Mar 24 2013, 02:51 | : David Hunkar | includes: EWW, FXI
Mexico’s economy boomed when the country signed the North American Free Trade Agreement (NAFTA) nearly two decades ago. The manufacturing sector especially thrived as U.S. firms shifted their operations to Mexico to take advantage of the cheap labor costs. As a result, Mexico’s share of U.S. manufactured goods import rose from slightly about 4% in 1994 to about 13% in 2001, according to a report in the latest issue of IMF’s Finance & Development magazine.
Then the party almost came to a halt when communist China joined the World Trade Organization (WTO) in 2001. China’s entry into the WTO gave the country a strong edge over over Mexico since China could freely export its goods to the U.S. without any import restrictions. Hence China’s goods exports to the U.S. rose significantly while Mexico’s exports suffered.
Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24%, while Mexico’s export growth decelerated sharply from about 20% a year to 3% on average each year over the same period. As a result, China’s share of U.S. manufacturing imports almost doubled by 2005, eroding the previous gains in market share by Mexico (see Chart 1).
In recent years, Mexico has been slowly regaining its lost manufacturing capacity as U.S. firms shift production to the country from China and other countries. This shift can be attributed to two reasons: labor cost and transportation cost.
(click to enlarge)
The above chart shows that wages in China are rising yearly and is getting closer to Mexican wages. Wages in the manufacturing sector in Mexico has remained fairly stable over the years while wages in China have been increasing. So China is becoming less competitive for U.S. firms.
Another factor that makes Mexico more attractive to U.S. companies is transportation costs. Since Mexico is much closer to the U.S. than China, and a stable rail and road network exists between the two countries, costs of shipping goods from Mexico to the U.S. is lower. Shorter distance also means that goods can reach U.S. destinations faster from Mexico than those transported by ships from China. Unless wage inflation in China stabilizes, manufacturing firms may continue to move out to other countries including Mexico, Vietnam, Philippines, etc. From an investment perspective, it is wise to keep an eye on the Mexican economy and equities.
(click to enlarge)
Source: The Comeback by Herman Kamil and Jeremy Zook, Finance & Development, march 2013, IMF
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.”
Not long ago, Mexican factories couldn’t compete with the “China price,” the ridiculously low cost of production in the Asian nation.
But some time this year, with rock-bottom wages now soaring in China, the average cost of factory labor in the two nations will be roughly the same. This is a boon to Mexico, and its industrial parks are swelling.
The trend has caught the attention of chief executives such as Rob Moser, the president of Casabella Holdings, who recently started totting up the pros and cons of where to make the housewares that his New York firm designs and sells.
China had been cheap – really cheap – when he first started buying there in 2003. But labor costs have climbed at a double-digit pace, and there were other factors that made China less convenient.
“You’ve got to get a visa to China, and that takes time. It’s a 16-hour flight, hours to the factory. It’s days at the very least to tackle some of these issues,” he said, referring to production problems that invariably arise.
“You literally can be in a facility in Mexico the same day and be fixing things. That is a huge benefit,” Moser said.
So like a number of U.S. and Canadian businesses – large and small – Casabella decided this year to bring some of its business back to North America, specifically to Mexico, the United States’ third-largest trade partner, after China and Canada.
Mexico’s charms look more attractive than ever to global supply-chain managers. Eclipsed over the past decade by the white-hot industrial juggernaut in China, and marred by an image of rampant criminality, Mexico is again seducing global business, drawing billions of dollars in investment.
The Boston Consulting Group, a major business strategy consultancy, says average factory wages in China this year have hit about $4.50 an hour – including benefits and other costs – and are likely to climb to $6 an hour by 2015. Mexico’s National Statistics Institute says average manufacturing wages stood at $3.50 an hour in June, the most recent month tallied, but that figure doesn’t include benefits.
