NAFTA’s Impact on the U.S. Economy: What Are the Facts?

September 8th, 2016

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Sep 06, 2016

When President Bill Clinton signed the North American Trade Agreement (NAFTA) in December 1993, he predicted that “NAFTA will tear down trade barriers between our three nations, create the world’s largest trade zone, and create 200,000 jobs in [the U.S.] by 1995 alone. The environmental and labor side agreements negotiated by our administration will make this agreement a force for social progress as well as economic growth.” Twenty-three years later, scholars and policy makers often disagree about the impact that NAFTA has had on economic growth and job generation in the U.S. That impact, they say, is not always easy to disentangle from other economic, social and political factors that have influenced U.S. growth.

On the positive side, overall trade between the three NAFTA partners — the U.S., Canada and Mexico — has increased sharply over the pact’s history, from roughly $290 billion in 1993 to more than $1.1 trillion in 2016. Cross-border investment has also surged during those years, as the stock of U.S. foreign direct investment (FDI) in Mexico rose from $15 billion to more than $107.8 billion in 2014. As for job growth, according to the U.S. Chamber of Commerce, six million U.S. jobs depend on U.S. trade with Mexico, a flow that has been greatly facilitated by NAFTA, which has helped eliminate costly tariff and non-tariff barriers. NAFTA has also facilitated a multi-layered integration of the U.S., Mexican and Canadian supply chains. According to the Wilson Center, twenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually “Made in USA” content, as are 40 cents out of every dollar for goods imported into the U.S. from Mexico.

Geronimo Gutierrez, managing director of the North American Development Bank (NADB), notes that trade between the United States and Mexico reached over $500 billion in 2015, a five-fold increase since 1992, when NAFTA negotiations concluded. Thus, he explains, Mexico imports more from the U.S. these days than do all of the so-called BRIC nations combined – Brazil, Russia, India and China. (The NADB acts as a binational catalyst in helping communities along the U.S.-Mexico border develop affordable, long-term infrastructure.)

Gutierrez adds that there are lesser-known benefits of NAFTA. By promoting the tight integration of North American industrial supply chains, “NAFTA is creating partners and not competitors among its member countries. As for Mexico’s interest in this bilateral relationship, it can be summarized in two facts: about 80% of Mexico’s exports go to the U.S., while 50% of the accumulated foreign direct investment received between 2000 and 2011 comes from the U.S. Moreover, NAFTA has been the fundamental anchor for reforms that make Mexico a more modern economy and open society.”

A Modest Impact

For all that, most studies conclude that NAFTA has had only a modest positive impact on U.S. GDP. For example, according to a 2014 report by the Peterson Institute for International Economics (PIIE), the United States has been $127 billion richer each year thanks to “extra” trade growth fostered by NAFTA. For the United States, with its population of 320 million at the time of that study, the pure economic payoff was thus only $400 per person, while per capita GDP was close to $50,000. And while the costs of NAFTA are highly concentrated in specific industries like auto manufacturing — where job losses may be significant for specific firms — the benefits of the trade pact (such as lower prices for imported electronics or clothing) are distributed widely across the U.S., as they are in the case of any trade pact worldwide.

Most studies conclude that NAFTA has had only a modest positive impact on U.S. GDP.

Supporters of NAFTA estimate that some 14 million jobs rely on trade with Canada and Mexico combined, and the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost, according to a PIIE study. Furthermore, the study found that only about 15,000 jobs on net are lost each year due to NAFTA. “On our reckoning, since NAFTA’s enactment, fewer than 5% of U.S. workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico,” wrote its authors, PIIE senior fellow Gary Clyde Hufbauer and research analyst Cathleen Cimino-Isaacs. For the roughly 200,000 out of 4 million people who lose their jobs annually under these circumstances, the job losses can be attributed to rising imports from Mexico, they wrote, but “almost the same number of new jobs has been created annually by rising U.S. exports to Mexico.” Moreover, “For every net job lost in this definition, the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.”

Trade specialists agree that it has proven difficult to separate the deal’s direct effects on trade and investment from other factors, including rapid improvements in technology, expanded trade with other countries such as China and unrelated domestic developments in each of the countries.

