In the past decade, Mexico’s welcome mat for the aerospace establishment has found an industry eager to manufacture “south of the border.”
The obvious attraction is Mexico’s lower wage-structure: some say that in Mexico manufacturers pay a tenth of what equivalent assembly jobs cost in the U.S.; others cite a differential of about a third from what is paid in Europe. This discrepancy is best explained by the costs of different skill levels, and by a hesitancy to be too specific on a subject that raises political hackles back home.
But lower wages tell only part of the story for why Mexico, a nation of 115 million, now counts 270 aerospace factories within its borders. On national and state levels, the country is aggressively pursuing “high-tech” aerospace jobs as part of a broadening of its industrial base beyond automobiles and electronics, for which it is already a major producer. U.S. shoppers may think of Mexico mainly in terms of summer vegetables in the winter, but the World Bank reports that industrial products account for 90% of its export earnings. The bank ranks Mexico as the world’s 13th largest economy in nominal terms and No. 11 in purchasing power. “Hecho en Mexico”—Made in Mexico—is more common everywhere, including in aerospace.
The aerospace influx has not happened overnight. Its roots date to the mid-1970s when U.S. companies, a mix of multinationals and lower-tier suppliers, began sending basic parts manufacturing and assembly tasks across the border, mostly to border towns like Tijuana and Mexicali but also deeper into the country to cities like Monterrey. Service operations followed, as did company research activities.
However, it has been in the past decade that Mexico’s aerospace manufacturing growth has mushroomed. Political reform led it to pursue a global free trade agenda vigorously and its 1994 signing of the North American Free Trade Agreement (Nafta) benefitted Mexico greatly. Still, it took about a decade for the aerospace sector to take off. Until 2004, growth was scattered, says Queretaro state Gov. Jose Calzada. Not anymore. “We’ve seen incredible changes in just the last five years,” he says.
The boom times are a testament to Mexico’s geography, its embrace of free trade and adoption of legal mechanisms that provide a “soft landing” for foreign-owned factories. Local leaders clear red tape and amaze U.S. and European executives at how quickly they can put up factories. A typical response comes from Peter Huij, a senior Fokker Aerostructures executive in Chihuahua, about how quickly the company went from bare earth in May 2011 to a completed 75,000-sq.-ft. factory in November: “It would be impossible in Europe.”
Behind all of this is Mexico’s Maquiladora factory system for supporting foreign companies, which allows them to control their own destiny, importing raw materials such as aerospace-quality alloys, or wiring and then exporting the finished product tax-free. Foreign manufacturers commonly turn to a large service provider—Intermex and American Industries Group are leaders for the aerospace sector—that lease buildings to their clients and handle their human resources, tax and other business needs under Mexican law. About 80% of the aerospace companies in Mexico use such services. Of the 36 Maquiladoras registered by the Mexican government last year, six were in aerospace, including a GKN Aerospace plant in Mexicali, Latecoere in Hermosillo, coatings specialist Ellison Surface Technologies and Rolls-Royce turbine supplier JJ Churchill in Guaymas and a fourth division for Zodiac in Chihuahua.
Under the Maquiladora system, Mexico allows resident foreign companies to control 100% of their businesses. They do not face the “local partner” rules so common elsewhere that limit foreigners to a maximum 49% share.
“They make it easy for you to do business down here,” says John Gardner, strategic program manager at Kaman Aerostructures, another newcomer in Chihuahua. “They provide a ‘soft landing,’ to get a quick startup—a good startup. We got a lot of support up front and afterward.”
Besides lower costs, the business case for going abroad is often a need to penetrate a particular market. That is particularly true in China but is far less meaningful in Mexico for original equipment manufacturers (OEMs). Eurocopter is an exception. The French-German company says the country is a prize sales territory. “It’s the most promising economy in the region, perhaps better than Brazil, says President/CEO Lutz Bertling, naming Eurocopter’s other hot new growth market in New World sales. Eurocopter opened a $100 million, 130,000-sq.- ft. factory in Queretaro in February as an offset for a large Mexican military purchase. Making such “proximity” manufacturing investments is “part of our DNA,” he says.
But for most, tapping into Mexico as a sales market is less important than the country’s geography, trade policy and political and economic stability. “Our main reasons for being here are, number one, to be close to the U.S. market and number two, to be close to the U.S. dollar market,” says Stephane Lauret, Safran’s national executive for Mexico and South America. The Mexican peso is pegged to the U.S. dollar, giving Europeans a currency hedge against the Euro. Nafta allows Safran to operate in a low-wage environment with access to the U.S. market. About 80% of everything Safran makes in Mexico, from Labinal’s 787 wiring harnesses and Messier-Bugatti-Dowty landing gear to Snecma’s CFM56-7B low-pressure compressors, is shipped across the U.S. border.
There is another, more subtle, reason why Mexico’s star is rising. As they search for industrial development opportunities, the country’s leaders emphasize their goal is for Mexico to become a key player in aerospace’s global supply chain. The message is not new, they have followed it for years—and succeeded—as automotive assemblers. However, what is not on the political agenda is a national aspiration to begin competing in aircraft, engine and major systems development or manufacturing. Of course, national ambitions are subject to change, but Mexico’s focus on the valued-supplier role plays well with manufacturers concerned about the security of their intellectual property (IP) when they work in markets such as China, where a well-financed state agenda of competing with Western OEMs has been announced.
Besides IP protection, there are other benefits to this good-supplier attitude. Mexican workers are widely praised for their eagerness to meet their employers’ standards. “Mexican workers want to learn the U.S. way,” says Alfred Espirio, senior vice president of international finance for General Electric in Mexico. “In China and India, they want you to do it their way.”
Mexico’s aerospace industrial growth has followed a classic leader-follower pattern. Safran’s first push was 25 years ago in Reynosa making electronics for cars. The company wanted to see how things went. Its first big aerospace bet was placed in 1998 when Labinal bought a General Dynamics wire harness factory in Chihuahua as part of a broader push in North America for Boeing contracts. Largely because of Labinal in Chihuahua, Mexico has become Safran’s third largest industrial base, behind France and the U.S.
But no one can reserve Mexico exclusively for themselves. Labinal’s biggest competitor, Latecoere, says it will build a factory in Hermosillo, Sonora’s capital, that will employ 400 by 2015 to make harnesses through its LATelec subsidiary. However, the factory’s output will be more diverse than Labinal’s; it also is to produce transport passenger doors.
Westinghouse and Honeywell were the first U.S. companies to arrive in Chihuahua, making components for the defense industry in the 1970s. The mountainous city has a farming, mining and automotive supply background with touches of the U.S.—Home Depot, Starbucks, Sam’s Club. There also are 32 aerospace factories scattered across it in industrial parks, some neighboring car factories, and others for consumer electronics, such as China’s giant Foxconn. Most of the aerospace activity has arrived since 2007 and the city has established itself as headquarters for general, business and rotorcraft manufacturing dominated by U.S. concerns, including MD Helicopters, Bell Helicopters, Cessna and Beechcraft.
The leader-follower rule is even stronger in Santiago de Queretaro. The capital city is about 140 mi. north of Mexico City and came to aerospace later than areas along the U.S. border. Its lifestyle, with an old town filled with cafes and historic churches, is especially appealing to Europeans. Observers of the progress of Mexico’s aerospace industry count Bombardier’s 2006 decision to locate in Queretaro as the start of the influx by other big companies, whether OEMs or major suppliers. In Queretaro alone, Meggitt, CFM, Messier-Bugatti-Dowty, Precision Castparts, AE Petsche, Aernnova and Eurocopter have all taken up residence near Bombardier.
Baja California and Sonora are centers for parts shops and actually have bigger company rosters than Chihuahua or Queretaro. Baja’s output covers a variety of engine, airframe and interiors supplier functions. Sonora is known as an aero-engines supply center.