“We’re at that point where Mexico is now getting wages that are lower than in China,” said Harold L. Sirkin, a senior partner at the Chicago office of the Boston Consulting Group. “The fundamentals are pretty favorable to Mexico.”
“This is the year that it is happening,” he added.
Yet to be seen, though, is whether Mexico can follow China’s path and leverage its low-wage status into sustainable fast growth. To do so, it needs policies to foster small and medium businesses and move them into higher-end production, and to draw workers into the formal economy and push them up the economic ladder. Some analysts have doubts.
“I would be quite cautious about talking of any Mexican euphoria over the return of these industries,” said Enrique Dussel Peters, coordinator of the China-Mexico Study Center at the National Autonomous University of Mexico.
Unlike in China, where the Communist Party identifies “pillar industries” and orders banks to shovel loans their way, Dussel Peters said, Mexicans who are eager to start or grow businesses even in strategic sectors can’t get cash easily.
“Smaller businesses in Mexico don’t have access to financing, and those that have it get it at a very high cost,” Dussel Peters said.
Even with the North American Free Trade Agreement, the sweeping 1994 accord that ties Canada, the United States and Mexico together in the world’s biggest trade bloc, Mexico suffers from an “enclave economy,” of which the vast gated industrial parks along the U.S.-Mexico border are the most visible sign. Goods are assembled there for export, but rarely from parts manufactured in Mexico. That means the country’s economy doesn’t benefit as deeply as it might from its low-wage status.
“It doesn’t make sense for Mexico in the long run to just sort of give up the production capacity by fiat to foreign suppliers,” said Frank Lange, the vice president of global development at Menlo Worldwide Logistics, a San Mateo, Calif., company that helps clients tighten controls of supply chains.
That, however, is an issue for Mexican politicians and businesses debating how best to develop their country’s economy. For multinational companies that are looking to keep a lid on costs, it’s of little concern.
“I was just on a call with a company that’s thinking of moving production from China to Mexico,” said Scott Stanley, the senior vice president of sales at North American Product Sharing, a Solana Beach, Calif., company that helps manufacturers set up and run operations in Mexico.
“There are a lot of companies that are saying, ‘China is not making much sense for us anymore. We should go to Mexico,’ ” said Vivian Olmos, another North American Product Sharing executive.
Industrial parks along the U.S.-Mexico border – even in Ciudad Juarez, once known as “Murder City” because of its homicide rate – are feeling a boom.
“This is not just a flash in the pan. These companies are inquiring about leasing space for three to five years,” said Tapen Sinha, a business professor at the Autonomous Technological Institute of Mexico, in the capital.
Moser, the 61-year-old Casabella president, said he’d been warily eyeing the prices of his suppliers in the Pearl River Delta and elsewhere in China.
“The clear cost advantage that these factories had in 2004, ‘05, ‘06, ‘07 and probably up to ‘08 and ‘09, where it was material, it was significant: that gap is virtually nil,” Moser said.
So earlier this year, Moser worked through an American consultant in Guadalajara, Ed Juline, and found a factory in Mexico City that could meet his specifications for a molded dish brush. He’ll take delivery on the first order perhaps late this month.
He expects that in five years, half of his suppliers will be outside China and that Mexico is “certainly the most logical place.”
The specialty molded plastic products that Casabella sells to chains such as Bed Bath & Beyond, The Container Store and Target aren’t simple to make.
“We do things with shapes and thicknesses and materials that are out of the ordinary,” Moser said. “I’ll just say, it ain’t easy.”
So far, the family-owned Mexican supplier has been up to the job, he said.
Other industries also are finding satisfaction in Mexico, especially when getting products to market quickly is vital.
“If I try shipping something from China to the U.S., I’m looking at 90 days for my goods to get there. There is a cost to that,” the Boston Consulting Group’s Sirkin said. That’s a long time, he noted, in a world where computers can face obsolescence issues in three months and clothes can cycle out of fashion.