Walter Kemmsies, managing director, economist and chief strategist at JLL Ports Airports and Global Infrastructure, notes that that many of the job losses that are popularly blamed on NAFTA would likely have taken place even in the absence of NAFTA, in part because of growing competition from China-based manufacturers, many of which have taken advantage of currency manipulation by the Chinese government that has rendered China-made products more price-competitive in the U.S. Likewise, Mauro Guillen, head of Wharton’s Lauder Institute, agrees that without NAFTA, many American jobs that were lost over this period would probably have gone to China or elsewhere. “Perhaps NAFTA accelerated the process, but it did not make a huge difference.”

“A lot of instant experts on NAFTA don’t really understand trade and what drives trade,” said Kemmsies. “And so they get confused between NAFTA and the globalization of the world’s economy. The fact is, with or without NAFTA, we would have done a lot more trade with Mexico anyway. I’m not sure that NAFTA has even fostered any growth of trade between the U.S. and Mexico. Look at Mexico and forget about everything else for a second: What is the single-biggest trade-flow corridor in the world? It’s East-West — Asia to Europe to North America. Mexico happens to sit right smack in the middle of the East-West trade flow…. Here is Mexico, with 120 million people, and all of these abilities to draw raw materials…. You have a cheap labor force, a global geographic advantage, a rising middle class. It’s a good place to make stuff.”

For a long time, because of a lack of investment, Mexico’s infrastructure was well below par, including its ports, which were made to process raw materials, rather than handle industrial goods. In that respect, NAFTA has had a positive impact on Mexico’s economic development, and it has encouraged foreign investors to trust that Mexico, whose governments were long protectionist and populist, would follow the rule of international law. International trade specialists M. Angeles Villarreal and Ian F. Fergusson of the Congressional Research Service wrote in a recent report: “While Mexico’s unilateral trade and investment liberalization measures in the 1980s and early 1990s contributed to the increase of U.S. Foreign Direct Investment (FDI) in Mexico, NAFTA provisions on foreign investment may have helped to lock in Mexico’s reforms and increase investor confidence [in Mexico.]” Nearly half of total FDI investment in Mexico is in its booming manufacturing sector.

Job Losses and Lower Wages

Some critics argue that NAFTA is to blame for job losses and wage stagnation in the U.S., because competition from Mexican firms has forced many U.S. firms to relocate to Mexico. Between 1993 and 2014, the U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus to a $54 billion deficit. Economists such as Dean Baker of the Center for Economic and Policy Research and Robert Scott, chief economist at the Economic Policy Institute, argue that the consequent surge of imports from Mexico into the U.S. coincided with the loss of up to 600,000 U.S. jobs over two decades, although they admit that some of that import growth would likely have happened even without NAFTA.

“A lot of instant experts on NAFTA don’t really understand trade and what drives trade.” –Walter Kemmsies

While conceding that many U.S. high-wage manufacturing jobs were relocated to Mexico, China and other foreign locations as a result of NAFTA, Morris Cohen, Wharton professor of operations and information management, argues that NAFTA has, on balance, been a good thing for the U.S. economy and U.S. corporations. “The sucking sound that Ross Perot predicted did not occur; many jobs were created in Canada and Mexico, and [the resulting] economic activity created a somewhat seamless supply chain — a North American supply chain that allowed North American auto companies to be more profitable and more competitive.”

Moreover, in their 2015 study published by Congressional Research Service, Villarreal and Fergusson noted, “The overall economic impact of NAFTA is difficult to measure since trade and investment trends are influenced by numerous other economic variables, such as economic growth, inflation, and currency fluctuations. The agreement may have accelerated the trade liberalization that was already taking place, but many of these changes may have taken place with or without an agreement.”

Some of its harshest critics concede that NAFTA should not be held entirely responsible for the recent loss of U.S. industrial jobs. According to Scott of the Economic Policy Institute, “Over the past two decades, currency manipulation by about 20 countries, led by China, has inflated U.S. trade deficits, which [in combination with the lingering effects of the Great Recession] is largely responsible for the loss of more than five million U.S. manufacturing jobs.” Scott argues that while NAFTA and other trade deals such as the Trans-Pacific Partnership are bad for American workers, the fundamental problem is not that they are “free trade” pacts, but that they “are designed to create a separate, global set of rules to protect foreign investors and encourage the outsourcing of production from the United States to other countries.”

