the demand for labour and skills away from metal and machinery workers towards researchers, engineers, and technicians with electrical, electrochemical, mechatronics, software, and industrial skills.

7. The Automotive Industry in Mexico, a Success Story?

7.1. The Impact of Integration

Creating an independent Mexican automotive industry has been desired in Mexico since the middle of the 20th century. Diverse paths have been tried to achieve this goal. Prohibition to import finished vehicles, minimum local content, and prohibition of foreign ownership were among the measures implemented by the government to protect an infant industry, as have many latecomer countries pursuing similar objectives. A few of them, including Japan and South Korea, succeeded, but many failed. Despite being one of the leading world producers of motor vehicles, Mexico lacks a “national champion”49 that could set an independent path and successfully compete with foreign carmakers. In their epochal work “The Machine that Changed the World”, (1990, Ch. 10) Womack and co-authors considered the difficulties Mexico met compared with South Korea’s different outcomes. After abandoning the import substitution policy, Mexico’s industrial policy has been geared towards maintaining those elements of comparative advantage –low labour costs and tamed industrial relations – deemed necessary to attract foreign investment and companies that produce cars in the country. However, at the same time, it prevented the development of a domestic market. It subjected the decisions on what, how, and where to produce in the interests of foreign-owned companies. The integration of the North American market has been developed within a hierarchically ordered industry to suit the interests of the U.S. OEMs rather than the development needs of Mexico.

49 There were approximately 600 T1 and 900 T2 and T3 producers in Mexico in 2019; however, of about 90 of the top 100 global suppliers of parts and components with plants in the country, only one was a Mexican company (most of the ten remaining T1s with no plants in Mexico were Chinese companies) (INA–Industria Nacional de Autopartes 2019).

Mexico represents a significant case study for analysing the impact of trade agreements and digital transformation on the location policies of big multinationals in an integrated periphery and their effects on the domestic value chain. The development of its automotive industry has been heavily dependent on FDI. The dependency of the Mexican automotive industry on the strategic decisions of global players is considered a factor of great vulnerability, especially in a context of rapid change in consumption patterns, technologies, and geopolitical turmoil provoked, in the first instance, by the trade wars. Despite the efforts made by the Mexican government to incorporate domestic companies, the industry’s foreign-owned, technologically advanced part has been in great measure insulated from the rest of the domestic value chain.

Would a different policy have made a difference? China’s recent experience highlights the difficulty for a latecomer country to enter a mature oligopoly: the Chinese government has exercised tight control over its potentially huge market, limiting imports and FDI, banning exclusive foreign control by imposing joint ventures with local companies to promote their technological upgrade, and fostering competition between producers (foreign and domestic) to avoid being colonised, as befell Mexico, Brazil, and Argentina. China has jumped top of the world producers list ￼ in a few years. Still, the government’s target of developing a domestic industry capable of consolidating around a few ‘national champions’ has found it challenging to succeed. An industry dominated by foreign brands emerged, producing conventional high-end vehicles, but it has seen high trade barriers for its exports worldwide (Smitka & Warrian, 2016). However, this is rapidly changing with its recent mass production of EVs heavily subsidised by the state. Paba (2021) argues that the joint venture policy hindered the creation of national champions: exploiting the clout that brands still command, especially in the premium class, foreign producers could retain control of most of the massive increase in domestic production and sales of traditional, internal combustion engines – ICE-cars.

Sales in China are now an essential part of the overall OEMs’ production: in 2019, VW’s output in China accounted for 38 per cent of its global production; GM’s share was 45 per cent, with similar values for Honda. The policy of China differs not only from that followed by Japan and South Korea, which bought foreign technology and developed their brands, but also from that of Mexico: a vast domestic market, which allures and locks in foreign producers, and a government policy determined to orient, and subsidise, the development of an innovative industry. China has invested heavily and well in e-vehicles in advance of traditional carmakers. However, after an initial phase of inertia, the OEMs have moved quickly, investing massively in the “new car” and entering into joint ventures with Chinese start-ups to reverse-engineer the new technologies back in their production sites (Russo et al., 2021).