That’s an advantage that could help keep Mexico competitive in a world where low-wage options continually arise – “There’s a lot of buzz going on about Myanmar as they loosen up,” Lange said, as an example.
But Myanmar doesn’t have the highways and truck fleets that Mexico can provide for moving products to the United States.
“Their long-haul trucks are as good as anything I’ve seen in the U.S. It’s a misperception that Mexican trucks have bumpers that are about to fall off,” Lange said.
Still, Mexico has underlying problems – in addition to security issues – that he said would hamper a real takeoff from the 4 percent economic growth expected this year.
“The bureaucracy is just numbing to get anything done,” he said. “Mexico needs to address its underlying issues of corruption, infrastructure and bureaucracy to make this go smoothly.”
Mexico remains a far more popular destination than the US for “reshoring” manufacturing to supply North American demand, according to research by a global business advisory firm.
The report, to be published on Monday by AlixPartners, could damp the hopes generated by US cheerleaders for reshoring – where jobs previously outsourced to low-cost emerging economies are brought back home.
US job creation slowed in May, according to official data on Friday that showed employers created 69,000 posts last month, well below average expectations of about 150,000, while the unemployment rate rose to 8.2 per cent from 8.1 per cent.
Barack Obama, US president, has cited reshoring as an example of the country’s increasing economic competitiveness in the face of competition from emerging markets. However, the trend, although real, may not benefit the US as much as some expect, the survey suggests.
Nearly half the manufacturers surveyed by AlixPartners said they saw reshoring as a good opportunity, but half also said Mexico was their top choice for relocating factories designed to supply the US market. However, that is down from 70 per cent last year. In addition, 35 per cent said the US was the most attractive place to reshore production – up from 21 per cent last year.
Some 15 per cent of respondents said they could relocate factories elsewhere in Latin America or the Caribbean, up from 8 per cent last year.
“A lot has been written of late about America’s manufacturing rebound, and there certainly has been a very impressive rebound,” said Foster Finley, co-head of AlixPartners’ transport practice. “However, Mexico still remains the near-shoring locale of choice for companies looking to overcome the higher costs of doing business today in places like China.”
Chas Spence, one of the report’s authors, said relatively low wages continued to make Mexico attractive. “Despite the logistic attraction of the US, the labour arbitrage is still a monumental hurdle for the US to overcome,” he said. “Labour costs are such a big part of the equation.”
Russell Dillion, his co-author, said Mexico was particularly competitive in low-skill assembly work. “US workers can bring more productivity to the table, so that shrinks the gap between the US and Mexico. But in some industries – such as auto – the productivity and quality gap is not as large as it was two decades ago,” he said.
Mr Spence noted that Mexico had superior infrastructure to support relocating factories. “They have an entire industry dedicated to serving a manufacturing transition,” he said. “The US doesn’t have that to the same extent, because we’ve never really done it – reshoring is a new thing.”
Of the companies that said they were considering bringing production closer to the US, almost 90 per cent said they were likely to relocate within three years.
About half the companies surveyed were from the automotive or aerospace industries. Respondents said the chief attraction of relocating from Asia was lower freight costs, followed by improved speed to market and lower inventory costs.
All eyes are on Mexico as the cost of manufacturing in China rises, forcing businesses to rethink their global sourcing strategies. Companies that once flocked to China because of its massive pool of cheap labor and attractive government incentives are now finding themselves at risk of losing the advantages that brought them to China in the first place. A number of factors are to blame: a diminishing population of low-cost workers, rising production costs, and government-controlled incentives to favored industries at the expense of those seen as less vital to China’s growth.
