The Mexican automobile industry is one of the important sectors contributing to the economic growth of the country. The industrial boom in Mexico started in 1994 after the North American Free Trade Agreement (NAFTA) between Mexico, USA, and Canada. During the presidential election, Trump criticized the NAFTA agreement, threatening to cancel it when he assumes office. Even before Trump started his official administration, he has successfully forced Ford to scrap its plan to build a $1.6 billion car plant in San Luis Potosi, Central Mexico.
In the San Luis Potosi, at least 70% of the industry is dependent on the auto sector. The decision by Ford will have a huge impact on the entire community. It could result in loss of hundreds of millions of dollars to the economy. The city anticipated an increase in manufacturing and contracting jobs. Many economic experts are still unsure about the negative impact of the decision by Ford.
Ford initially planned to start its car manufacturing plant in Mexico to build small cars with reduced labor costs while manufacturing expensive vehicles in the USA. Even before the election, Trump had been bashing Ford for its decision to take away jobs from the USA. He said that he will be imposing border tax on cars manufactured in Mexico and sold in the USA. Ford in its statement on exiting Mexico mentioned that the plan is canceled due to a decline in the demand for small cars in North America.
The Ford factory site at San Luis Potosi looks like a graveyard with white skeletal buildings left uncared. Numerous suppliers who were part of the supply chain had also invested heavily in the city to participate in the auto sector boom. A few other major automobile players are also in the middle of billion dollar investments. General Motors is now targeted by Trump for taking the investment to Mexico. BMW is working on building a $1 billion plant and Goodyear Tire and Rubber Co is already erecting a tire facility worth $550 million. The exit decision by Ford raises questions about the future plans of other automakers. In reality, if they wish to cancel their plans, they can do it without any problem and this can put a tremendous pressure on the Mexican economy. Mexico’s auto sector has made 3.22 million autos last year until November and 77% of it was exported to the USA.
Following the news of Ford’s cancellation, Kansas City Southern shares fell by 3.3%. About 40-5 foreign-owned suppliers were ready to provide supplies to the San Luis Potosi plant. Many government and private projects have commenced to improve airport and bus line, anticipating the growth. San Luis Potosi was expected to create 15,000 to 17,000 direct jobs in 2017, excluding the additional jobs that were supposed to be created by Ford factory. As a part of the contract with the Ford, the government had already paid Ford a part of 1 billion pesos. Ford has agreed to reimburse the amount.