Many CEOS have visions of swirling pink slips

From the Associated Press

11:56 AM PDT, June 18, 2008

WASHINGTON -- Nearly one-third of the country's top executives expect to cut payrolls in the coming months, reflecting fallout from the housing bust as well as soaring energy prices.

At the same time, a survey by the Business Roundtable, released Wednesday, showed that most executives expect sales and capital investment to remain at current levels or even improve over the next six months.

That's consistent with expectations from the Federal Reserve and other economists who say they think the fragile economy will strengthen later this year and into next year -- even as the nation's unemployment rate, a lagging indicator of business health, rises. As in the past, many employers won't want to ramp up hiring until they are sure the economy is really back on a firm footing.

Businesses are "being very cautious, very cost-controlled oriented," said the group's chairman Harold McGraw III, president and chief executive of The McGraw-Hill Companies.

The survey found that 31% of chief executives said they expected to reduce employment at their companies in the coming months. That's up from 22% who said they expected to cut payrolls in a previous survey released in April. Seventy percent of executives in the new survey said they probably would hold payrolls at current levels or boost them. That's down from 78% in the old survey.

Every month so far this year, cautious employers have eliminated jobs. The unemployment rate rose to 5.5% in May from 5% in April, the biggest one-month rise in two decades.

The results of the overall survey "reflect the broad crosscurrents at work in the U.S. economy," McGraw said. "Our CEOS clearly have tempered their overall expectations against a backdrop of continued housing declines and mounting energy prices. That said, CEOS remain cautiously optimistic about their sales and spending projections."

In the survey, 91% said they expected their sales to hold steady or increase over the next six months, the same percentage as the old survey. Nine percent said they expected sales to go down -- also the same as the previous reading.

On capital investment, 85% said they would hold such investment steady or increase, the same as the old survey. And, 15% said they expected capital investment to decrease, the same as the old reading.

For this year, the executives predicted the economy's growth would be 1.3%, down from a previous estimate of a 1.5% growth. If the new estimate proves correct, the would be the weakest growth since 2001, when the economy was last in a recession.

The Business Roundtable is an association of CEOS of major corporations, representing a combined work force of more than 10 million employees and $4.5 trillion in annual revenues. The quarterly survey, conducted May 22 through June 9, was based on the responses of 110 of the group's 160 member companies.

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Race to the bottom: Mexico lowers wages to snare international auto production

The Associated Press

Wednesday, June 4, 2008

MEXICO CITY: Mexican auto unions are taking a cue from U.S. labor leaders by offering two-tier hiring schemes and salary cuts that bring already low wages down to near-Chinese levels.

As more automakers turn to Mexico, a big argument for the North American Free Trade Agreement in 1993 — that Mexico's low wage rates would slowly rise to close the gap with U.S. wages — seems to have been thrown in reverse.

"The pressure has not been to raise the Mexican wages up, it's been to push the U.S. wages down," said Ben Davis, the director of the AFL-CIO Solidarity office in Mexico City.

And now Mexican wages are being pushed down even more.

Wage concessions were apparently key to convincing Ford Motor Co. to direct many of the 4,500 new jobs involved in building Fiestas to the Ford plant in Cuautitlan, on the outskirts of Mexico City. Union leaders at the plant told The Associated Press they had agreed to cut wages for new hires to about half of the current wage of US$4.50 per hour.

"We agreed to it," said Ford union leader Juan Jose Sosa Arreola. "We need to be more competitive. That's the truth. That's a reality."

The United Auto Workers union had hoped to preserve American jobs by offering a two-tier wage system last fall, cutting starting wages for new U.S. workers by half to about US$14.20 an hour. But it hasn't worked — the jobs are flowing to Mexico, where starting wages at some plants also have been two-tiered, to as little as US$1.50 per hour with a lot less of the related pension and health care costs of U.S. workers.

With labor costs like these, Mexico is staying competitive with China, where an average worker at a foreign-owned factory or joint venture can make US$2 to US$6 per hour. While Mexican benefit costs run higher, Mexico may have already won the low-wage race.

Mexico also now has the advantage of a massive auto production platform based on experience with export plants and proximity to major markets that can't yet be beat in China, whose factories still produce mainly for its own domestic market.

Ford spokeswoman Alejandra Acevedo said she did not know what starting wages for new hires at Cuautitlan would be, but she acknowledged that to win the jobs, the plant had to compete against other Ford facilities worldwide.

"It makes business sense that labor costs are much lower here, and also it's much cheaper here to grow the local supplier network," said Acevedo, noting Mexico's free trade deals help slash the cost of importing parts and exporting cars, Acevedo said.

Other U.S. automakers also are squeezing wages. General Motors said Tuesday it will stop using relatively high-wage workers to assemble slow-selling pickups at its plant in central city of Toluca. A labor leader there said the union had gotten the message, and would offer to work for less to keep the plant alive.

"I think we are going to have to sacrifice something in order to continue to be competitive," said Edgar Arroyo, a union leader at the Toluca General Motors plant, where he estimated some workers earn about US$6 per hour, an extremely high rate by Mexican auto industry standards.

Nothing in NAFTA stops this drive to the wage floor. The treaty only requires countries to enforce their own minimum wage laws, which in Mexico means about US$5 per day.

Foreign investment in Mexico's auto industry is soaring, averaging about US$2 billion per year since the 1990s. Ford's US$3 billion investment in the Fiesta project may accelerate that trend.