Unlike the earliest generation of “free-trade agreements” – which focused on reducing or eliminating tariffs and duties that stifled trade — these newer pacts are more comprehensive. As Scott explains, they “contain 30 or more chapters providing special protections for foreign investors; extending patents and copyrights; privatizing markets for public services such as education, health, and public utilities; and ‘harmonizing’ regulations in ways that limit or prevent governments from protecting the public health or environment.” When critics of the TPP conflate their criticism of that pact with their criticism of “free trade,” they miss an essential element of the TPP that has disaffected many otherwise loyal supporters of earlier-generation agreements that truly focus on deregulation of “trade” per se, he notes.

The Role of China

Two decades ago, when NAFTA was born, China had only a faint presence in the global economy, and was not yet even a member of the World Trade Organization. However, the share of U.S. spending on Chinese goods rose nearly eight-fold between 1991 and 2007. By 2015, U.S. trade in goods and services with China totaled $659 billion— with the U.S. importing $336 billion more than it exported. China has become the U.S.’s top trading partner for goods — a development never anticipated at the signing of NAFTA. And yet, NAFTA continues to attract the lion’s share of the blame among U.S. critics of globalization, despite the fact that the U.S. and China have yet to sign any bilateral free-trade treaty.

“NAFTA did foster greater U.S.-Mexican integration and helped transform Mexico into a major exporter of manufactured goods.” –Robert Blecker

How is that possible? In a recent study that de-emphasized the impact of NAFTA on the U.S. economy, economists David Autor (MIT), David Dorn (University of Zurich) and Gordon Hanson (University of California, San Diego) stress the role of China’s emergence on job growth and wages in the U.S. In the study, published by the National Bureau of Economic Research, they write: “China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences…. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists.”

As Robert Blecker, an economist at American University, notes, “Contrary to the promises of the leaders who promoted it, NAFTA did not make Mexico converge to the United States in per capita income, nor did it solve Mexico’s employment problems or stem the flow of migration.” However, “NAFTA did foster greater U.S.-Mexican integration and helped transform Mexico into a major exporter of manufactured goods.”

The benefits for the Mexican economy were attenuated, however, by heavy dependence on imported intermediate inputs in export production, as well as by Chinese competition in the U.S. market and domestically. The long-run increase in manufacturing employment in Mexico (about 400,000 jobs) was small and disappointing, while U.S. manufacturing plummeted by 5 million — but more because of Chinese imports than imports from Mexico. In both Mexico and the United States, real wages have stagnated while productivity has continued to increase, leading to higher profit shares and a tendency toward greater inequality.”

Blaming NAFTA for all of these disturbing problems may make some NAFTA critics feel good, but as trade researchers have learned in recent years, the growing complexity of today’s economic challenges defies any simplistic explanations.

Analyzing reshoring’s impact on the market

August 3rd, 2015

In the past three to four years, one of the commonly observed trends in North America manufacturing has been reshoring or repatriation of the manufacturing industry.

Nexant defines repatriation or reshoring as bringing back of manufacturing from overseas to North America, resulting in the displacement of process imports into the region.

Nexant conducted a survey of the plastics industry, in collaboration with Plastics News, to understand reshoring trends and the effect on the North American market. Nexant received about 200 survey responses from compounders, fabricators, equipment suppliers and toolers.

About 70 percent of the survey responses mentioned that they had either reshored or were planning to reshore in the near future.

One of the major reasons quoted for reshoring is the rising labor costs overseas, particularly in China. Wages in China have almost doubled in the past decade, while U.S. wages have stayed relatively flat.

Low cost natural gas and the diminishing price gap between the U.S. and Southeast Asian polyethylene prices is making North America more cost competitive for manufacturing. However, about one third of the fabricators mentioned that they would not consider reshoring to North America as they supply Asian markets and the logistic costs would not make sense if manufacturing was moved back to North America. Also, it is not critical to reshore in cases where the product quality is not crucial, which has been identified as another driver to reshoring.

Cost competitive

Nexant compared the cost of production plus logistics cost for delivering polyethylene blown films and polypropylene injection molded items in the U.S. market in 2014 and 2019 for manufacturing in the U.S. Gulf Coast, Mexico and China. Repatriation activities are being observed in blown films and injection molding segments particularly.

In 2014, for polypropylene injection molded utensils, even though the cost of production was the lowest in China, when transportation cost was added, Gulf Coast becomes more attractive as a manufacturing location for supplying the domestic U.S. market.

By 2019, the Gulf Coast and Mexico is expected to become more cost competitive for manufacturing, as a result of rising labor costs in China and declining price gap between the Gulf Coast and China polypropylene prices.

