A recent report by Reuters indicated that Toyota halted production for 19 days in February and March at one of its Mexican production facilities. The letter to suppliers cited frequent production halts, high employee turnover, and declining skills at suppliers, compounded by global declines in electric vehicle demand and rising input costs. Labor challenges are not new in Mexico and have political and historic underpinnings. These challenges are exacerbated by inadequate investments in technical education, with Mexico spending less than 5% of its GDP on education, below the OECD average.
Mexico's notoriously onerous labor laws, confounded by local labor shortages, caused Toyota to halt production for a total of 19 days in February and March at its plant in Tijuana, Mexico.
The knock-on effect of the production challenges in Mexico has negatively impacted Toyota's plans to launch its electric vehicles in the United States, leading to a six-month delay.
This information comes from a letter and other documentation reviewed and reported on by Reuters. The letter, addressed to Toyota's North American supplier network and dated late April, acknowledged the "frequent production halts" that were causing "inconvenience and concern."
The letter also cites supplier challenges such as regular employee turnover leading to a decline in skills at certain suppliers. Compounding the issues are declining demand for electric vehicles globally and higher input and commodity costs.
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Toyota in Mexico
Toyota has a significant presence in Mexico, with commercial operations starting in 2002 with its first plant opening in Baja California in 2004. By 2023, Toyota produced more than 10 million vehicles globally and had 67 plants worldwide, 14 of them in North America.
Two of the fourteen plants in North America are in Mexico: Toyota Motor Manufacturing de Baja California ("TMMBC") and Toyota Motor Manufacturing de Guanajuato ("TMMGT"). The Mexican plants mainly produce the popular Tacoma pickup truck for the North American market.
Combined, the two plants in Mexico can produce 266,000 vehicles annually and managed to produce around 250,000 units in 2023. The production figures represented about 12.5% of North American production for the Japanese car company last year.
Toyota recently invested $328 million in Guanajuato for retooling to manufacture the fourth-generation Tacoma. This was in addition to an investment of $180 million by Metalsa, a Tier 1 supplier in Mexico, for a new plant next to the TMMGT facility.
Toyota was the third-largest automaker in Mexico in 2023 with a market share of 10.1%, trailing General Motors (14.3% share) and Volkswagon (12.9% share).
Labor Shortages and Challenges in Mexico Nothing New
For decades, labor issues have hindered Mexico's appeal as a preferred investment destination, primarily due to federal government inaction. Recognized as having some of the most stringent labor laws in Latin America, Mexico faces hiring and firing complexities and bureaucratic obstacles that impede business efficiency.
The roots of these labor issues are intertwined with Mexico's political and social history. The Mexican Revolution (1910-1920) led to significant labor reforms, including the Constitution of 1917, which guaranteed various labor rights. However, these rights have often been inconsistently implemented, frequently undermined by powerful economic interests and political corruption.
The USMCA has recently increased foreign investment and trade, pressuring Mexico to improve labor conditions and enforce labor rights consistently to prevent worker exploitation and ensure fair competition with other member countries.
Companies considering relocating manufacturing closer to North America are often deterred by Mexico’s inadequate labor infrastructure and the high costs associated with training and retaining skilled workers.
Mexico's Lack of Investment in Technical Education
A critical factor exacerbating labor issues is the lack of investment in technical education. Despite being the 15th largest economy in the world, Mexico spends less than 5% of its GDP on education, which is below the OECD average. This underinvestment has resulted in a workforce that often lacks the specialized skills needed for advanced manufacturing roles.
The World Economic Forum’s Global Competitiveness Report consistently ranks Mexico poorly in the quality of vocational training, underscoring the skills gap in the labor market. Efforts to improve this situation have been minimal.
The Mexican federal government has not prioritized the establishment of technical colleges or vocational training centers at a scale needed to meet industry demands. For instance, between 2010 and 2020, only a handful of new technical institutions were established, far fewer than what is required to support the burgeoning manufacturing sector.
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