Ford’s announcement that it will invest $3 billion in Mexico confirms the recent rebound of the country‚Äôs auto sector. Sharp U.S. economic slowdown may have a significant negative impact in the sector, hitting exports. However, these are slowly becoming more geographically diversified, and domestic markets will remain relatively sturdy.

According to the Economy Ministry, Mexico was the world’s 10th most important vehicle producer in 2007, with production exceeding 2 million. The auto industry’s domestic importance is huge. National Institute of Statistics and Economy Ministry figures show that it represents about 3% of gross domestic product, 15% of manufacturing output, and employs some 1 million people.

Auto production in 2007 reached record levels. Moreover, there has been a clear, strong recovery over the past two years, after significant falls in production in 2000-2004. This trend seems set to continue:

–Vehicle production stood at 188,090 units during April, a 28.4% year-on-year increase.

–The January-April total, at 679,981 units, represented a 13.8% year-on-year rise.

Exports are the main growth driver–from January-April the number of vehicles sent abroad rose 18.5%. While the U.S. market remains (and will remain) the most important destination for auto exports, there is some diversification Exports to Europe in January-April represented 14.4% of the total, up from 10.0% last year. Meanwhile exports to the U.S. declined from 76.4% to 71.5%.

The $3 billion Ford will invest is significant for the overall economy, given that total foreign direct investment in manufacturing in 2007 stood at $11.5 billion. Only foreign acquisitions of Mexican banks represented bigger capital inflows.

Moreover, it represents a national success, as the United Auto Workers union lobbied hard to produce the Ford Fiesta for North America in U.S. territory (part of the investment will be geared toward this).

Mexico has important advantages for the global auto industry, namely:

–geographic location and increasing integration with the U.S. economy–virtually all plants are in states bordering the U.S. or in the center of the country;

–wage competitiveness: Mexican auto workers earn about one-sixth of U.S. counterparts–though China’s are lower, the gap with Mexico is shrinking;

–an experienced and relatively large pool of qualified workers;

–a stable political system and growing domestic market;

–the peso mostly mirroring the U.S. dollar, providing some certainty on exchange rate movement–the peso has not appreciated as strongly as other industrialized and emerging economy currencies.

However, drawbacks are also significant, and may hinder growth. Infrastructure development is behind industrialized countries. Inputs are expensive–for example, until recently, Mexico had the industry’s second-highest electricity costs, after Japan. Labor unrest, while infrequent, has also flared up in recent years.

Mexico could become a global production center for small vehicles, yet high input costs and poor infrastructure must first be addressed. Production falls have happened in the recent past, and recent gains could prove reversible in the absence of appropriate policy.