For more than twenty years, after it entered the WTO in 2001, China outcompeted Mexico in the United States market and began to compete with the United States in the Mexican market50. However, the situation is changing rapidly, with Mexican exports to the United States surpassing China’s. Firms from this last country are investing heavily in production facilities in Mexico to produce mainly electric vehicles. This constitutes a double-edged sword that, on the one hand, can trigger a rapid development of the production of electric cars. At the same time, it constitutes a threat to US firms that can provoke a protectionist reaction on the part of the United States and call into question the renewal of the USMCA, whose ratification must be discussed, according to its Sunset Clause51, in 2026. Competition by Chinese companies in the Mexican automotive sector has remained relatively limited, and their expected massive investments in Mexico have yet to materialise. However, China’s explosive production of motor vehicles, its high domestic consumption, and the Chinese companies’ rapid learning processes and experience with other chains (such as the electronics and yarn-textile-garment chains) suggest that the country can export automobiles on a large scale.

50 China’s share of total United States imports expanded from 12% to 42.1% in 2000-2010, and Mexico’s fell from 13.22% to 6.51%.

51 Article 34.7: Review and Term Extension. 2. On the sixth anniversary of the entry into force of this Agreement, the Commission shall meet to conduct a “joint review” of the operation of this Agreement, review any recommendations for action submitted by a Party, and decide on any appropriate actions… 4. If, as part of a six-year review, a Party does not confirm its wish to extend the term of this Agreement for another 16-year period, the Commission shall meet to conduct a joint review every year for the remainder of the term of this Agreement. Office of the United States Trade Representative (USTR) https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/34_Final_Provisions. pdf

In North America, the rise of Mexico is reflected in the decline of Canada, which is gradually losing ground in exports to the United States (Russo et al., 2021). This situation may change if, despite the promises of large flows of foreign investment, it does not develop the advanced technology that the new electric, autonomous vehicles and their components require and production moves to countries that have superior technological capabilities and a workforce with a higher degree of qualification, as is the case in Canada. The changing fortunes of the two countries raise the question of the implications that opening an economy to a free trade agreement has on the localisation strategy of firms and, ultimately, on the prospects of the industries of countries at different stages of development. This issue has recently been investigated in relation to the European automotive sector within the theoretical framework of core-periphery relations. The concept has a long tradition. In the current discussion, a preeminent role is assigned to the presence of “national champions”. Integrated peripheries reflect the rise of the global industry, with centrally developed platforms which use a standard set of materials and components worldwide (Smitka & Warrian, 2016). Mexico responds to most of the characteristics of integrated peripheries, as identified by Pavlínek (2018).

In the first place, Mexico has a small domestic market mainly due to the inability of the economy to reduce unequal income distribution. Measured in constant 2015 U.S. dollars, in 1993, U.S. GDP per capita was US$40,108 while Mexico’s was US$7,951. 2019 U.S. GDP per capita was US$60,698, while Mexico’s was US$9,756. In 25 years, per capita GDP in the U.S. grew at an average compound rate of 1.6 per cent, while in Mexico, the growth was 0.9 per cent. GDP per capita in both have diverged instead of converging, and poverty in Mexico maintains high levels. Some have explained the persistence of such problems as “market failures”, asymmetric information and lack of coordination among agents that lead to low growth traps, but such argument implies that the lack of growth and the small size of the market are “anomalies” that could be corrected with the appropriate state interventions and not a normal condition of dependent economies. If Mexico has not been able to grow at the needed rate, as it is argued, it is due to incomplete liberalisation of the economy and further structural changes are required. The “neoliberal” ideas that prevailed during the entire NAFTA period led to an almost complete absence of an industrial policy other than attracting new foreign investment, at least as far as the automotive industry is concerned. These theses share the notion that the primary job to be done to achieve higher growth rates is to increase factor productivity. However, some authors (Ros, 2013) have proved that the market reforms implemented–commercial openness, financial liberalisation, and privatisation of state-owned companies–have not been able to increase the economic growth potential of the economy.

