Japanese Suppliers Choose to Raise Wages

Amid the new USMCA trade environment, companies are starting to evaluate their strategies towards the treaty’s uniform regulations presented in June. Nikkei reports that Japanese companies are choosing to increase wages to US$16 per hour in Mexico rather than moving production to the US. 

Uniform regulations are the specifics under which procedures and rules of origin established in USMCA are to be followed. The document, published in June by the Mexican Ministry of Economy, detailed the LVC rule which requires companies to have 30 percent of their production located in high wage material and manufacturing facilities (15 percent), high-wage technology (10 percent) and high-wage assembly plants (5 percent) as of July 1. The percentage is expected to increase to 40 percent by July 1, 2023.

"USMCA’s rules of origin are really complex, which could make it difficult for OEMs to comply given the short transition times. Having uniform regulations at the beginning of June meant having less than three weeks to understand them and to apply them. These regulations are the guidelines under which rules of origin will be applied. This really short amount of time will put OEM purchasing and strategic planning departments in a difficult spot," told Eduardo Solís, former AMIA Executive President and Private International Consultant to Mexico Automotive Review.

Uniform regulations define a qualifying wage rate for vehicle assembly or production: (a) US$16 in the United States, (b) CA$20.88 (US$15.4) in Canada; and (c) MX$294.22 (US$13.4) in Mexico. Average hourly wage rate is also defined as " the average hourly rate of pay based on all the hours performed on direct production work at a plant or facility, even if such workers performing that work are paid on a salary, piece-rate or day-rate basis." (Sec. 12-1)

You can read the full article on uniform regulations here.

Nikkei reports that Japanese suppliers Piolax, in Monterrey, and Keihin, in San Luis Potosi, will raise the hourly wage of factory employees by next month, which will be cheaper than moving operations. Other strategies include incorporating more robots into their processes to mitigate labor costs. Raising the hourly wage to MX$294.22 (US$13.4) can start to distort Mexico's labor market since Mexico's daily minimum wage is set at MX$123.22(US$5.52) and MX$185.56(US$8.31) at the border region, according to Deolitte. If automakers fail to comply with new regulations, they can be subject to a 25 percent tariff on vehicle exports to the US.

"Given these conditions, OEMs will have to face the second element that needs to be put on the table: transitional regimes. These particular regimes will give OEMs a waiver on the immediate application of the rules of origin. This will have to be analyzed on a case-by-case basis where each OEM will have to negotiate its plan to comply with the incoming rules," says Solís.

The auto parts sector in Mexico remains confident of the opportunities Regional Content Value rule stablished in the treaty represents to the country. “The treaty stablishes an increase of regional value content, which presents an opportunity to increase auto parts production in the country as OEMs will be bringing their suppliers' operations from Asia and Europe to North America; not necessarily in Mexico but the country can offer investment opportunities,” said Oscar Albin, Executive President of INA in mid-May. 

You can read the full article on INA here.