Brazil’s rule as Latin America’s auto king is coming to an end as Mexico positions itself for a dramatic increase in factory output over the next 10 years. Brazil has enjoyed its decade at the top of the auto industry in Latin America but is currently experiencing a slump in domestic consumer demand. A simultaneous boom in U.S. demand — the primary export market for the Mexican auto industry — has paved the way for Mexico to speed past Brazil in auto production.

Brazilian-made cars are typically not shipped abroad due to high labor costs and taxes, meaning that the South American giant’s auto market is driven mostly by domestic buyers. Output in Brazilian auto factories has fallen 17 percent this year already, and light-vehicle exports have fallen 52 percent since June 2013. Brazil‘s exports to its top trading partner Argentina plummeted nearly 30 percent in May, according to Anfavea, Brazil’s automaker association. Additionally, a weakened economy and tight credit are dissuading Brazilians from purchasing new vehicles.

On the other hand, Mexico’s promising growth in the auto sector is due in large part to its proximity to the United States. New and prospective plants in Mexico are predicted to add 1.5 million units of vehicle capacity through 2019, increasing vehicle production from nearly 3 million units in 2013 to almost 4.5 million units by 2019. Much of this 50 percent increase will be oriented toward U.S. consumers.

Auto companies Nissan, Mazda, Toyota, Honda, Audi, Mercedes-Benz, Infiniti and BMW are all expanding into Mexico, drawn by cheap labor and available capacity for compact and subcompact car production. European companies are particularly lured by free trade agreements with Mexico that create favorable climates for export to Europe.

The real drive behind the Mexican boost in auto production, however, comes from across the northern border. Car makers in Mexico earn 20 cents for every dollar made by U.S. laborers.

Joe Langley, the chief analyst for North America vehicle production forecasting at IHS Automotive observes, “Because these new models are lower-priced vehicles, the factories need to be in a market where labor is inexpensive, which Mexico’s certainly is. But they still need to be very close to the main market, which is the United States.”

The surge in auto production in Mexico, fueled by U.S. demand for cheap labor and small cars, involves significant foreign investment and has the potential to boost Mexico’s economy tremendously. However, Mexican factories, known as maquiladoras, have a reputation for dropping the ball on worker’s rights. The debate continues on whether more jobs with meager pay, harsh hours and poor working conditions are better than no jobs.

– Kayla Strickland

Sources: BusinessWeek 1, BusinessWeek 2, Automotive News
Photo: The Detroit Bureau