Auto exports grew by almost 68 percent between 2004 and 2007 to 1.6 million units. Most went to the U.S., but also to European and other Latin American markets.

But since NAFTA's approval in 1993, the gap in overall manufacturing wages between Mexico and the United States has widened slightly, according to government figures.

At Volkswagen's plant in the central city of Puebla, union spokesman Arturo Monter blames low wages on Mexico's antiquated system of labor laws that favor employers and discourage strikes and union organizing.

Unlike in the United States, where a single national union, the UAW, organizes most auto plants, in Mexico unions are deeply split and may only represent workers at one manufacturer, or even at a single plant.

Union leadership at Monter's plant agreed to cut starting wages to US$1.50 an hour from US$1.95 a few years ago. It can now take as long as seven years to work up to earning what was once the entry-level wage, Monter said.

Still, those lower labor costs helped win a contract for an as-yet unnamed Volkswagen model, known at the plant only as "Project Zero," that the automaker had been considering building in the United States, Monter said.

A VW spokesman declined to comment on production plans, saying only that nothing had yet been confirmed.

Mexico's abundant, youthful work force is still drawn to auto plants despite the low wages, union leaders say, because the firms offer stable employment, a rarity in Mexico's working world.

"Despite the fact that we're negotiating what you could call a cheaper contract, I guarantee you that if we advertise for 2,000 workers, 10,000 people are going to show up," said Sosa Arreola, whose plant sits on the outskirts of Mexico City.

Mexico prepares for (Ford) Fiesta

Ford will build its new Fiesta subcompact car in Mexico, the firm announced Friday.

By Sara Miller Llana | Staff writer of The Christian Science Monitor

from the June 2, 2008 edition

Mexico City - Ford Motor Co., in a struggle to regain profitability, will build its new Fiesta subcompact at a factory near Mexico City for sale in the US.

It is a blow to Detroit.

But for Mexico, Friday's announcement – which has been heralded as the largest manufacturing investment in the country's history – is a decisive feat.

President Felipe Calderón called the $3 billion deal a "turning point."

While the US automaking industry sags – undergoing massive restructuring and downsizing – Mexico's production has expanded, especially for small, low-cost vehicles. Last year, Mexico produced a record number – over 2 million – and analysts forecast that by the year 2015 production could at least double.

A US recession is bound to affect the Mexican car industry, where the majority rolled out head north for export. But amid high gas prices that are fueling the market for smaller cars, Mexico could position itself as a center for fuel-efficient vehicles – a pivotal development after years of shedding manufacturing jobs to China and beyond.

"Asia is where all the growth is. But now all of a sudden Mexico is looking pretty good again," says Greg Gardner, an analyst at the consulting firm Oliver Wyman in Troy, Michigan. While China offers automakers lower wages than Mexico, he says that the gap is shrinking. Plus, he adds, Mexico is closer to the US and has experience in automaking. "In the past two years, Mexico has really rebounded."

The launching of the Fiesta subcompact, to be available for export to the US in 2010, is part of Ford's effort to tap a new market, after truck sales have slowed. Ford intends to transform its plant near Mexico City, in Cuautitlan, to replace pickup truck production with the fuel-efficient Fiesta. It will also revamp two other plants in the country.

Ford announced last week it would not meet its goal of being profitable by 2009, dealing a setback to the United Auto Workers union, which had renegotiated contracts in an effort to save jobs in Detroit. Buyouts are expected.

Here in Mexico, the investment is expected to create 4,500 direct jobs and 25,000 others. Mr. Calderón said Friday that the country wants to reposition itself as a leader in car manufacturing. "We want Mexico to be an automotive country, one that is competitive and with the most advantages so that the worldwide automotive industry will establish itself here."

The announcement comes as the other major automakers, including General Motors, DaimlerChrysler, Nissan, and Volkswagen have laid down massive investment plans in Mexico, building new plants, expanding production, and rolling out new models.

Mexico's draw is geographic and economic. The average Mexican worker makes roughly one-sixth as much as the average American worker. And because the major industries have long had a presence here, it has an experienced labor pool and a slew of auto parts suppliers supporting the industry.

"Now and in the past, US manufacturers have been producing in Mexico because the quality is high and the labor market is very reliable," says Pascual Francisco, an automative analyst for Latin America at Global Insight, an economic forecasting firm headquartered in Waltham, Mass.

In the past year, Mexico has also drawn interest from much farther away. In November, China's First Automobile Works Group (FAW) caused a stir when it announced it would be partnering with Mexican electronics retailer Grupo Elektra to build China's first automaking plant in Mexico, expected to be up and running by 2010.

Their goal, according to Group Elektra, is to tap into the growing number of middle-class Mexicans who can afford small cars. But their sights might be on the US. "By bringing those vehicles into Mexico, Mexico can be used as a testing ground for the US market," says Mr. Francisco.

Mexico currently exports about 75 percent of the cars it makes, most of those to the US. And many say that growth here cannot exist without growth north of the border. "We are an appendix of the North American market," says Huberto Juarez Nunez, an auto industry expert at the University of Puebla in Mexico.

So as concerns about the cooling US economy grow, any investment is good news, he says. But Mexico's industry needs to mature, too, he says, adding that the fact that China will be making its own car here, while Mexico, after years working with the US industry, has not yet, underscores the point. "After decades of presence of the major automakers, we still have no possibility to export a car called 'Pancho,' " he says. "The Chinese have achieved this."

• Wire services were used in this report