U.S. propylene markets have tightened appreciably in recent years aggravated by the rush towards lighter feedstock at crackers and reduced availability of supplies from the refinery. New investments in propane dehydrogenation units by companies such as Ascend Performance Materials, Enterprise Products, Dow Chemical and Formosa in the U.S. are set to lengthen supplies by 2020, restoring markets to a more balanced position and bringing U.S. prices on par with Asian polypropylene prices.

Demand growth?

The impact of reshoring on domestic polyolefin demand in North America will not be significant; with about 10 percent of the total 4 million tons demand growth from 2014 to 2020 driven by reshoring activities.

Polyethylene accounts for the lion’s share of polyolefin reshoring. The majority of the growth will be in the injection molding segment as it is an automated process, and requires less labor; providing manufacturing advantage to the United States. Repatriation is occurring in the automotive, packaging and appliances sectors of injection molding.

NexantThinking’s recently published report “Impact of Reshoring on North American Polyolefin Demand” provides an in-depth analysis into Nexant’s reshoring survey results, reshoring drivers and challenges, reshoring measurement indices, North America’s manufacturing cost competitiveness and impact on polyolefin applications growth.

Mexico transitions to high-value manufacturing location

August 3rd, 2015

Mexico is no longer the low-wage sourcing location for low-value consumer products for the U.S. market that it was two decades ago when the North American Free Trade Agreement with the U.S. and Canada was implemented. True, average wages have risen higher in coastal China, where so much export production is based, than in Mexico. But with an increasingly skilled Mexican workforce and a rapidly growing middle class, many international companies are investing in facilities that manufacture higher-value products for the U.S. and Mexico’s domestic market, and still more are planning to invest in sourcing there.

The near-sourcing trend is fueled by the desire to reduce turnaround time from order to delivery, cut transportation costs, and, increasingly, to avoid any repetition of the West Coast port congestion and delays that plagued so many supply chains in late 2014 and early this year.

One U.S. importer, for example, responded to a survey about shippers’ supply chain plans in the wake of the West Coast longshore labor agreement in May by saying he wanted to shift as much production as possible away from China to Mexico.

“The whole near-shoring trend is based on ‘How do I make sure I don’t have my supply chain cut off because of lack of capacity or longshoremen’ and all of the issues you have when you’re bringing in product by boat from around the world,” said Troy Ryley, managing director of Frisco, Texas-based third-party logistics provider Transplace Mexico. “In Mexico, you’ve got multiple points to enter the U.S. via truck, and trucks are a lot more consistent on the highway than vessels on the open ocean. It’s a matter of days by truck, rather than weeks at sea.”

Over the past several years, there has been a continuous move of production to Mexico for the North American market. Some of that has come at the expense of Asia, but more often the investment in Mexican production may be in addition to Asia. “Investment going forward may be in Mexico, which doesn’t mean it’s being relocated from Asia,” said Foster Finley, a managing director of logistics consulting firm AlixPartners who specializes in supply chain performance. “Plants that in years gone by may have gone to Asia are going to Mexico now.”

In a survey last year of the near-sourcing plans of 143 senior manufacturing and distribution executives, AlixPartners found that 86 percent plan to increase their foreign manufacturing capacity closer to the U.S. in the next two or three years. The chief reasons behind these plans were the desire to cut the landed cost of imports, lower freight costs, improved speed to market and improved customer service.

The survey, conducted before the severe congestion that began to clog West Coast ports last fall, also found that 30 percent of those surveyed said near-sourcing of production would result in fewer supply chain disruptions.

“After NAFTA was implemented in 2004, many companies located in Mexico to take advantage of low wages and duty-free access to the U.S., but when China joined the WTO, they moved there to get even lower wages,” said Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson Center in Washington. “Over time, companies have become more sophisticated about the way they make site-selection decisions and are looking at a much wider range of factors. What that has done is push Mexico into its proper niche into areas where it has important competitive advantages vis-à-vis other countries.”

AlixPartners uses local wage costs as one of seven factors in measuring the competitiveness of global supply locations. The other six factors include availability of raw materials and cost, regulatory overhead, inbound transportation costs, inventory cost tied up in product flow, exchange rates, and tariffs or duties.

“Although Chinese wages are on average lower than Mexico’s, wages have risen rapidly up and down the coast of China that has historically been the factory of China, and they continue to go up,” Finley said. “China has made a concerted effort to tap into lower wages in inland China, but the problems are the lack of infrastructure to get product to and from the coast. The number of qualified workers also is still well behind the coast.”

