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Why Mexico Is More Attractive For Producing Passenger Cars Than Detroit
Detroit automakers are comfortable producing high-selling SUVs in North America but not small passenger cars


Within the next four to five years, there will hardly be any passenger car produced in Detroit. This is what has been agreed by United Auto Workers , Ford Motor Company and Fiat Chrysler Automobiles NVin recent negotiations. The only company to make small cars in Detroit by 2019 will be General Motors Company .

This shift in mass-market production comes as automakers try their best to avoid wage hikes that have compelled them to shift their passenger car production to Mexico. In return, Ford and Fiat Chrysler have agreed with the UAW to abolish a two-tier pay scheme that will support additional jobs for autoworkers. However, the auto companies will continue to manufacture large trucks and sport utility vehicles (SUVs) that are in high demand, thanks to low gasoline prices.

With Detroit automakers clutching at every opportunity to save their dropping margins, the production of SUVs in North America will keep profits per vehicle high, while small cars will be manufactured cheaply in the South. Even last month’s auto sales reached their year-high level boosted by high sales incentives and high auto leasing, rather than organic growth.

According to Autodata, US auto sales in October exceeded 18 million, but spending at auto dealers declined, according to last week’s report by the Commerce Department. This means automakers are keen to boost sales even at low margins, which will further hurt if small car production continues at home.

Last year, the average labor rates in Mexico were $5.50 an hour, nearly one-fifth of US auto workers' rates, as reported by Reuters, citing the Center for Automotive Research (CAR). Over the same concerns, General Motors decided to move its Buick brand production from the US to China. The largest North American automaker also has plans to lay off workers at its Orion plant and eventually reduce the local production of the Buick Verano.

On the other hand, the Blue Oval is planning to shutter production of four passenger car brands, namely Focus, Fusion, C-Max and Taurus. According to Automotive News, the automaker is moving out production of the Focus and C-Max from the Michigan Assembly Plant to make space for its Bronco SUV and Ranger pickup truck. The move is expected to be completed by 2018.

Similarly, Fiat Chrysler is planning to produce the Chrysler 200 and Dodge Dart in Mexico after 2016 and halt the production of Dodge Viper in 2017. In an interview to Automotive News, Sergio Marchionne, CEO of Fiat Chrysler said that it was better to move production of “all the cars that we get killed to somewhere else,” and continue truck production at UAW plants.

As the demand for large trucks and SUVs is high in the US, the production of these vehicles will continue to be favorable in North America. But that will last as long as gasoline prices are low. On the other hand, a strong reaction over job migration to Mexico can come from the government, as the Obama administration depends on GM and Fiat Chrysler to recover from the financial crisis and boost local auto jobs. Republican presidential candidate Donald Trump is already known for being a strong critic of automakers shifting jobs to Mexico.

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