Of the roughly 270 aerospace companies currently in Mexico, 79% are in manufacturing, 11% in maintenance, repair and overhaul and 10% in development and engineering, says Vladimiro de la Mora, president of the Mexican Federation of Aerospace Industries (Femia).
Femia’s goals are to see the country rank among global aerospace’s top 10 supplier nations by 2020; it is now ranks 15th. The federation wants exports of $12 billion a year by then, with half their value coming from local content, and employment of 110,000 workers. Employment is now more than 34,000 and exports are worth $4.5 billion.
Although Mexico’s aero business is booming, it is riding a wave of global demand dictated by others. It will live and die by how well U.S., Canadian and European OEMs and Tier 1 suppliers fare. But its factories also can be the tail that wags the dog. In February, Bombardier announced a six-month delay in first delivery of the Lear 85 because of technical challenges with its all-composite airframe, manufactured in Queretaro. These problems have now been overcome, the company says.
In Mexico, plant managers see a national industry in its infancy, still learning the basics but with an eager workforce. “The numbers tell us we are attractive now,” says Kaman Aerostructures plant manager Francisco Meza in Chihuahua. “What I would say is that the industry is not mature enough. One of my major challenges is to make this business more innovative, to introduce more lean.”
Bombardier’s director of strategy and international business development, Vice President Michael McAdoo, watches the wage and skill-set forces at work in Mexico closely. His job involves tracking costs and managing capacity for Bombardier’s global supplier network. He sees a narrowing cost gap between Mexico and China. China still wins on costs but Mexico has advantages in terms of education, investment climate and infrastructure.
Mexico is “assembling forces for expansion,” he says. “It wants to move into higher value-added activities.” The question is how much it can expand, and how quickly.
Soon after the Queretaro factory opened, Bombardier pulled work into it from Mitsubishi Heavy Industries, a tradeoff McAdoo characterizes as common with a long-time partner. But even as Mexico becomes more attractive, Bombardier continuously evaluates other locations for its supply chain. New on the list is Casablanca, Morocco.
The question of whether low-cost Mexico is taking jobs from U.S. and European workers is a sensitive one, especially for Americans. Many U.S. OEMs declined to comment on this issue.
Old-fashioned labor-rate hunting explains much of the recent push into Mexico, especially from the U.S. and Canada. For instance, pricing pressure on the 737 trailing edge flap drive transmissions that it makes for Boeing prompted Curtiss-Wright Flight Controls of Shelby, N.C., to open a 70,000-sq.-ft. factory in Queretaro in January 2012. “Wages are one-tenth those in Shelby,” Director of Operations Everett Rice says.
But other factors are also at work. Kaman Aerostructures’ lead factory in Jacksonville, Fla., is largely devoted to military contracts, notes Vice President-Sales/Marketing Jim Melvin. The company needed to expand its commercial operations and knew it would be under pricing pressure. “We looked globally, at Asia and elsewhere, but zeroed in on Mexico based on where commercial aerospace is heading,” he says. “We weren’t looking to take work out of Jacksonville. Our strategy was to put in the [Chihuahua] facility and then go after work.”
The first parts produced by France’s Manoir Aerospace’s finishing and machining factory in Chihuahua in 2009 did not head back home. They were for its long-time customers Snecma and Messier-Bugatti-Dowty in Queretaro, says plant manager Nicolas Maillard.
Easy logistics across the U.S.-Mexico border were early attractions, but increasing demand has opened flight connections deeper into the country. For Rice, shifting work into Mexico instead of overseas keeps time-zone changes to a minimum and allows him to board a flight at 8 a.m. in Charlotte, make a connection in either Dallas or Houston, and be in Queretaro by noon.
European OEMs say rising demand means expansion in Mexico does not diminish jobs at home, but it does overcome concerns they have about finding new hires in Europe, where open jobs listings can last for months. In Mexico, they find workers in their 20s and 30s eager to make a transition into aerospace from other industries. “Aerospace is very sexy now,” says Fokker’s Huij.
Which is not to say that qualified workers are always available in Mexico. “Queretaro needs more engineers,” says Lauret. “Schools in Chihuahua are good—they’re a strength, but more are needed.”
Competition among Mexican states for jobs is no less intense than it is in the U.S. Not surprisingly, the biggest group of foreign plants is in the six states that border the U.S. A breakdown by Femia ranks 22% of the country’s aerospace industry with just 11-50 employees and 7% with 10 or fewer. Forty-three percent have 51-250 employees and 28% have more than that. There are 15 corporations with more than 500 employees, with the largest concentration (8) in Baja California.
Security concerns, from shootings or kidnappings for ransom, remain a consideration in Mexico because of drug-war violence. The government reports that industry in general, and aerospace in particular, has not been targeted and no manufacturing executives interviewed by Aviation Week reported problems. But the issue remains, and is one of the biggest political concerns for Enrique Pena Nieto, who became president in January. A month later, when he celebrated the opening of a Eurocopter factory in Queretaro, the company’s second in Mexico, there had already been 2,399 deaths since the first of the year.
The most violent areas tend to be in the north, along the U.S. border. Although they emphasize that their facilities have remained safe, U.S. executives still exercise caution. When senior U.S. officials visit they take precautions, like not bringing U.S.-licensed vehicles across the border and following a strict hotel-to-factory travel regime. Queretaro is regarded as safe, which is one reason it has had such success attracting foreign firms. Chihuahua had a spate of violence in 2009 but it is said to have settled down.
Still, one manager who makes frequent trips there hires a trusted driver, just to be safe.
Tap on the icon in the digital edition of AW&ST for listings of 250 aerospace companies in 15 Mexican states, or go to AviationWeek.com/mexicoaerospace
David Agren, Special for USA TODAY 9:33p.m. EDT March 18, 2013
MEXICO CITY — Robert Moser moved the manufacturing of his company’s lines of cleaning products and kitchen gadgets to China during the last decade. Now his company is moving its manufacturing again — to Mexico.
“When you look at total costs, you’re pretty much at parity,” says Moser, president of Casabella, based in Congers, N.Y.
Companies like Casabella couldn’t move out of Mexico fast enough a decade ago, sending production to China to take advantage of the cheaper wages and prices in a country keeping its currency artificially low.
But the cost of doing business in China has been rising steadily, say companies that have returned to Mexico. Salaries are surging there. The Chinese currency, the yuan, has risen in value, making goods more expensive to export. Shipping costs have risen as well, making a move to Mexico even more attractive to companies whose primary markets are in the Western hemisphere.
The Mexican peso this week rallied on optimism about the country’s economic prospects following an unexpected rate cut last week. The peso has risen 2.8% in 2013.
Recently installed President Enrique Pena Nieto, meanwhile, has promised changes to Mexico’s tax system and reforms of its government-run energy sector to attract more outside investors and businesses from the USA and elsewhere.
“Mexico is a stable country, close by, but unfortunately with cheap wages,” says Eduardo Garcia, publisher of online business journal Sentido Común.
Wages were six times higher in Mexico a decade ago, but only 40% higher than those paid in China in 2011, according to a recent report by the International Monetary Fund. Mexico is part of more than 40 free trade agreements, which tends to reduce costs further. Then there is the weariness of doing business in China what with the midnight telephone conferences and 16-hour flights to Beijing — says Ed Juline, whose Guadalajara-based company, Mexico Representation, consults and represents manufacturers moving to Mexico.
“I have a dozen projects on my plate” of companies that want to get out of China, Juline says.
The upswing in manufacturing — about 20% of Mexico’s GDP — is driving the Mexican economy. Mexico says it expects its economy to expand by 3.5% in 2013.
It’s a reversal of fortune for Mexico, which lost manufacturing jobs to China during the last decade and watched rival Brazil boom by selling boatloads of raw materials to the emerging Asian economy.
“Mexico was uncompetitive,” Juline says.
But China was gaming the system against places such as Mexico, he says. Along with keeping its currency low, China has subsidized fixed costs to benefit its commercial activity, which hurt Mexico, he says.
