Business, Finance & Economics

Car exports crash, and Mexican unemployment rises


PUEBLA, Mexico — Ernesto Zuniga thought he was made for life when he got a job at the sprawling Volkswagen plant in this colonial city in central Mexico three years ago.

The biggest factory for the German carmaker in the hemisphere had employed many of Zuniga’s friends and neighbors for decades, and he hoped he would join them for a life of secure pay in an otherwise struggling country.

But when he turned up for his shift on the Jetta production line earlier this month, his foreman gave him the bad news: Due to a crash in exports, the foreman said, Zuniga was being laid off.

“My life has been turned on its head,” Zuniga said, waiting outside the gates in the sweltering heat to pick up a severance check. “How am I going to feed my family now? Sneak into the United States?”

Zuniga is one of half a million Mexican workers who have been laid off since November as Mexico’s auto industry and other manufacturing sectors nosedive amid the global downturn.

The current financial situation represents a dramatic turn from recent years, when car manufacturing was at the center of Mexico’s strategy for surviving in the globalized economy.

While it couldn’t compete with the dirt-cheap labor of China, Mexico had skilled workers and was right next door to the biggest market in the world: the ten trillion dollar goliath of the United States.

Encouraged by the government, the world's biggest carmakers — such as Honda, Nissan, General Motors, Ford and Chrysler — all set up shop here.

They could churn out vehicles tax-free to American drivers under free trade agreements, and then the same factories could sell to Latin America and Europe.

But critics long warned about relying too much on the seemingly invincible economy of their northern neighbor. Now the latest figures show the naysayers may have had a point.

Mexico's car production for January was down 51 percent compared to the same month in 2008 — mostly due to a sharp drop in exports.

"We are going through the worst year in the last five decades," Eduardo Solis, president of the Mexican Auto-Industry Association, said in a recent news conference. "While our principal competitors have created strategies to kick-start their internal markets, Mexico is paralyzed."

Not only is the slump hitting the car factories, but it is also walloping a huge network of small- and medium-sized businesses that provide parts and services for them.

The effects are being felt particularly hard in this community southeast of Mexico City, where the auto industry is estimated to provide 12 percent of jobs and a staggering 40 percent of manufacturing wealth.

They are also ravaging an area across the border from Texas known as the “Mexican Detroit,” where the American big three carmakers all have plants.

Automakers in the real Detroit had complained bitterly when their jobs went south of the Rio Grande following the 1993 North American Free Trade Agreement. But now those same jobs are evaporating altogether.

As well as laying off workers, car companies are giving many Mexican employees extra holidays — on half pay.

Trade unions don’t like this tactic but say they are powerless to do anything about it.

“What are we going to do? Go on strike? That would be doing a favor to the companies, not the workers,” said Gilberto Martinez, a member of a union federation called the Authentic Worker's Front. “All we can do is try and keep our jobs.”

The companies themselves, meanwhile, are asking for more government help.

For President Felipe Calderon, it's a tough call whether to give cash bailouts to foreign firms. But Calderon recently announced there will be tax relief for companies who don’t lay off workers.

Solis, the president of the Mexican Auto-Industry Association, wants the government to go even further and suspend a special car owner tax to stimulate Mexico’s domestic car market. However, with fiscal revenues predicted to fall generally amid the recession, the government may be unlikely to swallow such a loss.

The direst warning of economic instability here came from Mexican billionaire Carlos Slim, the telecom tycoon who is the second richest man on the planet after Warren Buffet.

In a speech earlier this month, he predicted, “unemployment will rise as we have never seen in our personal lives and companies small, medium and large will go bankrupt.”

Calderon rebuked the mogul as being “alarmist.”

But Calderon has conceded that economic pressures could exacerbate the other main challenge to his administration: crime.

Amid a widespread breakdown in security, there were more than 5,300 drug-related murders and thousands of kidnappings for ransom.

Many fear this problem will only increase as the ranks of unemployed swell.

“When people have no food for their family they can get desperate,” said Zuniga, eying the shuttered gates of the Volkswagen factory where he used to labor. “There are some who will turn to crime rather than go hungry.”