General Motors (NYSE:GM) has announced that its next-generation Chevrolet Cruze will be made at a factory in Mexico.
GM announced that it is making a $350 million investment in its factory in Coahuila, Mexico, to cover the costs of tooling and other changes needed to make the all-new Cruze, which is expected to be revealed later this year.
This is new. GM doesn't make the current Cruze in Mexico. What's this about?
It's not about replacing U.S. jobs
We should start by saying what it's not about: This isn't a case of GM shipping U.S. jobs to Mexico.
GM has said clearly that the next-generation Cruze will also be made in its plant in Lordstown, Ohio, where the current-generation version of its popular compact sedan is now made. (GM has also confirmed that the new Cruze will also be made in China.)
Lordstown has been busy: The current Cruze has posted solid sales numbers in the U.S. for several years now. But the Cruze is a global model, sold in over 100 countries. Right now, the Lordstown factory builds Cruzes for the U.S. and Canada, while the rest are supplied from several other plants around the world, including GM's vast manufacturing complex in South Korea.
It's not clear whether the new Cruze will be made in Korea. GM has been battling for years with the feisty union that represents the (well-paid) workers in its South Korean factories, and it's possible that the company is looking for less-expensive and less-contentious alternatives.
But Mexico has some big advantages over Korea, the U.S., and other countries for GM that go beyond cost and contentiousness -- and for a lot of other automakers as well.
It's not about cheap labor, either
While workers at Mexican auto factories make an average of around $10 an hour, the growing popularity of Mexico as an auto-manufacturing hub isn't just -- or even mostly -- about the cheap labor costs.
It's about this: Mexico has free-trade agreements with over 40 countries.
That's important. A company that exports from Mexico has duty-free access to markets that cover about 60% of the world's economic output, according to the Wall Street Journal. Put another way, because they don't have to pay import duties, automakers exporting from Mexico to these markets can lower their retail prices, take more profits, or both.
In other words, it's a big competitive advantage. And it's one that more and more automakers are looking to get.
The Journal reported recently that seven Asian and European automakers have opened new factories, or disclosed plans to build new factories, in Mexico over the last year.
That list includes Honda, which is making the Fit and HR-V in a new $800 million plant in Celaya, and Volkswagen Group's Audi, which will soon start building the Q5 SUV in a new $1.3 billion factory in southern Mexico. Others, including Ford and Fiat Chrysler along with GM, are making significant investments to expand or upgrade existing Mexican factories.
Wherever it's made, the new Cruze should be a strong contender
GM hasn't said much yet about the all-new Cruze. But if the just-revealed 2016 Chevy Malibu is any guide, we can guess that the new Cruze will be lighter, thanks to GM's increasingly advanced use of lightweight materials, and probably more aerodynamic as well.
That, together with GM's new four-cylinder powertrains, should yield significant fuel-economy gains. It's also likely that the Cruze will be a little bigger -- or at least longer, to yield more rear-seat room -- that its interior will be nicely upgraded, and that its price will be close to the current car's.
If all of that pans out, it should make the new Cruze a strong contender in a class where the longtime leaders, Toyota's Corolla and Honda's Civic, have been coming under increasing competitive pressure. If so, GM's Lordstown and Coahuila plants should have plenty of work for the next several years.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.