Meanwhile, lead times for Chinese factories are increasing and manufacturers there are showing less interest in handling smaller orders, says Mike Rosales, whose Los Angeles-based company, Manufacturing Marvel, makes toys and trinkets in both China and Mexico.
Rosales says that shipping costs for him jumped when oil prices hit $100 a barrel, and the lack of protection in China for industrial and intellectual property became problematic.
“They would ship your product out the front and your product with someone else’s name out the back,” he says.
Some of the merchandise being made in Mexico ranges from figurines to flat-screen TVs, along with advanced items such as aerospace parts and automobiles — 2.8 million of which were assembled south of the border last year.
Some here say more manufacturing in Mexico benefits U.S. businesses because it offers them suppliers on both sides of the border. Jim Raptes, custom sales manager at Deco Products, which makes zinc castings in Decorah, Iowa, says his Mexican business has increased from 1% of total sales to 10% over the past five years, due to orders from manufacturers in Mexico.
Security remains a concern in Mexico, Juline says. But he feels the violence, due largely to drug wars, has given few companies pause about coming south.
Executives won’t travel to Mexico, he says. “But the Americans who do come down here secretly love it.”
That boom coming from North America’s southernmost state isn’t just gunfire
by David Agren on Monday, March 18, 2013 11:50am
Mario Armas/AP
A new truck rolls off the assembly line every minute at the GM factory in the conservative Catholic heartland of Mexico’s Guanajuato state. The factory in Silao, set in the shadow of a giant Christ statue considered the geographic centre of the country, produces so many trucks that GM has expanded its workforce by more than 60 per cent since 2008 and has plans to hire even more. The nearby Volkswagen plant just opened a $550-million engine plant and Toyota has announced plans for a facility down the road.
Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year, while factories in border towns like Tijuana and Ciudad Juárez churn out everything from plastic toys to plasma TVs. Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise. “This has nothing to do with Mexico,” Ed Juline, head of Guadalajara-based Mexico Representation, a business consultancy, says of the trend. “It has everything to do with China.”
Ten years ago, wages in Mexico were six times higher than those paid in China, but the gap had narrowed to 40 per cent by 2011, according to an International Monetary Fund report. Geography also works in the country’s favour, as companies take advantage of its easy access to U.S. and Latin American markets, where economies are expanding, demanding Mexico’s autos, appliances and advanced electronics.
But manufacturing is just one part of the picture, as Mexico moves from mess to can’t-miss status, the hottest of the emerging markets. “This is Mexico’s moment,” said new President Enrique Peña Nieto, summing up the sentiment at his December inauguration. Indeed, the Mexican government is projecting growth of 3.5 per cent this year—better than Brazil, which investors are suddenly bearish on after a decade of adulation. In Brazil, a credit bubble appears set to burst and demand for its commodities is diminishing.
The scenario has created a collective giddiness among elites and investors unseen since the early 1990s, when Mexico prepared to enter NAFTA and appeared poised for First World status, only to suffer a calamitous peso crash. Last year, investors poured $80 billion into Mexican securities—five times more than went to Brazil, according to the Banco de México. But external factors also benefit Mexico, especially as the BRIC countries lose their lustre.“Brazil is a mess,” says Manuel Molano, adjunct-director of the Mexican Institute for Competitiveness, a Mexico City think tank, “China is decelerating, India’s growth has been stalled for three years, Russia is nothing special.”
Peña Nieto is pledging structural reforms to the energy, tax and social security systems—measures his party previously opposed. The reforms, he says, will generate six per cent economic growth, tripling the rate of the past dozen years. He’s formed a pact among the three main political parties to pursue his agenda and has already struck deals to overhaul labour laws and an education system that allowed teachers to sell their positions like personal property. “He’s a smart political negotiator,” says Molano. His administration is “resourceful in convincing people.”
The story doesn’t begin with Peña Nieto. For three decades, government policies have been geared to suppressing spending and controlling inflation that had climbed to triple digits. The central bank’s interest rate and inflation both now hover around four per cent, while central government debt is low, amounting to approximately 28 per cent of GDP. (It’s around 36 per cent in Canada.)
Remarkably, the raging drug war has done little to dampen enthusiasm for Mexico. “A pile of 49 headless human bodies on a roadside is apparently less scary than an interest rate cut,” says Ulysses de la Torre, a blogger who focuses on emerging markets.
How much the “boom” benefits average Mexicans remains to be seen. Almost half (46 per cent) say their economic condition actually deteriorated over the previous year, according to a recent poll, and many expect little improvement in the short term, says Federico Berrueto, director general of polling firm Gabinete de Comunicación Estratégica. Fully 59 per cent of Mexicans now work in the informal economy. “The average person sees unemployment, that ends don’t meet, that their salary is low,” says Berrueto. When compared to the perspective of international investors, “it’s two distinct worlds.”
For the last few years, the people of Juarez lived in a warlike collective trauma that reached its peak in January-February, 2011 when, on average, almost ten lives were taken per day in the belligerent streets of the battered border city. In retrospect, the reality of a leading community the size of Juarez stroked simultaneously by the great economic recession and the security crisis seems implausible even for a movie script.
The toll has been high and widespread. A drought of new manufacturing projects, the emigration of talent, the closing of businesses, the constant mantra claiming for peace and the shroud of fear, all tested the resilience of Juarez. The only consolation is thinking that it could have been a lot worse. And yes, it is important to mention “The elephant in the room” because the violence was real and because if we don’t remember the past we might be condemned to repeat it. Fortunately, the elephant is on its way out of the room. The “Murder capital of the world”- no more.
According to data from the trustworthy source Ciudad Juarez “Mesa de Seguridad” (Security council), a group that includes the three levels of government (Federal, State, City) and private citizens (persons without public or government positions) from the local academic, business and social institutions, the incidence of crime and homicides in Juarez has declined significantly. The graph in the Exhibit shows the number of homicides in Juarez per 100,000 inhabitants for the last three years. Note that since the peak in early 2011 when murders/100k were at a mindboggling 240, they have had a constant decline.
The lowest figure of 24/100k was recorded in November 2012, an arithmetical drop of 900%…! The 12-month average of homicides/100k for 2012 was 57, and the last 6-month’s average was 31. Statistically, the data series for the three years in record can be regarded as a significant trend. But other important indicators are also receding as explained in The Mesa de Seguridad’s report which may be found at www.mesadeseguridad.org
For example, auto thefts with violence have gone from over 500 per month in the first quarter of 2011 to about 65 per month in Q4-2012, presenting a much safer panorama in the streets. For the general public, businesspersons and tourists driving, this is probably the most important security indicator of all.
The report also shows large and important drops in auto theft without violence, convenience stores assaults, kidnappings and extortions. Where do we want to be to be able to say that Ciudad Juarez is safe? According to the Mesa de Seguridad objectives for 2013, the target for homicides/100k per month is 15, kidnappings and extortions should be at zero. The report doesn’t show an objective for auto theft with violence, but reaching a level of 30 or under per month seems reasonable.
Now, border regions and ports everywhere in the world are by nature less safe than most interior cities, so it is hard for Juarez to aspire to be level with the likes of Seville, Little Rock or San Jose, Costa Rica. But as shown in the graph, Juarez is becoming a lot safer, and if measured by the homicides/100k yardstick, it is safer than other cities in the U.S. and abroad. But by that token, any city is dangerous if you are with the wrong company, at the wrong place and time. The most important things for the inhabitants of a city and visitors to remain safe are to be careful, avoid risk and keep your eyes and ears open.
The task in Juarez for now is to finish getting rid of the elephant and making sure that it doesn’t come back.
China lost its factory wage advantage over Mexico earlier this year, an ongoing trend that has fueled Mexican economic growth past its neighbors to the north and south.
But whether Mexico can maintain that momentum may depend on how much political will President-elect Enrique Pena Nieto has in pursuing reforms that challenge special interests.