In the second place, the similarity of Mexico’s characteristics to those of the integrated peripheries concerning the export-oriented assembly of inexpensive mass-market models and components has changed in recent times as MNCs operating in Mexico have gradually abandoned the production of this type of vehicles, substituting them for light trucks and premium cars with high value-added and more expensive features. It is undoubtedly true that most OEMs and Tier-1 producers are foreign-owned and controlled by their headquarters in core countries. Low labour costs prevail, with scant strategic functions and weak activation of domestic suppliers.

A high degree of foreign control of the automotive industry by core-based multinational companies (MNCs) is a feature also shared by semi-peripheries. Following Mordue and Sweeney’s (2020) definition, unlike the integrated peripheries, semi-peripheral automotive countries are home to a well-educated, relatively high-cost workforce and the headquarters location of some large automotive parts suppliers. However, they lack many regional assets endogenous to the core, such as a domestically headquartered automaker and the clustering of R&D and managerial functions, with substantial implications for strategic decision-making and technological, know-how, and managerial dependency. Semi-peripheries also tend to retain considerable (but declining) automotive production levels but still need to attract significant mandates for automotive R&D. Their competitive advantage has diminished with the globalisation of the industry throughout the 21st century.

This classification, helpful in offering a fresco of the regional recompositing of production, structured in relations of integration and dependence, should not obscure the differences between peripheries and core companies’ responses. Our reconstruction of the developments in the Mexican automotive industry has highlighted how differences in the strategies of firms and governments at the core affect their future development and the quality of relations with their integrated peripheries. The Japanese threat in the 1970s and 1980s made the US auto industry panic and triggered the U.S. government’s response. Relocation in the Southern non-unionised states in the U.S. and sourcing from Mexico were among the industry’s responses. Covarrubias and Perez (2020) noted that “following four decades of penetration of the American market with the double strategy of importing and producing at home, European and Asian manufacturers were able to dominate the market. As such, the United States auto producers became the only component of the TRIADs to lose control of their home market to auto manufacturers from other continents”. The Detroit Three’s share of U.S. production declined from 87 per cent in 1990 to 78 per cent by 2000 and 52 per cent by 2017; the first three Japanese companies, plus Hyundai, accounted for 40.5 per cent in the same year. Of the 43 assembly plants active in 2018 in the U.S., 26 belonged to the Detroit Three, 13 to Asian companies (four each to Honda and Toyota, two each to Nissan and Hyundai, and one to Subaru); BMW, VW, Daimler, and Tesla had one plant each (Klier & Rubenstein, 2020). The five legacy producers kept control over production in Mexico: in 2015, they accounted for 85.7 per cent of total vehicle production, the Detroit Three accounted for less than half (48 per cent), with Nissan and VW 24.5 per cent and 13.2 per cent, respectively.

7.2. The Road Ahead

The automotive industry is facing the transition to the production of electric vehicles and autonomous driving, automation, robotics, and digitalisation, as well as new forms of car ownership and mobility. All these changes can reshape existing industrial geographies, affecting the relative advantage of integrated peripheries versus semi-peripheries and of different regions within and between cores as leading companies adopt new digital technologies and alter their component supply chains and sourcing practices. Competition is no longer between the traditional players but extends beyond the automotive sector to include batteries, software, connection, and mobility. The rise of new competitors from emerging economies and would-be entrants from other sectors, which compete to master the latest digital and software technologies, threatens the industry’s established structure and the countries’ comparative advantage.

Although the precise effects are unknown, this transformation will occur at different speeds in the core, semi-periphery, and periphery. An ample supply chain segment connected with the internal combustion engine is expected to disappear. The challenge for Mexican companies is integrating into the new supply chains and participating in the co-engineering of the manufacturing process52, adapting models to different markets, and being involved in designing and developing new, more efficient parts and components.