The Mexican government is moving to enhance its competitive position by investing heavily in road, rail and aviation infrastructure improvements and by streamlining its customs procedures. As a result, it has become a major source for U.S. imports of bulky products such as automobiles, aerospace products and components and appliances that don’t fit easily into a container, but can be shipped by road or rail to the U.S.

Mexico is also the second-largest source of high-value, high-tech products such as cell phones, gaming consoles and computers, after China.

In the past, the Mexican government spurred the growth of these industries by providing incentives for them to group in clusters around cities that have an abundance of skilled engineers graduating from universities and the infrastructure to support shipments to and from the plants. It has since ended those incentives for all but the aerospace industry.

“Mexico has a very well-educated workforce that has the expertise to produce more technical products, like the aerospace industry,” said Derrick Johnson, vice president of segment marketing for UPS. “It is graduating 230,000 engineers every year.”

UPS is working with the Mexican government to identify the areas that have the infrastructure to support the transportation needs of industry clusters. “We look for good roads and rail infrastructure, but also the people with the skills to support these clusters,” Johnson said.

The aerospace industry is clustered around Chihuahua, which boasts plants by Hawker Beechcraft, Honeywell, Pratt & Whitney and Zodiac Aerospace. Bombardier, Eurocopter and Messier-Bugatti-Dowti have plants around Queretaro.

Although the government has scaled back on incentives to other industries, the incentives it provided in the 1980s and 1990s resulted in a cluster of more than 600 high-tech plants in the state of Jalisco around Guadalajara, which is known as Mexico’s Silicon Valley. Foxconn, Jabil Circuit and Flextronics assemble products there with components imported from Asia for the local and the U.S. market. Other plants are clustered around Chihuahua, Monterey and Mexico City.

“One of the big concerns for these highly technical products is intellectual property,” Johnson said. “Mexico’s IP protection is as strong as or stronger than other areas of the world, such as China.”

The automotive industry is far more spread out. Ford Motor Co. has plants in Chihuahua and Sonora in the north and Toluca in the south. Audi and Volkswagen have plants in Puebla near Mexico City. Honda has a number of plants. Chrysler, General Motors and Mercedes Benz have plants in Saltillo. BMW plans to build a plant in San Luis Potosi by 2019.

Approximately 1,100 top-tier parts makers also have opened production facilities in Mexico to supply these plants. Mexican automotive plants export about 80 percent of their production and account for 11 percent of all new car sales in the U.S.

Some cars are transported by rail to the U.S., and others by ocean. “Over the last two years, we’ve been seeing an increase in the traffic of car carriers transporting cars from Lazaro Cardenas through the canal to the U.S. East Coast,” Panama Canal Administrator Jorge Quijano said. “That may change if Mexico improves the roads and rail transport to Veracruz so cars can be shipped directly from there to the East Coast.” He said car carriers have told him they are building post-Panamax vessels that can carry 8,000 to 8,500 cars, compared with the current maximum capacity of 5,000 to 5,500 cars. “So for the next three years, we see strong performances for cars moving from Mexico through the canal to the U.S. East Coast.”

U.S. companies that source products in Mexico find it much easier to manage the engineering and quality control processes than in Asia because it is more cost efficient and easier to visit plants south of the border than across the Pacific. “The ability to supervise your engineering at a plant in Mexico is a lot less expensive than in Asia, and companies are starting to realize this,” said Phillip Poland, director of international trade compliance for DHL. “If I was making strategic decisions for a U.S. company, I would seriously consider building a plant in Mexico.”

Mexico has eased its customs procedures on imports of components for assembly in plants by moving all customs transactions onto a single electronic platform of window for export. “Mexico is ahead of the U.S. in that a single window increases compliance, decreasing the arbitrariness of customs from port to port,” Poland said. “It really streamlines and helps the movement of imports through customs.”

Mexico is working closely with the U.S. and Canada to harmonize their customs procedures under NAFTA. It signed on to the Wassenauer Agreement on export controls last year and is implementing an export control system, which together with its single platform on imports creates greater trade compliance.

Security is less of an issue in Mexico today than in the past, when theft of truckloads in transit was not uncommon. “That’s less frequent now, as the government has been cracking down on cartels to improve transportation safety,” Poland said.