In 2005, China’s productivity-adjusted manufacturing wage advantage over Mexico was $1.22 an hour, but that narrowed to 34 cents in 2010, according to the Boston Consulting Group. They switched places this year, and Mexico’s wage advantage is estimated to widen to $1.75 by 2015.
Fast-rising Chinese labor costs are prompting companies to “reshore” production back to Mexico and the U.S., where transportation and other logistical costs are lower.
“Mexico is going to be a big winner in reshoring,” said Hal Sirkin, managing director at Boston Consulting Group, though not as big as the U.S. will be.
Rio Grande Vs. Rio
U.S. exports have helped Mexico outpace economic growth in Brazil after lagging for years. In 2011, gross domestic product expanded by 3.9% vs. 2.7% in Brazil. In Q1 2012, Mexico grew 4.6% vs. a year earlier against Brazil’s scant 0.8%. That was also significantly faster than the U.S.
Mexico’s economy could top Brazil’s by 2022, helped by manufacturing, Nomura analysts predict. Mexico is benefiting from its reliance on the U.S., where manufacturing has recovered, while Brazil sees less commodity demand from China.
Media coverage of gruesome drug violence hasn’t deterred companies like Alcoa (AA) from expanding plants or Nissan (NSANY) from moving production there.
Mexico is once again reaping the benefits of the 1994 NAFTA pact with the U.S. and Canada. Manufacturing production has leapt to new highs, after a lull in much of the last decade when companies rushed into China. Mexico’s auto production from January to July rose 13% from a year ago to a 1.65 million vehicles, a record for that period.
But several obstacles to Mexico’s continued growth remain.
The amount of production Mexico can absorb from China will be limited by the availability of skilled workers, infrastructure, supplier networks and safety concerns, Sirkin says.
Mexico will still get higher-end production, like transportation equipment and machinery, and stands to capture a substantial amount from China, he said. But about three-fourths of the manufacturing reshored from China will flow to the U.S. in the next decade.
Mexico Still Has Problems
China will still enjoy a more flexible labor market, where workers can more easily be added or cut, notes Peter Morici, a University of Maryland economist.
Chinese factories can also quickly ramp up production and revamp work schedules to meet client deadlines, while Mexican unions limit such flexibility. But proximity to the U.S. gives Mexico an edge in just-in-time manufacturing, as shipping from China can take 3-6 times longer.
Government corruption in Mexico is another disadvantage, especially given the country’s infrastructure needs. Corruption is a problem in China too, but at least its government is more efficient, Morici added.
“It’s going to take more than wage parity,” he said. “Mexico is having a lot of trouble getting its act together.”
While China’s wage advantage is disappearing, Mexico’s regulatory edge over other emerging markets is shrinking too, says Tom Fullerton, an economics professor at the University of Texas at El Paso.
Red tape for businesses and labor inflexibility are Mexico’s biggest weaknesses, and there isn’t much chance for improvement, he said.
The incoming president’s Institutional Revolutionary Party has a bad record of deregulation, as interest groups in the PRI have blocked prior reforms. That could benefit China and India, which are “making progress toward parity with Mexico,” Fullerton said.
Still, hopes are high for Nieto, who has pledged to allow more private investment in the state-run oil industry, overhaul the tax code to raise government revenue and liberalize labor laws.
Russell Investments’ index of Mexican stocks topped an all-time high Monday, reflecting a 20.5% return so far this year vs. 8.9% for its global index.
“The run-up in the performance of the Russell Mexico Index is largely due to optimism around President-elect Enrique Pena Nieto giving indications of market reforms,” said Mat Lystra, senior research analyst with Russell Indexes, in a statement.
Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.
In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.
The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.
“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”
Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.
Sounder Footing
This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.
President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.
“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”
Trade Agreements
Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.
Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.
Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.
The latest company to expand operations is Plantronics Inc. (PLT) (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.
Human Capital
Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.
Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.
“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.
Low Inflation
Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.
A press official from the Mexican finance ministry didn’t respond to a request for comment.
Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.
Time Lost
The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.
“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”
Dissatisfaction with the economy is propelling Pena Nieto’s bid to return his Institutional Revolutionary Party, or PRI, to power for the first time since Fox ended its 71-year reign in 2000. The 45-year-old former governor of Mexico state had 37.2 percent support in a June 8-10 poll by Consulta Mitofsky, compared with 25.1 percent for Andres Manuel Lopez Obrador, who narrowly lost to Calderon in 2006, and 21 percent for Josefina Vazquez Mota of the PAN.
Raise Salaries
If elected, Pena Nieto says he’ll raise salaries gradually, by improving productivity. To do so, he promises to support legislation making it easier to hire and fire workers, luring more companies into the formal economy where they can take out loans more easily and make investments. He also favors ending state-run Petroleos Mexicanos’ monopoly; revenue for Latin America’s largest oil producer funds about a third of Mexico’s public budget.
“In no way are we willing to sustain Mexico’s competitiveness through low salaries, nor can we raise salaries artificially through populist measures,” Luis Videgaray, Pena Nieto’s campaign manager and his finance chief when the candidate was governor, said in a May 30 interview. “The only way to increase productivity is through reforms.”
Pena Nieto’s rivals say he isn’t capable of bringing about the change he promises and returning the PRI to power would reignite corruption that blossomed under its previous rule.
Poor Performance
Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.
The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.
Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.
Skill Shortages
Delphi Automotive Plc (DLPH) (DLPH), the former parts unit of General Motors Co. (GM) (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.
While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.
“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.
That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.
“I supervise 15 workers,” Chavero said. “I should be making more money.”
Security concerns don’t yet appear to be putting a major dent in Mexico’s appeal to manufacturers. Here’s why.
Wednesday, March 14, 2012 By Closer, cheaper, friendlier. That might have been the formula underlying moving to or opening manufacturing operations in Mexico. The United States’ southern neighbor offers transportation distances a fraction of those from Asia, a labor force a good deal cheaper than domestic workers, and a country causing fewer headaches about intellectual property and other trade concerns. But in recent years, drug-related violence along the border has caused some manufacturers to be more cautious about making the move to Mexico.
Even with those concerns, Mexico continues to benefit from U.S. companies and other foreign investors who see it as an attractive manufacturing destination. In fact, 63% of those surveyed by AlixPartners, a business advisory firm, named Mexico the most attractive country for siting manufacturing operations closer to the United States. Only 19% of the companies reported supply-chain disruptions in Mexico as a result of security issues. And 50% reported they expect things to improve over the next five years.
Mexico’s proximity to the United States solves the most pressing issue facing manufacturers, which is speed to market, according to Rich Bergmann, global lead for manufacturing for Accenture. “The stability of the time schedule of supply has become paramount in manufacturing. Whether we like it or not, a 12-month forecast, steady-state demand is no longer a reality. Everyone is running lean supply chains and inventories. Being close to customers is key to reducing lead time. Add to that the overall total landed cost and that explains why reshoring is occurring in Mexico,” he says.
In fact, Mexico helps multinational firms cope with a variety of factors stemming from intense global competition, says Arnold Matlz, an associate professor at the W.P. Carey School of Business, Arizona State University. They include the pressure to reduce and control operating costs, the need for operational flexibility, the need for different service outcomes for different customers, and shorter product/service development cycles.
Precision manufacturing is critical to aerospace-industry needs. Photo Courtesy of The Offshore Group
To date, manufacturers operating in Mexico have been largely shielded from the drug-related violence. “As reports have indicated, Mexico’s violence is characteristically cartel versus cartel. It is something that has not had a very large amount of leakage into civil society, nor has it affected, in a noticeable way, the companies that are already doing business there. As a matter of fact, in spite of what is in the news, Mexico’s manufacturing economy is humming along,” says Steve Colantuoni, director of corporate marketing for the Offshore Group. “Companies that are already in Mexico are increasing their numbers and their production.”
