NAFTA Case Study - Essay Example

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NAFTA AND MAGMA The passage of North American Free Trade Agreement let many companies in Canada, the U.S., and Mexico, to review and revise their business models. There were many new incentives and many new things to consider. Some companies were forced by their competitors to completely restructure their businesses and change their long-term forecasts. One of these companies was Magma, the Canadian auto parts manufacturer. Magma had unfortunately undergone a massive restructuring just prior to NAFTA. On the plus side this meant the company was profitable again; on the negative side it meant that there was not a lot of will within the company for another big shift. Nevertheless, this was required if Magma was to survive in the new business climate. In particular with the reduction in tariffs in the Mexican auto sector, how should Magma respond?
To being with there are problems and opportunities. How should Magma respond to the problems is a good first question. The problem for its managers is that although there are very low wage employees available there, the Mexican infrastructure and business climate is not easy to work with. Plus, the employees may not cost much, but you get what you pay for (in some respects)—many are not highly skilled. The question facing Magma’s managers is whether it should follow many of the other manufacturers to Mexico. In some ways, this is not such a big problem. The sort of problems Magma foresees in Mexico are not so different than problems facing its competitors and its customers. Everyone is going to have the same limitations. All companies are going to invest in Mexico, but very few are going to jump in with both feet first. Magma should take a cautious approach and should especially review the history of Volkswagen starting up its factory in Mexico. Magma can’t avoid having zero presence in Mexico, but it should not immediately put all its eggs in one basket. Shifting a small part of its business to Mexico during a trial period would provide managers with more information on which to base a later decision.
Going it slow in the beginning is important, but Mexico offers a lot of opportunities to Magma. If predictions hold up, a lot of car manufacturing is going to be done in Mexico in the next few years. While there are a lot of initial problems, none of them are all that structural. The fact that employees are not skilled is a temporary one as is the problem of low-grade steel. It will take time for the market to adjust, but it will adjust, and Mexico will become more competitive. The first few years are not going to be easy, but things will dramatically get better and soon. Magma should come up with a medium-term plan to push a lot of business into Mexico once other businesses have done the dirty work of forcing the labour market to improve.
Mexico offers a lot of opportunities to Magma—many more opportunities than problems. There will be high costs in the beginning, but if Magma can look past these—or shift them on to competitors—life and business in Mexico will be very fine indeed. Read More
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