A Strategically Vital Industry
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Volkswagen is not only the most audacious, most creative corporate fraudster of 2015 (though there are still three months of the year to go and competition is, as ever, fierce); it is also the newest entrant of the world’s elite club of too-big-to-fail corporations, as the German government itself admitted. But it is not just too big to fail in Germany, where its stock has suffered its worst week in history, losing 34% of its value; it is too big to fail in Mexico, too.
And just like any TBTF entity worth its salt, it will soon be getting a taxpayer-funded bailout from the Mexican government, albeit a tiny, token one.
A Strategically Vital Industry
The car industry is essential to the health of Mexico’s economy. In the last two years the country has overtaken global competitors like Japan, Brazil and Canada to become the biggest supplier of the world’s second biggest automotive market, the U.S, accounting for 18% of total production in 2014.
With wages in the $8 an hour range (compared with close to $40 an hour in Canada), a surplus of skilled mechanics and engineers, and easy shipping routes to the U.S. and Canada, Mexico is a perfect production center for the world’s biggest car companies. The fact that it’s a signatory of NAFTA as well as 44 other free trade agreements is an added bonus.
In 2014 the country’s light vehicle production climbed to 3.2 million vehicles. According to the Center for Automotive Research, global automakers poured $7 billion of new investment into the country. They include Chrysler, Ford, General Motors, Mazda, BMW and, of course, the self-confessed partners in auto-cyber crime, Volkswagen and Audi, whose Mexican operations are based in the central state of Puebla.
Although VW’s Mexico installations are not implicated in its more nefarious practices – the “defeat device” that deceived US consumers and regulators for years was allegedly designed and built in Germany – the carmaker’s travails are almost certain to heap even further pressure on the country’s economy.
When Volkswagen struggles, so does the state of Puebla. The huge manufacturing plant built on the city’s outskirts 50 years ago provides roughly a quarter of local GDP. Its supply chain consists of 150 companies, generating 78,000 jobs – most of them secure and highly paid, at least in local terms. What’s more, Volkswagen recently built a huge new state-of-the-art plant for its Audi subsidiary in San José Chiapa, Puebla.
In the words of my mother-in-law, a born and bred Poblana, there is not a single family in Puebla that does not have some level of exposure to the VW plant.
The total estimated value of VW’s annual production in Puebla is around 90 billion pesos ($5.4 billion). A few months ago the German company even announced an additional $1 billion capital injection in its Puebla plant. But then this week, the metaphorical excrement hit the extractor fan.
Of the 324,000 vehicles VW manufactured in Puebla up to August 2015, almost half were exported to the U.S. They include the three TDI diesel models (Beetle, Jetta and Golf) that were discovered to contain code – the “defeat device” – that shut down the emission control system during regular driving, but turned it back on as soon as the car was plugged into an emissions testing machine. As BBC World reports (in Spanish), the average number of units exported to the U.S. is 115 per day.
And now those models are no longer going to be sold – at least not in their current form. As a matter of fact, it’s no telling how many (or how few) VW cars will be sold in the US in the wake of this gargantuan scandal. For Mexico, and Puebla in particular, that could be very bad news indeed.
“The sudden slide in sales of VW in the U.S. will be immediately reflected in lower production in Puebla’s plant,” wrote the director of the local daily Cambio de Puebla.
“We could expect a slowdown in production and maybe some layoffs next year,” warned the Director of International Business at the Monterrey Institute of Technology, Manuel Valencia.
A Tiny, Token Bailout
Naturally, fear and panic is beginning to spread in government circles. After all, good, well-paid jobs are on the line, and jobs mean votes. What’s more, Mexico’s fiscally challenged economy is already beginning to splutter and stall. The country’s exports fell 6.8% in August, the second consecutive month of declines. For the first time in three years, Mexico’s automotive exports shrank, by 3.2%.
“It goes without saying that there will be a reduction in (Volkswagen) vehicle demand in the U.S. and in other markets,” said the state governor of Puebla Rafael Moreno Valle. “That’s going to have an impact on the state’s GDP.”
To try to soften the blow, Moreno Valle has offered Volkswagen a tiny, token lifeline. The state of Mexico will buy 200 cars straight off the production line, which will be used as police patrol cars, he said. “We already have an agreement in place to buy new patrol cars and what better way to safeguard local jobs?”