Foreign direct investment in Mexico rose 9.7% in 2011 compared to 2010 to reach $19.44 billion, indicating that violence is not chasing away dollars. This faith in Mexico is helping to fuel strong economic growth there. After a 5.5% growth rate in 2011, the Mexican economy is expected to grow 4.5% in 2012. Manufacturing has been a significant driver of the economy, growing 8% over the past year and creating 1.8 million jobs.
A High-Flying Aerospace Cluster
One industry flocking to Mexico for its lower cost structure and ample workforce is aerospace manufacturing. Between 2010 and 2011, total sales in Mexico’s aerospace cluster increased by 25% to $4.5 billion, according to the Aerospace Industries Association, far outstripping the industry’s overall annual growth rate of 15%, according to data from the World Bank.
More than 250 aerospace companies and suppliers, including Aernnova, Bombardier, Cessna, Eurocopter, Hawker Beechcraft and Messier Dowty, now operate in Mexico and employ 29,000 people. As large OEMs set up shop, suppliers follow. Québec-based Heroux-Devtek, a manufacturer of aerospace and industrial products, made the move after prompting from some of its biggest clients. “Customers such as Boeing were saying, ‘If you want to be a key supplier, then you should consider Mexico’,” says Michael Deshaies, general manager of the firm’s Querétaro operations. Querétaro is one of the top states in Mexico for the industry along with Chihuahua and Sonora.
In fact, in Sonora alone, located in Northeast Mexico, manufacturing has been growing at 25% a year for the past five years. The number of companies serving the aerospace supply chain has grown from 21 in 2007 to 45 in 2011; and employment in the sector has more than doubled at the same time, from 2,520 to 7,000. The city expects employment will exceed 10,000 jobs by the end of 2013.
One employer contributing to the growing industry is INCERTEC, a specialty plating, metal finishing and engineering-solutions company based in Fridley, Minn. The company will be investing $1.2 million to move some processes to Mexico from Minnesota, where both capacity and labor constraints make it difficult to fulfill demand.
“In the industries we serve, precision is critical,” says Tim Meador, INCERTEC’s chief executive officer. “By adding this location, we can provide manufacturers doing business in Mexico the same consistency, quality and delivery provided by our U.S. location.”
Another consideration for Meador was the available labor source in Mexico. The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year, 90,000 engineers graduate from Mexican universities — three times the number who graduate from U.S. schools. This contrasts to the company’s Minnesota location, where there is a shortage of skilled labor.
Mexican manufacturing provides advantages for high-volume manufacturers. Photo Courtesy of The Offshore Group
It is not only the skilled labor but also the low cost of investing that attracted Scott Livingston, CEO of Horst Engineering, to the region. “New England is a good area for knowledge, but it is a high-cost environment,” says Livingston. East Hartford, Conn.-based Horst, a contract manufacturer of precision components and assemblies, has been in Sonora since 2006.
“We looked at environments all over the world and came back to the aerospace-manufacturing-in-Mexico option,” Livingston explains. “We felt that for a high-mix, low-volume product in a high-precision environment with a significant North American customer base, that it would give us significant opportunity — opportunity to transfer some product that we may not have been as competitive on in the U.S. that we were doing for existing customers; and it would give us access to a new labor pool that was manufacturing-oriented. We’ve seen considerable shrinkage of the manufacturing labor force in Connecticut, and we’re training people from scratch here anyway. So we figured we could do that in Mexico.”
Training is one of the many incentives offered to companies. “Government incentives, including training and infrastructure improvements, are key reasons that the aerospace cluster is growing. The government is also increasing resources to build up interior areas as opposed to the border towns,” explains Jay Jessup, president, Mexico Services Group.
Becoming a Manufacturing Export Powerhouse
Aerospace isn’t the only industry finding a manufacturing-friendly environment in Mexico. Automotive manufacturing in Mexico was on the rise in 2011, observes George Magliano, senior principal economist at IHS Global.
“It was a year of record production in terms of total vehicle consumption and export in the light- and passenger-vehicle market segments,” he notes. “Mexico is becoming a magnet for supplier investment. This is due to announcements of sizable investment in the country in new production platforms over the last year by large automotive-industry OEMs such as Nissan, Mazda, BMW, Volkswagen and General Motors.”
In 2008 Mexico became the largest supplier of auto parts to the United States. In 2010 Mexico ranked as the sixth largest automotive exporter in the world. The country exports 80% of its vehicles to the United States, and 11 of every 100 autos sold in the United States are made in Mexico. Predictions are that by 2014 automotive production will reach 2.4 million units. Eight of the 10 leading automotive OEMs have assembly plants in Mexico, and more than 300 Tier 1 suppliers have plants in Mexico.
The skill sets of Mexican aerospace-industry workers continue to advance. Photo Courtesy of The Offshore Group
Heavy-truck manufacturers include Dina, Navistar, Kenworth, Daimler, Volvo, Isuzu and Scania.
On the supplier side, over 1,100 companies manufacture auto parts in Mexico, including: Robert Bosch, Denso, Delphi, Magna, Visteon, Eaton, Valeo, Bridgestone/Firestone, Johnson Controls, Michelin, Goodyear, Lear, ThyssenKrupp, Faurecia and Siemens.
In terms of exports of high-tech manufacturing, Mexico is the second largest supplier of electronic products to the United States. Exports of consumer electronics and devices reached $71.4 billion in 2010, an increase of 20% over the previous year. In fact, Mexico is the third largest global exporter of cell phones.
While Mexico is still heavily dependent on the United States for its exports, the country is starting to diversify its export markets.
“Mexico’s exporting structure has been based on the U.S. market where 90% of the products land. But during the recent economic downturn, in the past three years, they have reduced this number to less than 80%. Their export markets are more diverse, with Latin America growing. In fact, trade with Brazil alone has increased fivefold,” explains David Rutchik, a partner with Pace Harmon, an outsourcing advisory services firm.
Fueled by a young, increasingly educated population, low labor rates and aggressive promotion by Mexican government officials, Mexico appears well-situated for years of sustained growth. “We are predicting that by 2050 Mexico will be the eighth largest economy in the world,” says Paul Cronin,a U.S.-based executive vice president with the international commercial banking firm HSBC.”
Good news for Latin America: wages in China, Vietnam and other Asian countries are rising faster than expected, leading growing numbers of multinational firms to move their manufacturing plants to Mexico and other countries closer to the U.S. market.The Feb. 19 announcement by Foxconn Technology Group, which assembles iPads and other products for Apple, Dell, Nokia, Motorola and other firms in China, that it has raised pay for its workers by 16 to 25 percent was just the latest example of how fast Chinese salaries are rising. It was Foxconn’s third wage hike since 2010.
“More and more companies are telling us that wages are rising faster than they expected,” says Harold Sirkin, managing partner of the Boston Consulting Group, which recently published a study on China’s wages.
“The quality of the workforce in China is highly competitive,” Sirkin added. “People have options to go to other factories, and they do, which is why companies are forced to raise wages.”
According to BCG projections, China’s wages in the Yangtze river delta technology belt have risen from 72 cents an hour in 2000, to $2.79 cents in 2010, and are expected to reach $6.31 in 2015.
And the trend is likely to continue beyond 2015. A growing appreciation of the Chinese currency, higher education standards and a declining workforce will drive Chinese salaries up for decades to come, economists say.
A new joint report by the World Bank and China’s government-run Development Research Center, entitled “China 2030,” says China’s labor force “will start to shrink from around 2015, initially slowly but faster from the 2020s, and is projected to be 15 percent smaller than at its peak by 2050.”
That is because, among other reasons, the population is getting older, Chinese workers tend to work fewer years than their counterparts in other countries, and the supply of rural workers moving to the cities is drying up, the report says.
Even if China were to further relax its one-child policy, things would not change much, because Chinese women are not likely to have more babies, it says. Fertility rates in countries such as Japan, South Korea and Vietnam are not significantly higher than China’s, and suggest that China’s average rate of children per couple — now at 1.5 — will remain stable “even if the (one-child) policy were eliminated,” it says.