Although China’s minimum wage rates have been increasing by more than 15 to 20 percent per year according to a study by management consulting firm Cost & Capital, China’s overall wage cost remains far lower than that of Mexico, its closest low-cost competitor. It would be logical that companies without a firm understanding of their true landed costs might look at the labor costs per hour between the two countries, which were $1.40 and $5.93, respectively, in January 2012, and determine that China is still the preferred manufacturing point. However, over the next five years, industry projects that China’s wage cost will increase by 80 percent, a far sharper rate than in the past. Moreover, the growing cost differential between China and its low-cost competitors overall — from supply chain to labor to currency to other less tangibles like regulatory costs or value-added tax (VAT) policy fluctuations — is starting to erode the China advantage.
Companies that know their true landed costs account for factors such as energy costs, currency valuation, shipping costs, transit time, and taxes and tariffs. For example, currently, electricity is cheaper in Mexico than it is in China. In fact, China’s electricity cost per kilowatt-hour (kWh) stands at 15 cents, while the cost per kWh in Mexico is 9 cents. Currency valuation against the U.S. dollar (USD) is also telling. The Chinese renminbi (RMB) is expected to appreciate at an annual rate of 3 to 5 percent for the next three years relative to the USD, while the Mexican peso continues to depreciate. Finally, trans-Pacific freight costs are expected to increase 5 percent annually over the medium term. A similar December 2011 study comparing variable cost components between the United States, China, India and Mexico, conducted by the financial consulting firm Alix Partners, predicts that multiple variables of the costs of production could equal costs in the United States by as early as 2015.
In Mexico, safety and stability issues do exist, but overall there’s a business landscape in place that is very appealing to manufacturing companies. The country has a well-educated workforce and a maquiladora system that eliminates tariffs for products exported to the United States.
Moving manufacturing operations to Mexico would seem to have clear advantages — but only if those advantages can be fully leveraged by a particular company. A third-party logistics provider can help clients determine if a move to Mexico makes sense by asking some key questions in addition to ensuring they understand their total landed costs:
How is an increased level of agility going to impact your ability to sell more? If you’re a garment retailer that has to shift quickly with seasonal changes and you need to be increasingly responsive to the needs of your customer base, a 40-day lead time to accommodate ocean carriage from China can be highly damaging.
How important is sustainability within your operations? More customers are becoming very concerned about green supply chains — they want to know where product is being sourced for both safety and environmental reasons. China doesn’t have a reputation for strict environmental regulations, while Mexico has worked closely with the United States to improve environmental standards since signing NAFTA.
Do you know who your vendors and suppliers are working with at every point in the supply chain? If your supply chain involves multiple vendors and suppliers, then the chances are high that those partners are utilizing the services of a network of subcontractors. If those subcontractors begin to have trouble accessing electricity or sourcing raw material as is happening in China today, it could have a damaging ripple effect on your entire supply chain.
How important are intellectual property (IP) rights to your business and how much control do you believe you should have over them? China is notorious for disregarding IP rights, while Mexico is generally seen as being a far more stable environment.
Are you shipping controlled or protected products? A growing number of companies are running into more regulatory issues shipping out of China and would like to keep operations closer to home. Moving operations to Mexico may simplify this for some companies, particularly as the United States has made it very clear that they are going to start to bolster enforcement actions on products that aren’t in compliance with U.S. trade requirements.
All signs point to the fact that near-sourcing to Mexico is no longer a short-lived trend, but — for the right company — is a strategic business formula that has staying power. A Wall Street Journal headline that ran earlier this year, likely said it best: “China’s Export Pain May be Mexico’s Gain.”
Frank Lange has over 20 years of international experience in the supply chain industry, focused on Asia, Europe and Latin America. Currently responsible for Menlo’s global strategic investment out of its headquarters in San Mateo, Calif., his most recent overseas posting was leading Menlo’s operations in China, based in Shanghai.
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.
When all eyes are focused on China, it is easy to overlook Mexico.
For the last decade or so, the common view has been that China’s vastly cheaper labour and greater production capacity are too much to handle for Mexico’s manufacturing export sector.
But a research note on Tuesday by RBC Capital Markets comes as a timely reminder that in the battle for market share of US imports, Mexico is far from beaten.