The flow of trucks moving across the U.S. border promises to become easier as a result of changes in U.S. regulations introduced this year. For years, Mexican trucking companies with Mexican drivers could haul cargo only into a narrow commercial zone across the U.S. border, despite the provisions of the NAFTA treaty. In response, Mexico imposed retaliatory tariffs on U.S. imports estimated to cost $2 billion annually.

After a three-year pilot program, the U.S. Department of Transportation started allowing Mexican motor carriers to apply for authority this year to conduct long-haul, cross-border trucking services. Under this program, Mexican trucks must be inspected and meet the same safety regulations as those for U.S. motor carriers.

“You’re starting to see Mexican equipment go farther and farther north,” Ryley said. “What’s defining how far north they go is not any restriction by the law, but is more how much deadheading time they can afford to take on or whether they have the complementary southbound loads that allows for a round trip.”

More U.S. companies opening high-tech factories in Mexico

December 5th, 2013

Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.

By Shan Li

4:37 PM PST, November 29, 2013

Manufacturing in Mexico

Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)

TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.

A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.

San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.

It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.

“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”

It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.

From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.

“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”

The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.

Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.

The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.

3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.

But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.

“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.

Instead, the company looked south.

3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.

“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.'”

Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.

The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.

A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.

“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”

For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.

That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.

On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.

Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”

Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.

Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.

Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.

The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.

“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,'” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”

With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.

Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.

“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”

Copyright © 2013, Los Angeles Times

Tequila and Tacos: How this former Valley exec is poaching US talent for his Mexican startup lab

November 2nd, 2013

On November 1, 2013

It’s easy to get burnt out on the constant hustle of Silicon Valley. For Andy Kieffer, reaching for the pressure release valve after selling his Kleiner Perkins-backed startup in 2008 meant getting out of dodge. Despite having a young family, he didn’t move to Portland, San Diego, or Denver. Instead he packed up his life and moved 1,900 miles south to Guadalajara, Mexico. There he formed an incubator and contract dev shop called Agave Lab, hired some of the abundant and surprisingly skilled local talent, and began mixing innovation with margaritas to see what would come out the other end.

When we first reported Kieffer’s story, the closest he’d come to convincing another Valley veteran to join him was having his friends say on the way to the airport after a weekend visit, “You’re crazy man. How did you do this?” But things began to change as his story got out there more, first in PandoDaily, and then in the New York Times. Just a few weeks ago he got his first inbound inquiry.

The email came from out of the blue. A total stranger, Amazon engineer Eric Springer, wanted to know if there was room at Agave for another gringo with real technical chops but a growing distaste for the rat race. Kieffer invited him down to check out his operation with the promise that if he liked what he saw, there would a spot for him to join the team.

“I said to him, ‘It’s obvious why I’m interested in you, but why are you interested in me?’” Kieffer tells me in a phone interview.

The first step on any tour of the Agave Lab operation is tequila and tacos. Then, he introduces guests to the rest of his team and maybe takes them to a local meet up to give a sense of the community. Time permitting, he’ll squeeze in a trip to the company-owned beach apartment a few hours drive away. It’s a hard to turn down a combination that makes working in Mexico great, Kieffer says.

Springer’s tour was six weeks ago. He has been in living Mexico full time now for a little more than a month. Just a over a week ago he put an offer in to buy a house there. All signs point to him staying for the long term. Short-term, long-term or anything in between, Kieffer is just happy, if not a little shocked, to have someone this capable join his merry band of hackers. It also got him thinking about whether there might be more pent up frustration north of the border that he could tap into.

“Eric came down and has been awesomely productive and is having the time of his life,” Kieffer says. “I thought, why not see if there are more of him out there. I just posted this ad craigslist and, already, I’m getting tons of people who are interested.”

A little over a week ago, Kieffer posted a flippant job listing in the San Francisco section of Craigslist. The headline read, “Working vacation in Mexico’s Silicon Valley – Make almost NO money (guadalajara).” The listing went on to describe the Agave Lab operation and then dropped this offer in the laps of anyone crazy enough to join them:

We’re giving a few Bay Area developers the opportunity to rethink their life priorities and get out of Dodge for a while. You’re startup is flagging? Sick of the fog? Commute got you down? Just broke up with your partner? Why not pull the rip cord and come work with us for a while?

What do we have to offer?

-A vibrant, biggish (pop. 4M), student-oriented city, that’s full of hip bars, restaurants, and (really) beautiful, friendly people.