In Vietnam and India, wages are rising at an even faster pace. That will present a fantastic opportunity for Latin American countries to attract technology companies and service industries that help produce long-term growth, economists say.
Most multinational companies will maintain plants in China to serve the local market and neighboring countries in Asia, but will move their export-oriented plants to other parts of the world, they add.
While in 2002 China’s average wage was 237 percent lower than Mexico’s, by 2010 it was only 14 percent lower, a recent study by the J.P. Morgan investment bank said. Because of Mexico’s proximity to the U.S. market, many U.S. car companies and other manufacturing industries are moving from China to Mexico, the study said.
Augusto de la Torre, the World Bank’s chief analyst for Latin America, told me that many Latin American countries’ labor forces may already be too expensive and not skilled enough to draw manufacturing plants away from China, but added that Latin America can benefit in other ways from China’s rising wages.
As China’s population becomes wealthier, it will import more consumer goods, entertainment, health and education services. “Latin American countries need to find a niche in supplying that demand on the basis of higher productivity, rather than on the basis of cheap labor,” he said.
My opinion: Either way, Asia’s rising wages present a fabulous opportunity for Latin America.
But to lure foreign manufacturing plants and to export increasingly sophisticated goods and services to China, Mexico and Central America will have to reduce their violence rates, and all Latin American countries will have to dramatically improve their education systems, which nowadays lag far behind those of their Asian competitors.
Granted, these are major challenges. But Latin American countries that realize the golden opportunity they have thanks to Asia’s rising wages and take advantage of it will do great in coming decades.
Read more here: http://www.miamiherald.com/2012/03/03/v-print/2672086/chinas-wage-hikes-could-benefit.html#storylink=cpy
As companies expand their capabilities, Mexico’s advantages — and proximity to its biggest export market — will become evident and its manufacturing base will expand even further.
Clare Goldsberry (Winter 2012)
It wasn’t too long ago that Mexico, like the rest of North America, was beginning to believe that China would eventually capture all the manufacturing to be had. It was true that many companies fled Mexico for the lower labor costs of China.
In a report released in August of 2011, The Boston Consulting Group (BCG) noted that by 2015, wages in Mexico would be significantly lower than in China, pointing out that in 2000, Mexican factory workers earned more than four times as much as Chinese workers. The report notes, “After China’s entry into the WTO in 2001, however, maquiladora industrial zones bordering the U.S. suffered a large loss in manufacturing. Now that has changed. By 2010, Chinese workers were earning only two-thirds as much as their Mexican counterparts. By 2015, BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25 percent higher than the cost of using Mexican workers.”
And, according to a report from Maquila Reference, “Manufacturers producing goods for the U.S. market are reconsidering their manufacturing options in China, and looking at Mexico’s dual benefits of low-cost labor and reduced tariffs under various NAFTA clauses.”
Reshoring to Mexico
Mexico’s GDP is expected to rise 4 percent in 2011, despite the country’s problems with drug cartel violence, which hasn’t seemed to slow foreign direct investment (FDI) in new manufacturing facilities in just about all regions of the country. That’s because Mexico has a low inflation rate and debt levels, and a huge population of young people standing ready to meet employment demands of the big multinational companies. That has put Mexico on par with China and other LLC (low labor-cost) countries in Southeast Asia, particularly since labor costs — as well as other manufacturing-related costs — are rising in Asia.
Another recent Boston Consulting Group study notes that “wage and benefit increases of 15–20 percent per year at the average Chinese factory will slash China’s labor-cost advantage over the United States,” and that will create an attractive incentive for work to return to not only the United States but to Mexico as well. “BCG’s research projects that over the next five years, the fully loaded cost of Chinese workers in the Yangtze River Delta, which includes Shanghai and the provinces of Zhejiang and Jiangsu, will rise by an annual average of 18 percent, to about $6.31 per hour.”
Therefore, Mexico — like the United States and Canada — is seeing a rebound of its manufacturing base in a trend that is being called “reshoring.”
Mexico’s Largest Industry Sectors
While a lot can be said for the huge variety of industries that boast manufacturing plants in Mexico, the big focus is on the automotive, aerospace, and medical device industries.
Automotive: For the automotive industry, Mexico’s more than 1,100 Tier 1 manufacturing companies have been busy even in the face of “lackluster” sales of vehicles in the United States. Multinational Tier 1 suppliers include companies such as Delphi, Magna, Visteon, Johnson Controls, and many others with multiple manufacturing facilities throughout Mexico.
According to a report from Maquila Reference, Mexico became the largest supplier of auto parts to the United States in 2008. Additionally 80 percent of vehicles produced in Mexico are exported to the United States, and 11 out of every 100 autos sold in the United States are made in Mexico. Auto production in Mexico is expected to reach 2.4 million units annually by 2014 — with a projected growth rate of 5.5 percent per year — and account for 18 percent of Mexico’s manufacturing GDP, while generating 56,000 jobs.
Among the major automotive OEMs are Ford, GM, and Toyota, which have established manufacturing facilities along the northern border — the Northern cluster — in Baja California, Sonora, and Chihuahua. The Maquila Reference report notes that Baja California is a “preferred destination for the North American, European, and Asian automakers, with more than 60 foreign automotive companies in the region.”
Ford Motor Co., for example, established its Stamping and Assembly plant in Hermosillo, Mexico, the capital city of the state of Sonora, in 1986. Today the plant, which sits on a 279-acre site, has 1,650,307 square feet of manufacturing space and produces cars such as the Ford Fusion hybrid, Ford Fiesta, the Mercury Milan and Milan hybrid, and the Lincoln MKZ.
Tier 1 supplier TRW Automotive Holdings Group, manufacturer of safety systems, announced in November 2011 that it would open a new facility in the state of Queretaro, Mexico, to produce a range of advanced brake systems. Queretaro is located in the East-Central region that borders the western edge of Texas. According to TRW’s release, the 150,000-square-foot facility will manufacture hydraulic control units for a variety of electronic stability control systems, and brake actuation units including boosters and master cylinders. Production at the new plant is expected to begin near the end of the first quarter of 2012, with an estimated total employment of 450 when full production is reached.
Aerospace: Mexico’s aerospace industry sector has seen a big increase in growth over the last five years, according to a CCN Mexico Report, prepared by Cacheaux, Cavazos & Newton, LLP. Investment in the aerospace industry has exceeded $3 billion over just the last three years. According to data from the Mexican Aerospace Industry Federation, in 2011, $800 million will be added to that total, and over the next five years the sector is expected to create 35,000 jobs. Currently more than 190 aerospace companies call Mexico home, and employ approximately 190,000.
A report from Geo-Mexico notes that the number of aerospace companies in Mexico is expected to grow from 232 in 2010 to more than 350 in 2015. Exports of aerospace parts were worth $3.1 billion in 2010, and that is expected to jump to $5.7 billion by 2015. About one-half of all the jobs in the aerospace industry are in the Northern Border region, specifically in Baja California, Tijuana, and Mexicali, all of which border southern California.
One of the leaders of the growth in the aerospace sector is Canadian firm Bombardier Aerospace, which recently announced that it would build the aft fuselage for its new Bombardier Global 7000 and Global 8000 business jets, as well as major composite structures for the Learjet 85, at its Queretaro, Mexico, facility. Currently, Bombardier builds the Global 7000 and 8000 business jets at its Toronto, Ontario, facility. The company opened its business park in Queretaro in 2006, and has since enticed many of its suppliers to join them there. Bombardier Aerospace President and Chief Operating Officer Guy Hachey noted in a report in Aviation Week that the company is “ramping up in Mexico to about 2,500 employees by the end of 2012.”