The problem is that given the scale of VW’s U.S. business — last year alone it sold 366,970 units there — 200 cars are unlikely to make much of a dent in the company’s coming shortfall, or by extension save much in the way of local jobs. Perhaps if the scheme was extended to other Mexican states, in particular those on the frontline of the government’s misconceived, ill-fated war against organized crime, it might make more of a difference to the German car manufacturer’s income statement. Not only that, it could even help improve the chances of the country’s cash-starved police catching the much better equipped bad guys. Just don’t mention the emissions. By Don Quijones, Raging Bull-Shit.
When the government pushed a historic energy reform bill through the Mexican congress in 2013, it was hoped that it would serve not only to privatize but also modernize Mexico’s state-owned oil company Pemex so that it could compete with giants like Exxon. But it’s not working out that way. Read… Brilliantly Timed Oil Reforms Push Mexico into Fiscal Meltdown
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The auto industry is a dead duck, a dinosaur of a duck, too dumb- and inertia-bound to understand it’s dead.
Driving cars is non-remunerative, what pays in the place of return is hundreds of trillion$ of dollars in debt. Of course, driving does not retire the debt, either.
So … what is it we wish to do? Build and drive more cars.
Besides ruining us, driving has also reduced the world’s fuel supply by half. Those who do not understand this are either liars (Volkswagen) or in the media business. What has been gained in return for half the world’s fuel supply?
Right … absolutely nothing. We’re bankrupt, as rendered kaput by the car business, we will both go down together.
Not to mention, the advent of cars and the abandonment of mass transit (namely trains) in N. America has led to 50 years of urban sprawl — horrible pollution, gridlock traffic, expensive and wasteful living.
In the long term it doesn’t mater anyway. Within 10 years of the introduction of self-driving cars the auto industry will have drastically changed. Who needs to own a car when all you have to is call an automated taxi to take you anywhere you want? This will virtually eliminate the need for anyone to own a car within a metropolitan area and will be the equivalent of owning a horse today–an extravagant luxury for the rich. This will gut all car manufactures since 90% of all cars built will be for automated taxi services who will be more interested in durability than style (the repair industry will take a big hit, too).
Think it can’t happen? Neither did Kodak with the initial introduction of the digital camera, but Kodak is all but dead and digital cameras have taken over the world. Same thing happened with the buggy when the car was introduced, and the cruse liner business died with the advent of international airlines (and who owns a typewriter today?).
This always happens with the introduction of new technologies that replace the old. We’ll adapt as always, but I wouldn’t want to be investing in car companies, at least in the long term.
Note the qualifier: ‘within ten years of the introduction of self-driving cars…’
No mention of when they’ll be introduced.
One of the most experienced MIT experts in self- driving technology says we won’t see it our life times. He says he tells his young students that too. ( he has an odd name but he’s not hard to find)
Where it is introduced it will resemble a bus service, travelling a dedicated route. probably with beacons and guides built into the street, i.e., on virtual rails. One of its biggest problems, human- driven cars, will possibly be barred from its route.
I find it amazing that people think this is just around the corner. My God, go to a busy parking lot and imagine the automaton dealing with that!
They (when they come) will in all likelihood have to park in a large designated zone- again like a bus.
Existing test units don’t even try to operate in heavy rain or snow.
People see video of robots welding car frames and they think cars are built by robots. Actually the frame welding is the ONLY thing they do. The assembly of the components is done by human hand and although there will be nibbles here and there, a mainly robotic assembly is not within the forseeable future. Just the same with a machine that can cook your breakfast.
Go to the fridge, open the door, find the eggs, open the container, find the pan,
F%ck you broke another one!
There are just as many decisions to be made by a truly self- driving car.
And if in future you and a million others ARE flying along at 100 K, what happens if the GPS goes down? Or is brought down?
But the oddest thing about this post- he apparently thinks that if we all have these self- driving taxis, i.e. CARS at our disposal, we won’t need cars.
Well, the likes of Google, Apple, Tesla would say that guy is horribly wrong. The networks are being built today that will power the automated future, and its approaching fast.
I disagree with you. Will cars be self driving, yes. Will everyone want to share their car, no. If one can afford a car, they will buy it. The sharing economy is for those who are on travel or cannot afford their own ride.
