Auto Part Manufacturing

Overview

The global manufacture of auto parts is growing exponentially. This growth represents form any companies of the sector a need to reframe their supply chains, and look for more efficient solutions at low costs. Nicaragua has successfully satisfied the expectations of the companies that are already established in the country by offering a competitive cost structure, skilled workforce and proximity to major markets, among other benefits.

 

In 2013, Nicaragua’s auto parts industry’s exports accounted for 24 percent of the country’s free zones exports and 12.3 percent of its total exports. There are currently two companies operating in this sub-sector; Yazaki (Japan) and Dräxlmaier (Germany). Together they have created more than 14,900 jobs, where Yazaki on its own is the country’s largest employer.

 

Yazaki, the largest producer of automotive harnesses in the world, is operating in the west of the country with a US$50 million investment in four factories of harnesses and cable for brands such as Ford, Chrysler and GMC.

 

In 2011, Dräexlmaier (a German automotive corporation) established an automotive harnesses factory in Masaya, Nicaragua. This German investment represented more than US$10 million in its first stage, and generated approximately 1,000 jobs. Currently, it is expanding operations, and doubling its workforce, so it will generate up to 2,000 jobs when operating at full capacity. Dräexlmaier produces harnesses for European brands like BMW and Volkswagen.

 

The workforce has shown a rapid learning curve that has contributed to the growth of companies' exports. Except for a reduction in 2006 and 2009 due to low demand for Ford and GMC cars, the following chart shows the significant growth of the auto parts industry in Nicaragua, in terms of exports.

 

Source: National Free Zones Commission (CNZF), 2013.

Investment Opportunities

Nicaragua presents an array of profitable investment opportunities for companies with labor intensive operations looking to benefit from one of the world’s most well-located export platforms. One of the country’s main investment opportunities in the light manufacturing and assembly sector is the further development of its automotive industry. The country currently produces auto-wire harnesses and cables. On the other hand, its opportunities for growth include the manufacturing of certain aftermarket products such as:

• Floor mats and liners
• Seat covers
• Interiors
• Other labor intensive process
  

Competitive Advantages

Competitive Cost Structure

Nicaragua has the most competitive labor costs in the region, which makes the country a prime location for labor-intensive operations. Fringe benefits include: social security, holidays and vacation leave, severance, 13th month bonus, and contribution to the National Training Institute (INATEC, for its acronym in Spanish). These benefits amount to 47 percent of compensation.

The following graph shows a comparison of fully-loaded wages in the region for manufacturing operations:

Mininum Wage in Free Zones per Hour Benchmark

Note: Guatemala includes monthly bonus.
Source: Central Bank of each country, 2014.

The Government of Nicaragua, the private sector and unions reached an important consensus to define minimum wage between 2011 and 2013 with the purpose of further supporting the growth of companies within the free zones regime.

Attractive Investment Incentives

The Government of Nicaragua offers a series of fiscal incentives with the purpose of promoting investment in the country. These include:

Tax Concertation Law (Law 822)

This law grants fiscal exemptions to the export of goods and of services provided abroad and also establishes several fiscal benefits to certain productive sectors of the economy with the purpose of fostering their growth and development. Read more.

Temporary Admissions Law (Ley 382)

This law establishes a system that allows the entry of goods into national customs territory and local purchases of the same without payment of income tax and custom duties. Companies that export directly or indirectly at least 25% of their total sales are eligible for this scheme. Read more.

Free Zones Law (Decree 46-91)

Nicaragua offers significant tax incentives under free zones regime for those companies interested in establishing export-oriented operations, in compliance with World Trade Organization regulations. Read more.

Strategic Location and Preferential Market Access 

The speed of delivery/response to international markets and tariff benefits for products made in Nicaragua represent a significant advantage for Nicaragua in an industry as dynamic as manufacturing automotive parts, resulting in reduced inventory costs and greater ability to react to changes in demand. All this turns into higher profit margins for companies.

The proximity of Nicaragua with respect to North America, only two hours flight from major cities in the United States, allows business executives travel easily, also allows to respond to maritime shipping of only four or fivedays to the ports of the southern United States and ground shipments to Mexico about four days.

Nicaragua enjoys the benefits of trade agreements with major trading partners in the world. The most important trade agreements include:

• Central American Common Market.
• FTA with the United States, Dominican Republic and Central America (DR-CAFTA).
• FTAs with Mexico, Taiwan, Panama and Chile.
• Association Agreement between Central America and the European Union.
• GSP with Norway, Canada and Japan.
  

Testimonial

Yazaki

Yazaki company, dedicated to the manufacture of harnesses and cables for the automotive industry, found in Nicaragua the ideal conditions for the development of its operations, such as logistics facilities, competitive operating costs and wide availability of skilled human resources. These factors have enabled them to provide products of the highest quality to original equipment manufacturers of major brands such as Ford, GM and Chrysler, expanding its operations in the country beyond their original plans.

Yazaki began operations in 2002 with 400 employees in a manufacturing plant harnesses in western Nicaragua, currently operates four plants automotive harnesses and cables, which together account for more than 13,000 direct jobs.

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