-A work environment that is, hands down, the hippest place to work in Mexico. Imagine programming in the hammock – poolside (yes, we have a pool).

-Use of the beach house. We have a 3 story beach house with all mod cons, 20 feet from a graceful, immaculate sandy bay in a small fishing village. Also, one of the premier left point surf breaks is 5 minutes away by boat (which we also have).

-A chance to learn (or practice your Spanish).

-An opportunity to be at ground zero for one of the most vibrant and rapidly expanding startup scenes in the world.

-Beef up your resume with experience in navigating the business climate in Mexico and Latin America.

-and, finally, ALMOST NO MONEY. Okay, not entirely true – you’ll be paid a very tidy wage (by mexican standards) which will allow you to live well here – most things are cheap here. However, if you compare what you’ll make here versus what you’re making now? It will be a disappointing exercise. Said differently, if money is what you’re after – then this is not for you. If you’re looking for adventure, fun, and to challenge yourself with something new – welcome to your new home!!!

It’s been just eight days and Kieffer has gotten a few dozen inquiries. Some were from recent college graduates with no experience and he’s likely to pass – this is a job offer, after all, and he’ll have to pay these people to work for (or with) him. But amid the riff raff have been six more senior engineers looking to leave town. None have made their exploratory visit yet, though two have booked plane tickets.

“Whatever the reason is, I seem to have hit a nerve. It’s great for me,” Kieffer says.

No one has asked about narco-terrorism or been too concerned with compensation or lifestyle, he adds. “Guadalajar isn’t even on the list of the world’s 100 most dangerous cities. It’s about the equivalent of living Denver, risk wise.”

He expects to hire two to four expats over the next 30 days and says he has a total capacity of six over the next six months. But as with Springer’s unexpected enthusiasm, the response to this latest posting has Kieffer once again thinking bigger.

The real opportunity in Mexico is to build an elite technical team and begin tackling the basic problems that are holding the nation back. For example, Mexico doesn’t have an Amazon or Gilt equivalent – or the opportunity to create one in the short term – because Mexico doesn’t have a reliable local postal service. Agave is addressing this, in its own small way, with an “Uber for bike messengers” courier service startup. But it’s barely fair to call this the tip of the iceberg.

Having lived in Mexico for nearly six years now, Kieffer has a laundry list of opportunities identified but is limited in his ability to address them all. He’s bootstrapped all of Agave Lab operations to date with his own money, adding in supplemental contract development work for cash-strapped US startups to help keep the lights on. But with a seemingly extensive supply of talent now beating a path toward his door, the thought of raising a few million dollar incubation fund is growing more and more interesting.

“$20 million?” Kieffer asks incredulously at my suggestion that he raise what would be considered a small pile of cash for a Silicon Valley incubator. “I wouldn’t know what to do with that much here. With just $3 million you could literally own Mexico.”

But all of this is just a shiny idea in Kieffer’s head today. At the moment he’s up to his eyeballs in job applicants and tequila tasting tours to schedule. Once he eventually fills out his six person expat A team, things should settle down, he says, and then he’ll be able to give some more serious thought to how to make the most of this opportunity.

Kieffer is brimming with excitement. After we got off the phone, he sent a follow up email that read:

Imagine raising a small fund ($2-$5M) and importing startup talent from the Bay Area, partnering them with local dev teams, and targeting the emerging LATAM market place. I think that combo of a bay area founder with a track record, the huge untapped market here, and the low go-to-market cost, would be attractive to investors that are seeing too many of their startups fighting over too little market opportunity.  

I can’t imagine how difficult it must be for a partner at, let’s say, True Ventures to find things to invest in.  Is there ANY unplowed field left in the US? In Mexico – it’s all green field.

There are challenges, of course. Mexico has limited institutional knowledge around startups and venture capital. For example, Kieffer recalls explaining to a local lawyer hired to draft an ESOP (employee stock option plan) agreement why on earth he would give a piece of his company to a newly hired employee. But people are learning quickly. Mexico also lacks a reliable exit market. It’s one thing to generate revenue, and lifestyle business opportunities grow on trees. But there’s no Google or Yahoo out there to scoop up middling successes, and at the same time no local hero company for newby founders to look up to in aspiration.

“One of the biggest challenges with these guys coming down from the US is recalibrating expectations,” Kieffer says.

I raised the possibility that Kieffer is letting the cat out of the bag, so to speak and alerting his potential competition to the combination of massive opportunity and hard to pass up lifestyle south of the border.

