U.S. auto bankruptcies could deepen Mexican downturn
MEXICO CITY |
MEXICO CITY (Reuters) - Any bankruptcies among U.S. automakers could further batter Mexico's auto industry, push some parts suppliers to the breaking point and spur tens of thousands of layoffs.
Fears are mounting that General Motors Corp (GM.N) and Chrysler LLC could be lurching toward bankruptcy. On Tuesday, a source close to GM said the company is in "intense" preparation for a possible bankruptcy filing.
A Chapter 11 filing by either automaker could upset Mexican assembly lines and disrupt the flow of cash to auto parts makers, possibly spurring bankruptcies among the smallest or those already facing liquidity problems, analysts say.
"It could set off a domino effect throughout the whole (car parts) industry," said Armando Soto, head of Mexican auto industry consultancy Kaso y Asociados.
Mexican subsidiaries of U.S. automakers are unlikely to close their Mexico plants, as cheaper labor costs there make the factories essential to restructuring and cost-cutting plans.
But hundreds of parts makers who are primarily suppliers to U.S. firms -- either in their Mexican or U.S. factories -- stand to be hit hard by U.S. auto sector woes.
Companies that are major suppliers to U.S. firms and are owed large amounts of money could be pushed to breaking point by a bankruptcy process, said Agustin Rios, head of Mexico's auto parts industry association, or INA.
"If they can't deal with the financial weight, they will go bankrupt and that is going to affect the other automakers they supply," Rios said.
FEELING THE PINCH
Most of the world's top automakers have plants in Mexico, attracted by low labor costs, docile unions and proximity to the United States. Detroit's car makers operate around a dozen Mexican plants, accounting for more than half of the 2.1 million vehicles made here last year, most of them for export.
The U.S. government's rejection of turnaround plans by GM and Chrysler, owned by Cerberus Capital Management LP CBS.UL, has deepened worries that two of Detroit's "Big Three" automakers could be headed for bankruptcy.
Their plants in northern and central Mexico may be key to future turnaround plans, keeping them safe from closure even if the parent firms file for bankruptcy in the United States.
But the more vulnerable parts industry is one of Mexico's biggest manufacturing sectors, employing roughly 450,000 people. Some players, such as Vitro (VITROA.MX), Alfa (ALFAA.MX) and Grupo Industrial Saltillo GISSA.MX are already feeling the pinch from their U.S. clients' troubles.
A U.S.-government task force has given GM two months to come up with a restructuring plan while Chrysler has a month to work on an alliance with Italy's Fiat SpA (FIA.MI).
If GM and Chrysler kill certain brands and models under an overhaul, that could further dampen Mexican auto production, which industry group AMIA already sees declining by up to a quarter this year as U.S. demand hovers near a 30-year low.
Withering U.S. appetite for Mexican-made pick-up trucks and sports utility vehicles knocked down Mexican auto production by 44 percent in the first two months of 2009 to its lowest level since a 1995 economic slump.
The sector is weighing on Mexico's economy, which analysts see contracting by 3.3 percent this year. Vehicles and parts account for nearly a fifth of total exports and the industry offers some of the country's best-paying manufacturing jobs.
The auto parts sector has already cut some 28,000 official jobs, hurting northern states like Coahuila and Chihuahua.
Soto said the entire auto industry, including factories, parts makers and distributors, could shed around 100,000 jobs out of a total 1 million due to the downturn.
Even if Mexico's auto sector has further to fall this year, in the medium term U.S. automakers may shift more production south of the border to help them get back into the black.
Pascual Francisco, an auto industry analyst at IHS Global Insight in Boston, noted that U.S. carmakers cannot profitably produce small fuel-efficient cars in the United States.
"The only way these companies can meet upcoming U.S. emission standards and become profitable will be by shifting more production to Mexico," Francisco said.
(Editing by Chizu Nomiyama)
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