Indeed, Mexico’s share of that market, the world’s largest, finished 2010 at about 12.5 per cent – the highest in a decade. At current trends, Mexico could even overtake Canada within the next five years or so to become the US’s second-largest source of imports.
One reason, as RBC points out, is that while Chinese wages were roughly 300 per cent cheaper than those of Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to almost zero.
A second reason is simply that China is a lot further away than Mexico. That may not matter in a world of cheap energy, but today’s rising transport costs give Mexico an edge, particularly when it comes to heavy and bulky items.
Factor in Mexico’s skilled labour force and the effects of the North American Free Trade Agreement (Nafta), which shield the country from the potential threat of protectionism, and it is little wonder that foreign companies keep going to Mexico.
As if proof were needed, Mazda, the Japanese car manufacturer, announced last week that it would invest $500m in a car-assembly plant with a capacity of 100,000 units a year.
RBC’s bottom line? “Mexico is becoming more attractive for manufacturing, particularly that aimed at the US market.”
Partly as a result of this process of regional economic integration, per capita GDP in Poland, on a purchasing power basis, has risen from $10,305 in 2000 to $18,058 in 2009. Mexico has experienced a similar path of progress, with GDP per person rising from $10,868 to $13,681 (according to IMF data).
However, for all these remarkable signs of progress on the road to integration, it is labour markets in particular that remain a point of concern and contention. As Mexican President Felipe Calderon rightfully never tires of pointing out, “the only way in which we can find prosperity for the American and Mexican economies is working together through integration.” In fact, neighboring economies have an abiding interest on utilizing each others’ strengths and advantages in a complementary fashion to position themselves as well as their entire region optimally in the global competitive landscape. Germany passed a major milestone toward more integration on May 1 by easing labour restrictions on eight eastern neighbours. This may herald lessons for the future of the U.S.-Mexico relationship as well.
Lower labor costs in Poland and Mexico and the availability of a skilled and motivated work force in these two countries have helped German and U.S.-based companies to produce their goods at competitive prices. In what is fast becoming a true “twinning strategy,” Polish and Mexican operations have become ever more an integral part of U.S. and German firms’ global operating strategy.
At a time when there is much concern about all too far-flung supply chains, having a reliable industrial partner just across the border is a considerable advantage. In addition, with the ongoing erosion of the once tremendous labor cost advantage of China, the economic incentive to depend on long distances for goods assembly — and having to ship goods all the way back from Asia — is becoming gradually less attractive. This ought to strengthen region-based manufacturing compounds.
Still, despite all this progress and for all the advantages and bright prospects that lie ahead, the free flow of workers — whether from Poland to Germany, or Mexico to the U.S. — does remain a point of nervousness in the two richer countries.
Here, the past approaches of Germany and the U.S. have been quite different. While the U.S. never had a stated policy to the effect that its border was open, de facto a lot of Mexican labor found its way into the United States, primarily on a demand-driven basis.
In contrast, Germany relied on formal agreements with other countries to agree on the arrival of pools of Gastarbeiter (roughly the equivalent of Mexican farm workers). Especially in the heyday of its “economic miracle” period in the 1960s, Germany entered into arrangements with many countries, from Spain, Portugal, Greece and Italy to then-Yugoslavia and Turkey, all with the purpose of allowing specified numbers of workers into the country on a temporary basis.
In many cases, this model worked admirably. A lot of these “guest workers” put in a stint, usually of up to a decade, working in Germany. While they often lived in rather crowded quarters, they usually did so for one simple reason: They were keen on saving up as much money as possible, preferably enough to start their own small business upon their return to their home country, whether as a baker, mechanic or building contractor.