Many of these heavy industries attract numerous suppliers into Mexico. In September 2011, Fridley, Minnesota-based Incertec — a specialty plating, metal finishing, and engineering solutions company — announced that it purchased the assets of CRS Aerospace in Empalme, Sonora, in order to establish manufacturing operations in Mexico. This will allow Incertec to provide cost savings and geographical efficiencies to customers in the aerospace, electronics, connector, and medical device industries.
“In the industries we serve, precision is critical,” states Tim Meador, CEO and president of Incertec. “By adding this location, we can provide manufacturers doing business in Mexico the same consistency, quality, and delivery provided by our U.S. location.”
Medical Device: Baja California is also home to a medical device manufacturing cluster, with more than 65 plants in the area dedicated to medical device manufacturing and responsible for 35,000 jobs, according to Maquila Reference.
Companies in the region include Cardinal Health; Medtronic; ICU Medical, Inc., among others, with 91 percent of medical device investments coming from the United States. These facilities are FDA, CE, and ISO 13485 certified with clean rooms ranging from Class 100 to 100,000.
Some 233 companies comprise Mexico’s medical device industry, with an estimated value of approximately $3.4 billion, contributing 0.4 percent of Mexico’s GDP. Of the medical devices manufactured in Mexico, 92 percent are exported to the United States.
An Educated Work Force
Mexico has a vibrant and well-educated work force, with an average age of 29. A report from the Organization for Economic Co-operation and Development states that 50 percent of Mexico’s citizens age 15–19 are enrolled full-time or part time in an educational program. Each year, some 90,000 engineers graduate from one of Mexico’s many universities. The country’s university system also includes technical and trade schools. The Technology University of Mexico has schools in Atizapan, Cuitlahuac, Ecatepec, Marina, and Sur.
One of the largest university systems is the Monterrey Institute of Technology, one of the largest private, nonsectarian co-educational multi-campus universities in Latin America. With over 90,000 students among 33 campuses in 25 cities in its high school, undergraduate, and post-graduate programs, the Monterrey Institute is one of the finest systems in Mexico.
Mexico’s Vocational Education Training (VET) system offers three levels of vocational and trade school training that includes Training for Work courses that can be completed in three to six months, consisting of 50 percent theory and 50 percent practice, and preparing students for entering the work force.
The Technical Professional baccalaureate program consists of 35 percent general studies and 65 percent vocational studies; 360 hours of practical training is required to obtain this degree. The technological baccalaureate that comes with the title Professional Technician is offered by both state governments and the federal government, and similar to an engineering degree. All of these programs offer excellent collaboration between the schools and employers, giving ready access to a trained and skilled work force.
A Changing Landscape
BCG noted that Mexico “has the potential to be a big winner” when it comes to supplying North America. “It has the enormous advantage of bordering the United States, which means that goods can reach much of the country in a day or two, as opposed to at least 21 days by ship from China,” the report said. “Goods imported from Mexico can also enter duty-free, thanks to NAFTA.”
Nonetheless, changes might alter the landscape and create incentives for U.S. companies to bring some manufacturing back from Mexico. For example, Ford Motor Company recently announced that due to its new national labor agreement with the UAW, it plans to move production of the Ford F-650 and F-750 medium-duty trucks from Escobedo, Mexico, to its Ohio Assembly Plant in Avon Lake. This marks the end of a decade-old Blue Diamond Truck, LLC joint venture between Ford and Navistar International, which currently manufactures Ford F-650 and F-750 trucks in Mexico for customers across North America.
But even as some manufacturing is migrating back to the United States from Mexico, other manufacturing is headed there. In October 2011, Whirlpool Corp. announced that it will close its Fort Smith, Arkansas, side-by-side refrigerator manufacturing facility in 2012 and shift that work to its manufacturing facility in Ramos Arizpe, Mexico. And although Nissan plans to boost capacity at its U.S. plants in Tennessee and Mississippi, it also plans to build a new plant in Mexico, according to a January 2012 company announcement. The new plant — which will be Nissan’s third in Mexico — will reportedly have the capacity of producing 175,000 vehicles a year, and employing 3,000 workers.
The winds of manufacturing continue to shift, as companies seek manufacturing sites that offer the best of all worlds: low labor costs, high quality, good infrastructure, access to markets, reduced shipping time and costs, and educated, skilled work forces. Mexico can fill much of that bill.
Rail is hot in Mexico—and getting hotter every year. The country’s largest railroad, Ferrocarril Mexicano (Ferromex), saw its carload volume increase by 6.6 percent in 2011 compared with 2010, and revenues increase by 13.9 percent, according to the company’s chief executive officer, Rogelio Vélez.
Mexico’s second-largest rail carrier, Kansas City Southern de México (KCSM), reports that it moved 15.9 percent more carloads in the first three quarters of 2011 than in the same period in 2010.
These figures represent the growing demand for rail transportation both domestically and between Mexico and the United States.
The “nearshoring” trend is one driver of this growth. Thanks to high oil prices and rising wages, Asia is no longer the obvious low-cost location for companies that manufacture goods for the U.S. market. The increase in corporations building factories in Mexico has boosted the flow of materials headed south from the United States to Mexico, and finished products headed north.
Mexico’s central location is a second factor in the county’s rail renaissance. “It’s in the middle of two hot markets: North America and South America,” says Jim Commiskey, vice president, automotive and Mexico at Dublin, Ohio-based Pacer International, a logistics services provider whose portfolio includes a variety of intermodal freight services. “Mexico provides access to raw goods from the United States, and to countries such as Brazil that produce steel and other manufacturing necessities.”
A third cause is the fact that the rail industry in Mexico has been playing catch-up since the nation privatized its railroads in the 1990s.
“Rail in Mexico was underdeveloped because the state-owned railroad company, Nacionales de México, stopped investing in it in the years just before privatization,” says Vélez. When the private sector took over, the new rail carriers started improving the network and heavily marketing their services. Plenty of opportunity remains to be tapped.
As Mexican railways invest in upgrades that make their services more reliable, shippers are more apt to consider rail—especially intermodal—as a less expensive alternative to long-haul truck, says Paul Hirsch, vice president of Mexico operations at Hub Group, a provider of intermodal, highway, and logistics services based in Downer’s Grove, Ill.
“Many large corporations tried intermodal in the past, when the infrastructure and service providers were inadequate, and found that it didn’t work,” he notes. “Now they are trying it again.”
A BIT OF HISTORY
Mexico’s current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM’s share in 2005 and changed the railroad’s name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).
In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.
In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Having spent several years overcoming legal challenges, Grupo Mexico is currently merging Ferrosur with Ferromex.
Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas.
Often, the handoff of freight between a Mexican and U.S. railroad involves nothing more than a change of crew because customs import and export paperwork is pre-filed with U.S. and Mexican customs authorities before freight is loaded.
In the case of a UP train crossing onto the KCSM network at Laredo, for example, “the operators get out of the train at the border and hand over the controls to their KCSM counterparts,” Commiskey says. “Northbound KCSM trains are handed over to Union Pacific in the same manner for movement into the United States. Employees operating the trains are required to have personal customs documents and paperwork available for entry into the United States and Mexico.”
Much of the freight that passes through the international gateways serves the needs of the automotive industry. Pacer, for example, launched its “Mexico Direct” service 20 years ago to serve auto manufacturers with factories in Mexico.
Every major automaker in North America, including GM, Ford, Chrysler, Toyota, and Honda, uses Pacer’s services to and from Mexico, says Commiskey. Tier I suppliers that serve those manufacturers make up another significant customer group.
“We also serve a variety of electronics manufacturers, particularly in Tijuana and Juarez, and appliance makers in the greater Monterrey and San Luis Potosi areas,” he notes.
TWO-WAY TRAFFIC
Manufacturers in Mexico ship finished product north to U.S. markets, while raw materials move south on rail to supply production lines in Mexico.
“One appliance maker, for example, ships rolled steel and blanks south to be stamped into washing machines and refrigerators,” Commiskey says.
