By Michael O'Boyle
SILAO, Mexico (Reuters) - The spectre of bankruptcy hanging over automakers in Detroit is also stoking fears in Mexico, whose car industry is heavily dependent on the U.S. economy.
Mexico was the world's 10th-biggest car producer in 2007, building cars for most of the world's top car makers, but exports are slackening as the United States goes through its worst financial crisis since the Great Depression.
At a General Motors plant in Silao, nestled among the cornfields of Mexico's heartland, workers fear the steady flow of full-size pickup trucks and SUVs would quickly come to a standstill if the U.S. Congress fails to bail out its parent.
The plant discontinued producing the gas-guzzling Suburban this summer and slashed about a fifth of its work force.
"If they don't get the loan, GM could disappear from Mexico," said Carlos Campos, a worker at the plant.
If the plant closed, it would send shock waves through the local economy, hitting parts suppliers and a host of other businesses.
"It would be a terrible blow," said Dimas Rangel, a union leader for parts suppliers used by the plant.
GM, Ford and Chrysler have around a dozen factories in Mexico, where the car industry has become a big part of the economy. Nissan, Toyota, Honda and Volkswagen also have plants here.
TOUGH TIMES
Even without a bailout for Detroit, the Mexican auto sector is facing its toughest times since the mid-1990s, when the North American Free Trade Agreement sent a flood of Mexican-built cars into the United States.
As demand in its biggest market dries up, and Europe also slides towards recession, Mexican sales are plummeting.
At least 5,000 jobs have already been shed from the auto parts sector, according to the industry's national trade group, and unions are negotiating work stoppages.
"2009 is going to be a hard time for the industry," said Pascual Francisco, an analyst at IHS Global Insight based in Lexington, Massachusetts. "Everybody is going to stop production for a few weeks or a few months."
The problems in Mexico are the same as in the United States -- an over-reliance on gas-guzzling trucks and sport-utility vehicles.
"In the middle of this crisis, the General Motors plant here is making huge vehicles that, in the short term at least, have a death sentence," said Amador Rodriguez, a lawmaker in Guanajuato, the state where GM's Silao plant is located.
Analysts have already questioned the future of a Chrysler plant in Saltillo, in northeastern Mexico, which makes the Ram truck and produces Nissan trucks on the same assembly line.
Vehicles and parts now account for around one-fifth of Mexico's total manufactured exports. The industry employs nearly 600,000 Mexicans and they are among the country's best paid industrial workers.
The crash of a U.S. carmaker would cripple Mexico's industrial output, spread weakness to the country's services sector, push up unemployment, and cause the economy to shrink next year by as much as 1.2 percent, said Gabriel Casillas, an economist at UBS in Mexico City.
"This would be a very serious setback for the Mexican economy, even more so considering that we continue to be a Third World country with a very poor distribution of wealth," Casillas said.
Mexico's economy is already slipping as U.S. consumer spending withers and Mexican immigrants living north of the border send home less cash.
The central bank sees growth of as little as 0.5 percent next year due to the recession in the United States, the destination of 80 percent of Mexican exports.
A measure of how dependent Mexico is on the United States, the peso currency lost more than 4 percent against the dollar in late November, after U.S. congressional leaders refused to immediately back a bailout of Detroit's automakers.
DOMESTIC TROUBLE
Inside Mexico, once free-flowing auto loans are drying up as local banks and automaker financing units feel the pinch.
"Both consumers and companies are going to have trouble coming up with the money for new vehicles," said Armando Soto, the head of Mexico City-based auto industry consultancy Kaso y Asociados.
Domestic sales this year are expected to fall 6.5 percent to 1.022 million vehicles, the worst decline since 1995, according to IHS Global Insight. Next year, it is seen diving by 8.5 percent.
Similar troubles are being felt throughout Latin America, even though other countries are not as dependent on the United States as Mexico is.
Brazil's vehicle sales plunged 25 percent in November and output in Argentina's automobile industry looks set to fall at least 10 percent next year.
While the next couple of years may look grim for Mexico, analysts say it could end up with a greater share of North America's total output in the coming years.
Hoping to position themselves for an eventual rebound, General Motors and Volkswagen this week reaffirmed investment plans to build more fuel-efficient vehicles in the coming years at plants in San Luis Potosi and Puebla, both in central Mexico.
Ford is converting a plant outside Mexico City that once built F-Series trucks to produce the compact Fiesta.
The abundance of cheaper Mexican workers suggest that global companies will bolster operations here once consumer demand picks up again in the United States.
"Mexico does have better prospects ahead. In the medium term, auto production will grow," Soto said.
(Reporting by Michael O'Boyle; Editing by Alistair Bell and Eddie Evans)