With Mr. Obama attempting to relaunch the immigration debate in the United States, these are precisely the experiences that matter. They provide real-life evidence that Mr. Calderon ought to be taken at his word when he tells American audiences that the Mexican government’s primary goal is to keep as many Mexicans gainfully employed in their own country and also to have strong enough an economy to attract workers back home to seize economic opportunities which arise there. In addition, as the standard of living rises in Mexico, U.S. firms will have more opportunities to sell more goods just across the border.
More specifically, the lesson from Germany’s experience over the past half-century is that closing borders actually has the opposite effect to what is intended. It interrupts the labor demand-driven flow back and forth because these workers will obviously choose to stay in the richer country even during a steep recession because they see no realistic way back into the country.
That is a lesson the United States would do well to observe, since it is especially crucial here at the present time. Open borders, based on sheer economic logic, actually lead to having a smaller number of illegal immigrants, fewer migrants and less focus on family-based immigration. All of that would make the wider regional economy more flexible and responsive to market signals.
Ultimately, as labor markets evolve, and as regional economies expand and integrate on a cross-country basis, we need to comprehend that this path is beneficial to all sides. That is a pivotal lesson for all to embrace, whether we live in Europe or North America.
Although more companies are planning to bring their manufacturing operations closer to the U.S. market, Mexico remains a more popular nearshoring destination than the U.S. itself.
Nearshoring — the practice of shifting business or production operations closer to a domestic market — is picking up momentum as more manufacturing companies are seeking ways to reduce logistics costs and bring products onto the market more quickly by operating closer to the United States. Despite the desire to be nearer to the U.S. market, however, new research shows that economic conditions have made Mexico a more favored nearshoring location among manufacturers than the U.S. itself.
According to a recent survey from global business-advisory firm AlixPartners, 63 percent of senior manufacturing executives selected Mexico as the most attractive country for re-sourcing manufacturing operations closer to the U.S., with only 19 percent citing the U.S. itself as the best location for getting closer to the U.S. market. Geographical proximity and improvements in Mexico’s transportation infrastructure are key factors in shaping manufacturers’ nearshoring opinions.
The survey results are based on responses from 80 C-level and other senior manufacturing executives across more than 15 industries earlier this year.
The top three advantages expected to be gained from nearshoring in Mexico are lower freight costs, faster time-to-market rates and lower inventory costs. Other benefits cited include “time-zone advantages,” which allow for easier coordination between U.S. and Mexico-based operations, and “cultural alignment” with North American managers.
“In-transit inventory, in particular, was a high priority among those interviewed,” Russ Dillion, a vice president in the Latin American manufacturing practice at AlixPartners, said. “Obviously, shipping products in from long distances eats up a lot of inventory expense, and that’s something companies would like to improve if possible.”
The survey also found that 9 percent of manufacturing executives have already taken steps to nearshore their company’s operations, while 33 percent plan to do so within the next three years. Mexico’s attractiveness among those planning to nearshore was more than seven times higher than Brazil’s and Central America’s combined.
“[T]he country has a lot of appeal right now because of its proximity to North American demand and the continuing need of many companies to improve their working-capital positions,” Chas Spence, a director in the Latin American Manufacturing Practice at AlixPartners, explained. “That appeal could grow if fuel prices continue to rise globally.”
Mexico remains a popular destination for offshoring. According to AlixPartners, 37 percent of survey respondents have completed or are in the process of offshoring, while 27 percent plan to offshore some U.S. operations within the next three years. Mexico topped the list as an offshoring site among both groups, narrowly beating China and surpassing India, Brazil and Eastern Europe by wide margins.
Despite Mexico’s growing reputation as a major nearshoring and offshoring location for the U.S. market, the country still faces numerous obstacles in providing a hospitable environment for overseas companies.
“Violent crime, as much as it may be isolated in the border areas and in ‘no go’ sections of large cities, still remains a major perception issue for the country,” Latin American outsourcing firm Nearshore Americas notes. “Other challenges include English proficiency, overall costs vs. India and working with existing labor laws.”
