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Mexico's dubious BMW subsidies

Andreas Knobloch, Mexico City / hgJanuary 2, 2015

As more details about a new BMW plant in Mexico become known to the public, criticism of the deal between the carmaker and authorities is mounting. Thanks to NAFTA and low wages, the local auto industry is booming.

VW plant in Pueblo,Mexico EPA/VOLKSWAGEN/HO
Image: picture-alliance/dpa

Whenever corporate executives address the public with a broad smile, it's usually because they're able to report good sales figures or announce ambitious business plans. That also went for BMW's CEO designate, Harald Krüger, who back in July announced a new facility in Mexico's northern state of San Luis Potosi n the presence of President Enrique Pena Nieto. But according to a mid-December report of the Mexican daily "La Jornada" there was one more reason for Krüger to rejoice.

For its new plant, the German carmaker is to get a total of 3,500 pesos (196 million euros, $236 million) in tax breaks, concessions and other support payments out of San Luis Potosi's budget. In return, BMW commits to creating up to 1,500 jobs there by 2024 and invest $1 billion over the next 15 years. But according to La Jornada, the auto maker can cancel the deal at any stage without having to make punitive payments.

Anonymous sources had leaked the details of the deal, which was not due to be made public for another seven years from now when the responsible politicians of today will have ended their tenures, to the newspaper.

La Jornada criticized the volume of financial support for BMW that had been agreed without the consent of Congress. It also insisted the deal should have been made public right away, chiding governor Fernando Toranzo Fernandez for neglecting accountability rules.

The leftist paper concluded that even if the subsidies were legal, the financial aid granted to a private company would at least be morally reprehensible, if not scandalous in view of scarce public funds for education, the health service and public security.

"The deals between the weak state and mighty foreign companies are a precise reflection of how multinational firms avail themselves of public administrations," La Jornada said.

Mexico's record with German carmakers

The BMW production facility in question is to be operational in 2019, with Harald Krüger calling Mexico an ideal location for his company and adding that the whole American continent is "one of BMW Group's most important growth markets." Audi and Daimler have also announced new plants in Mexico.

in 2013, German carmaker VW opened its 100th plant - in Silao, MexicoImage: picture alliance / dpa

Audi hopes to start production as early as 2016, with Daimler-Nissan to follow suit one year later. According to in-house figures, BMW and Audi want to churn out 150,000 new units each per year, while Daimler-Nissan is aiming for 300,000 cars annually.

That way, Mexico is gaining importance as a production arm for the German car industry. The bilateral relationship goes back 50 years when inexpensive compact cars started coming off local assembly lines. Just think of the iconic VW Beetle, which is still an integral part of Mexico City's metropolitan life. VW built the car in Pueblo from 1964 to 2003.

In 2012 alone, carmakers from around the globe announced new projects in Mexico worth $13 billion. Michael Robinet of IHS Automotive told Bloomberg Mexico had become a hub for car trading in the western hemisphere, adding the nation had shown it could produce the most different kinds of vehicles.

Meanwhile, Mexico has become the world's eighth-largest auto maker and the fourth-biggest car exporter. In 2013, more than 2.9 million cars were produced there according to figures provided by the country's auto makers' association, AMIA. That marked a 1.7-percent increase year-on-year. In the same period, 2.5 million cars were exported, with more than 70 percent of them going to the US.

Why Mexico of all places?

In the past few years, the focus has been on premium brands as BMW's, Audi's and Daimler's plans show. "It was a rather easy decision for us," BMW's Bernhard Eich said about the location in San Luis Potosi. "We're confident we'll find enough skilled workers, and there are enough suppliers in Mexico," said the man who's responsible for the new plant. But as a sales market, Mexico is still far from playing a decisive role.

In 2013, BMW sold no more than 14,000 units in the country, with global sales reaching almost two million units, and China and the US being the most important markets.

Due to the free-trade agreement NAFTA, Mexico is crucial logistically for carmakers' sales ambitions in the US. And hourly wages paid in the car industry in Mexico are among the lowest globally. According to a number of recent studies, hourly wages dropped by more than 10 percent between 2008 and 2012 despite a tangible upswing in the industry.

The surveys pointed out Mexico was metamorphosing into a "Western China", characterized by high investment volumes and low wages. As wages keep dropping, productivity levels have risen by 4.3 percent annually, meaning companies' profits have in no small way been secured at the cost of employees.

More and more economists demand a reversal of this trend, saying wages in the sector have to rise to improve people's living standards and make the labor market more robust and sustainable.