52 Volkswagen, for example, in 2009, invested in designing a vehicle for the North American market. It was the first time Mexican engineers had participated in the technical design of the New Jetta at Puebla, and in 2013 opened a new plant at Silao, Guanajuato, to produce engines. The new models were built following the MQB platform (Modularen Querbaukasten or Modular Transverse Matrix), which allows Volkswagen to assemble a wide range of models on a common engine-mounting core for all different power trains (Volkswagen de México 2014).

There are several obstacles along the way. First, U.S. policy: legislation that encourages re-shoring and regulations interpreting the USMCA’s car and truck content requirements could limit Mexico’s future access to the U.S. market, mitigating the potential benefits of nearshoring productive investments from Asia. The Mexican governments have invested considerable resources in developing domestic production and competence networks. The automotive suppliers in Mexico are now organised around a national network of clusters (Red Nacional de Clusters de la Industria Automotriz). There are nine regional organisations–Clusters–whose mission is to facilitate the collaboration between industry, government, and research institutions to boost the competitiveness of the regional automotive sector. Governments and companies have put considerable effort and money into forming and training qualified engineers, technicians, and workers to fill the technical talent shortage – in engineering, advanced software, materials, and manufacturing – still plaguing the industry. The numerous signs of regional vitality and the recent surge in FDI in Mexico, besides the degree of integration reached by the Mexican and U.S. industries, may justify some optimism for the future of the Mexican automotive sector in the electric vehicles era. However, the transformations required in its supply chain may be very costly.

The automotive industry is undergoing a radical transformation. The transition to electric and digital vehicles and environmental and geopolitical challenges are bound to change the global structure of automotive production. The pandemic first, Russia’s war with Ukraine and the ensuing Western sanctions, and the trade rivalry between China and the U.S. have disrupted nearly every aspect of the global supply chains, as the lack of even a single component may be enough to halt production. Actual or anticipated shortages have led to reconsidering the need to shorten value chains, diversify supplies and identify those components that need to be re-shored to prevent dependence on overseas sources for critical parts. Moreover, with the new world of mobility and electrification accelerated by climate change, a whole segment of the value chain producing parts and components for the internal combustion engine will have to restructure or downsize. Batteries, chips, and their inputs are at the forefront of the OEMs’ worries. Many dimensions impact the international trade network: skills, wages, regulations, innovation ecosystems, and absorptive capacity shape the structure of the supply of automotive components and parts, which also depends on other production specialisations in the country, the location of domestic and foreign car makers’ plants in the country, the role assigned by carmakers to supply from that country concerning their global supply chains. Countries’ centrality in international trade depends on those dimensions. In addition to these dimensions, one must consider that the trade network is only one of the various interrelated networks that should be considered for a complete understanding of the trade pattern: networks of technologies, competencies and organisations, regional trade agreements and preferential trade arrangements are intertwined with the trade flows operated by MNCs (car manufacturers and Tier-1 suppliers), which in turn affect countries’ trading. The competencies of incumbents are no longer sufficient to master digital innovation. Since R&D in the new software and digital technologies are primarily developed in regions other than those dominated by OEMs, even the automotive industry’s old core, which based its supremacy on engineering excellence, risks losing ground. If the car follows the destiny of the computer, where the value is increasingly in the software, a redistribution of profits across sectors is very likely.

The transition towards electrified, autonomous and connected vehicles requires large investments, not only in the technology necessary for their production but also in charging and connectivity infrastructure. Despite the important incentives offered by the governments of industrialised countries, demand still shows no signs of taking off to the levels that were predicted a few years ago. On the other hand, difficulties in the supply of critical materials have prevented, despite subsidies and incentives, the prices of these vehicles from falling to affordable levels in the markets of the central countries, much less in those of the peripheral countries. On the other hand, the growing danger represented by the intensification of international tensions and conflicts, which will most likely continue to constitute a threat in the coming years, will put many countries in the dilemma of dedicating resources to the transition towards electrification or to divert these resources towards the production of weapons.

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