Violence is a particularly important issue in Mexican nearshoring. The AlixPartners survey found that 19 percent of respondents have experienced some form of supply-chain disruptions caused by security issues.
“Companies considering a nearshoring engagement in Mexico, or any area with political volatility or violence, should invest time upfront with their provider to validate business continuity and disaster recovery plans and develop special termination clauses and detailed transition plans,” Forbes.com’s CIO Central blog advises. “Companies should also ensure that provider technologies can seamlessly move work to another delivery location and insist upon offsite, secure storage of critical company data.”
Although it remains a highly attractive country for establishing — or re-establishing — manufacturing operations close to the U.S. market, the risks posed by crime may come to outweigh the economic advantages of working in Mexico unless concrete steps are taken to ensure stable conditions.
“Mexico’s proven role as an established and credible nearshoring locale may be in serious jeopardy if the upswing in violence does not fade quickly,” CIO Central adds. “The country offers many of the most sought-after outsourcing benefits, but the risks of continued violence may eclipse the rewards if the government is not able to restore a safe environment.”
63% of those planning to source closer to home say Mexico is their top choice, vs. 19% for the U.S
NEW YORK (April 20, 2011) – Highlighting geographical proximity and improvements in transportation services, 63% of senior executives chose Mexico as the most attractive locale for re-sourcing manufacturing operations closer to the U.S. market, compared with just 19% who would re-source to the United States. That’s according to a recent poll of 80 C-level and other senior executives across more than 15 industries by AlixPartners LLP, the global business-advisory firm.
The survey also found that 9% of executives surveyed have already taken efforts to “near-shore” manufacturing operations and another 33% plan to do so within the next three years. Additionally, just 19% of those surveyed have experienced supply-chain disruptions in Mexico due to security issues.
“While safety and security in Mexico are certainly issues to be taken very seriously, our survey suggests that many companies believe these issues can be effectively dealt with,” said Foster Finley, managing director at AlixPartners and head of its Logistics & Distribution Practice. “As companies think about near-shoring production that was previously off-shored – to respond to rising labor costs overseas, exchange-rate changes, etc. – Mexico is obviously high on their lists.”
According to the survey, Mexico’s average ranking for attractiveness among those likely to near-shore was more than seven times that of Brazil’s and countries in Central America combined.
The survey also polled executives on plans to off-shore current U.S. operations, and found that 37% of respondents have already completed, or are in the process of off-shoring, while 27% expect to off-shore U.S. operations within the next three years. Of those who have off-shored or plan to off-shore, Mexico also topped the list as the most attractive locale, beating out the much-touted BRIC countries (topping China narrowly and India, Brazil and Eastern Europe by wide margins).
“Despite security concerns in Mexico, the country has a lot of appeal right now because of its proximity to North American demand and the continuing need of many companies to improve their working-capital positions,” said Chas Spence, a director in the Latin American Manufacturing Practice at AlixPartners. “That appeal could grow if fuel prices continue to rise globally.”
In terms of the expected advantages to be gained from near-shoring, lower freight costs, improved speed-to-market times and lower inventory costs were the top three reasons cited on average. Other reasons included “time-zone advantages” (easier management coordination, etc.) and improved “cultural alignment” with North American managers.
“In-transit inventory, in particular, was a high priority among those interviewed,” said Russ Dillion, a vice president in the Latin American Manufacturing Practice at AlixPartners. “Obviously, shipping products in from long distances eats up a lot of inventory expense, and that’s something companies would like to improve if possible.”
About the Study The AlixPartners Executives’ Perspectives on Manufacturing Near-Shoring survey included an online poll of 80 C-level and other senior executives in manufacturing-oriented companies from more than 15 different industries conducted Jan. 24 to April 8, 2011.
About AlixPartners AlixPartners LLP is a global business-advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial-advisory services and information-management services. The firm has more than 900 professionals and 15 offices around the world, and can be found on the Web at www.alixpartners.com.