“More industry is coming to Mexico,” says Bernardo Ayala, vice president, marketing and sales for Mexico at UP. “That is increasing demand for raw materials, as well as the need for transportation services to move those products within Mexico to the ports, or to the United States.”
Automakers also comprise the top customer segment for Hub Group’s services to and from Mexico. After that, Hub’s intermodal volume to and from Mexico consists of what’s known as FAK—freight all kinds. “Appliances, food products, beverages, and industrial products make up 60 to 70 percent of our total freight,” Hirsch says.
Some manufacturers in Mexico have chosen that country as a more economical alternative to China. The nearshoring trend drives an increasing volume of freight along the corridor that connects Mexico’s industrial centers with U.S. intermodal terminals such as the one that Kansas City Southern operates in at the CenterPoint Intermodal Center in Kansas City, says Chris Gutierrez, president of economic development group Kansas City SmartPort.
“Transportation costs from Mexico into the United States are 75 to 80 percent lower than from Asia, so we’re seeing a lot more manufacturing distribution coming into that corridor,” Gutierrez says.
Besides touting the advantages of the KCSM intermodal corridor to companies that manufacture in Mexico today, KCS and Kansas City SmartPort are also marketing to companies that currently import from Asia, but are good nearshoring candidates.
Agriculture has also helped swell cross-border traffic. “Bartlett Grain and other agricultural commodity traders have consolidation points in Kansas City and move their freight to Mexico,” says Gutierrez.
Along with those major customer segments, some less-obvious industries are boosting volumes on Mexican rail lines. “The growth driver for Ferromex in 2011 has been new railroad cars that are built in Mexico,” says Vélez.
Volume in that category surged 88 percent in 2011. Loads of glass bottles increased by 86 percent.
Ferromex parent Grupo Mexico, which operates a large copper mine in Sonora, Mexico, was responsible for another volume jump. In 2010, the mine reopened after a three-year strike.
“Sulfuric acid shipments resumed in 2011, driving Ferromex’s 58-percent surge on that commodity,” Vélez says. The railroad transports the sulfuric acid, a by-product of copper extraction, for export to the United States and Chile.
Another important factor in the growth of Mexican rail is the emergence of the Port of Lázaro Cárdenas, on the Pacific Coast, as an alternative to container ports on the U.S. West Coast. “Lázaro Cárdenas is largely a bulk port, but in the past four or five years it has expanded its container activity,” says Gutierrez.
NEW CONTAINER MAGNET
Hutchison Port Holdings opened the first container operations at Lázaro Cárdenas in 2007. “Since then, Lázaro Cárdenas has been the fastest-growing port in North America,” says Patrick Ottensmeyer, executive vice president, sales and marketing at KCS, whose sister railroad KCSM provides the only rail service at the port.
Lázaro Cárdenas can currently handle approximately one million 20-foot equivalents (TEUs), and that figure is expected to grow in the long run to 2.2 million to 2.5 million TEUs.
Mexico has announced plans to name a second container concession at Lázaro Cárdenas, which ultimately would offer similar capacity to the Hutchison facility.
Kansas City SmartPort has worked with KCS since the late 1990s to market the Lázaro Cárdenas-to-Kansas City rail corridor. “We pushed both the U.S. importers and Asian exporters to consider the corridor not only for their freight moving into Mexico, but freight coming into the United States,” Gutierrez says.
That strategy seems to be paying off. “As of December 2011, our container traffic through Lázaro Cárdenas was up 31 percent through September,” says Ottensmeyer. “With continued expansion of container operations at Lázaro, KCS should post solid double-digit volume growth for an extended period.”
Along with improving its capacity to move containers, Lázaro Cárdenas will open a new bulk handling facility in 2012. “This facility will increase the volume of heavy, bulk commodities, such as coal and iron ore, that could move through the port,” Ottensmeyer says.
Whether containers are moving to and from the ports, or within Mexico, intermodal transportation still offers railroads and intermodal service providers a great deal of opportunity.
“The United States is a mature intermodal market,” Hirsch says. “Shippers understand the pros and cons, the rate structure, and the seasonal peaks.”
Not so in Mexico, where most freight still moves by truck. “Carriers and service providers still have plenty of market share left to capture by selling the economies of intermodal transportation,” he notes.
The improvements Mexican railroads have made to their infrastructure constitute a big selling point. Shipping by rail in Mexico used to be an adventure. “A shipment could take 10 days or 30 days to get to its destination,” says Hirsch. “The carrier wouldn’t be able to tell you when it would arrive.”
Commiskey cites the upgrades KCSM has made to its terminal in Monterrey as another significant improvement.
“In 2007, the ramp in Monterrey was inadequate for the market,” he says. Both the road leading into the facility and the ramp itself needed to be upgraded, and the facility needed to be modernized.
All that has changed. “The ramp is completely paved,” Commiskey says. “KCSM added a line of track, so there is plenty of room to park equipment, and new lifts speed unloading. The whole terminal is surrounded by chain-link fence and barbed wire, so it is very secure.”
The railroads have been making similar upgrades throughout Mexico, and those investments have produced significant benefits for shippers.
Ferromex spent $330 million on new equipment and infrastructure enhancements in 2011, including $72 million to improve the rail line and $35 million to update railyards and support track.
“We’ve invested $2.1 billion in infrastructure upgrades in the 13 years we’ve been operating,” Vélez notes.
BETTER SECURITY
Along with upgrading rail infrastructure, Mexican railroads and their U.S. partners have been improving security, helping to ensure that freight moving within Mexico or across the border arrives undamaged and free of contraband.
“Both KCSM and Ferromex work hard to ensure that safety procedures in Mexico are equal to the ones in the United States,” says Ayala at UP. Those safety measures include using x-ray machines to examine railcar contents, dogs that search trains for hazardous items, and high-speed cameras that monitor passing cars for open doors or broken seals.
If contraband is detected on a train, customs officials can isolate individual intermodal containers for inspection.
KCSM boasts a strong security record. “In 2010, the customer claims rate for theft, vandalism, or accidents for all shipments moving on KCS in Mexico was 0.02 percent,” Ottensmeyer says. “That means 99.8 percent of all loads we transported were moved without a customer claim.”
The multiple layers of safety and security provisions at KCSM include a focus on maintaining train velocity, which reduces the chance of incidents.
“The trains are really moving now,” says Hirsch. “They don’t stop, so no one can break into a train at rest.”
Whether in motion or stopped, double-stacked intermodal containers loaded into gondola cars present a formidable obstacle to criminals. One container rides low in the car’s well, making it impossible to open the door more than three feet, and the second car rides on top. “Most thieves will target trucks, rather than climb to the top of 20-foot-tall trains with a blowtorch to try to break in,” Commiskey says.
Criminal activity in Mexico has made rail carriers’ security challenges tougher in recent years. At Ferromex, recent initiatives to boost security include replacing private security guards—who are not allowed to carry guns—with armed Federal Police officers. Those officers protect the trains both in-transit and in the yards.
“We pay for the security that they provide us,” Vélez says. But Ferromex has not been able to boost the number of armed officers as quickly as company officials would like.
While the safety of shippers’ freight is of paramount importance, Ferromex also looks to the police to safeguard its own operations. Particularly challenging to the railroad were thieves in the state of Zacatecas who were stealing diesel from engines.
Not only did Ferromex lose money on the fuel, but the thefts interrupted operations. “Fifteen or 20 locomotives were stranded there because we had to refuel them,” Vélez says. Since federal officers started protecting the equipment in Zacatecas in September 2011, those losses have stopped.
Rail transportation in Mexico still enjoys a great deal of growth potential. Rail carries about 42 percent of freight in the United States and 60 percent in Canada, but only 26 percent in Mexico. “If we concentrate on boosting that share to 35 or 40 percent,” says Vélez, “our industry will gain real volume growth opportunities.”
Copyright © 2013, Aviation Week, a division of The McGraw-Hill Companies.