Automatic cars in the distant future? As mike earussi above mentioned, Kodak wasn’t concerned about digital cameras when they first appeared – and they were the first to be offered the new technology. So have a look at
These pods – slow and careful – driving along public roads and mixing with cars and pedestrians. Not in 20 or 30 years time, but now. And they are just the first. Remember how crappy the first digital cameras were?
Kodak is no more, eat your heart out VW, GM, Ford etc. etc. Only the nimble survive.
Well, a car-parts plant can make car parts no matter whose name is on the sign, no? The automotive industry may be Too Big To Fail (in ecological terms, it’s also Too Expensive To Succeed in its present form, but that’s another topic) but Volkswagen/Audi is just a formal layer of ownership tacked onto the side of that industry. I’m sure ways could be found. People who industrialize the commission of fraud are maybe not people we want running around loose.
I love my 2015 Golf TSI (gasoline). Other than a GTI, it is the only VW gas model I could get with a manual trans. 0-60 in 6.8 secs, and gets 34 mph combined (much better than advertised). I paid $19,200, including tax and tags, which is ten grand less than the GTI (0-60 in 5.8 secs). The 2015 TSI cost less money than I paid for my 1999 Turbo Beetle, 16 years ago, and the TSI feels like 5 times the car. NAFTA definitely took US factory jobs, but it sure kept car prices from inflating.
I rented 2014 Audi A3 1.8 TSI manual in Budapest Hungary last year for 3 days and I really enjoyed it as it was perfect combination of sweet TSI with manual. Felt lot faster than I thought easily reaching 75 MPH on express and downshift to 5th gear to pass was breeze. Felt like I was in a sports car!
Too bad it’s getting to be very hard to find manual transmissions in US as only manual in Audi US line is A4 and they’re very hard to find. 3 of 4 cars I rented in EU last year were manuals.
This whole emission scandal is proving very effective at masking the true deadly sins of the car industry, which include massive overcapacity, overreliance on financial suppression and dubious lending practices, overdependence on some markets (chiefly China) to provide profits, predatory practices on their contractors and a business model built around ever increasing volumes which may prove extremely hard to maintain short term, let alone over the next decade.
Take the Puebla factory. It’s one VAG’s historical sites outside of Germany: it started manufacturing the Sedàn (known in Germany as Kaefer and elsewhere as the Beetle) in 1967 for the Mexican market. In 1978, after increasing its capacity, it started manufacturing Sedàn for the European market.
In 1988 a further round of expansion saw assembly lines in Puebla starting churning out Golf/Rabbit for the US market. Six years later Puebla started manufacturing cars for the Brazilian and Argentinian markets.
By 2000 Puebla was already manufacturing more than 400000 cars a year to supply both the Mexican and other American markets, including the US.
In 2013 VAG unveiled another Mexican factory (in Guanajuato) which builds powerplants both for Puebla and the Chattanooga factory in the US.
If one looks at VAG alone, he may be struck by the fact the group has closed very few assembly plants over its history, with the exception of one (the Lagos works in Nigeria) all parts of joint-ventures, such as the one with Toyota at Tahara (Japan).
This means VAG has expected nothing more of ever expanding sales for all its history.
But if one takes away the two-tricks pony of the past two decades (China and cheap and easy auto loans in the US and Europe), sales would have stagnated if not declined even for the mighty VAG and Toyota.
It seems fate has intervened in taking away the punch bowl in China which is seeing car sales decline for the first time since the Dotcom Burst.
And honestly I don’t know how long sales in the US and Europe can be maintained at present levels: the tricks employed in the last year reek of pure desperation, such as approving financing for temporary workers with just a two month contract.
There’s also the question of unsold stock, which is piling up more rapidly than anybody would like: in July Chinese dealerships were sitting on a fantastic 150 days of stock and unless factories are idled fast they will soon reach the even more fantastic figure of 200 days. Of course large discounts to clear these stocks are completely out of question: price deflation may be good for peasants but not for corporate profits.
thanks for that interesting comment.
Will this result in car prices being driven lower, do you expect?
It amazes me that no body gets it that the future of transportation is mass transit!
With population growth in 50 years self driving electric cars will feel like bumper cars at the fair!
Mass transit in this country is a sham. The cities and towns were built around cars and cheap gas.