He shrugs this off saying, “It would be hard for a US founder to come here and build LATAM-focused products. There’s just too much local and cultural knowledge required. Besides the market’s almost too big to comprehend, there’s plenty of opportunity to go around.”

And so it is. Kieffer is looking to spread this opportunity around and to make a few new friends in the process. The only question is, who else will be crazy enough to join him.

Mexican Manufacturing Benefits U.S. Industry

July 26th, 2013


When NAFTA was first implemented in the early 1990s, the fear was that Mexican manufacturing would cost the U.S. jobs and wreak havoc upon U.S. industry. Mexico was viewed largely as an economic competitor that would pilfer U.S. employment opportunities, businesses, and bring about the demise of national economic prosperity. This set of assumptions was merely the result of a misconception of the nature of the U.S.-Mexico industrial alliance.

In reality, China has been a much more formidable concern in terms of low wages and competition for industry stateside. The past decade, however, has amply shown that the best way for U.S. industry to meet this challenge is partnership – not competition – with Mexico through production sharing, or vertical specialization, which occurs when two or more countries bilaterally produce a product. In other words, Mexican manufacturing firms rely upon materials produced by U.S. suppliers. The geographic proximity of Mexico and the U.S. has actually led to greater opportunities for U.S. suppliers vs. China. This is demonstrated by the fact that Mexican imports contain ten times more U.S. content than similar items manufactured by the Chinese. In fact, 40% of the United States’ imports from Mexico contain material inputs that originated in the United States.

Thus we see that “near-sourcing” manufacturing jobs to Mexico is, in a palpable way, beneficial to U.S. industry, fostering a partnership that keeps high paying jobs in the U.S. and sustains a demand for suppliers to feed the manufacturing done in Mexico that will then be exported, in most instances, back to the U.S.. This partnership results in products that, when sitting on shelves next to those produced in China and other developing countries such as India, Brazil, Indonesia, Vietnam and Malaysia, are price competitive.

With the aforementioned in mind, it is no surprise that one in twenty-four U.S. jobs is dependent on the Mexican maquiladora industry. Over 6 million U.S. jobs are dedicated to supplying manufacturing operations in Mexico, which means there is significant opportunity for U.S. suppliers to expand to meet the demand created by Mexican manufacturing activities.

Four segments in particular presently stand out as unique growth opportunities for U.S. industry:

In 2011, the Mexican automotive industry achieved a growth rate of thirteen percent. As a result, the demand for U.S. made parts and supplies is on the rise – these include items such as spare and replacement parts for gasoline and diesel engines, electrical parts, collision repair parts, gear boxes, drive axles, catalytic converters, and steering wheel assemblies, for example.

In 2010 alone, Mexico imported approximately $3.5 billion worth of products for the manufacturing of medical devices, $2 billion of which were from U.S. suppliers. Key opportunities for medical products suppliers include anesthesia equipment, defibrillators, electrocardiographs, electro surgery equipment, incubators, lasers for surgery, etc.

Total Mexican packaging production reached 9.1 million tons of containers and materials in 2010 for a value of $10.1 billion, of which $2.5 billion came from U.S. industry. There is significant growth potential for U.S. suppliers of metal, plastics, glass, wood, and cardboard packaging materials.

$1.4 billion was invested in plastics manufacturing in Mexico in 2011, revealing a steady rise in the demand for plastic materials and resins. Additionally, Mexico exports Ethylene and imports Polyethylene, which shows the opportunity for U.S. industry to supply polymerization technology.

Mexican manufacturing, although this may be counter intuitive to some, should be viewed as a partner to the U.S., rather than exclusively as a competitor.

K. Alan Russell
President and C.E.O.

The Tecma Group of Companies
2000 Wyoming Avenue
El Paso, Texas 79903
Phone: 915 . 534.4252
Fax: 915 . 534.0205

Our Mission: “To create an environment where our clients and employees never want to leave us.”

How Mexico Is Becoming More Attractive To U.S. Manufacturers

March 29th, 2013
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.

From the report:

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

Some manufacturers say ‘adios’ to China

March 24th, 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.”

As China’s wages climb, Mexico stands to win new manufacturing business

September 11th, 2012

McClatchy Washington Bureau

Posted on Mon, Sep. 10, 2012

By Tim Johnson | McClatchy Newspapers

last updated: September 10, 2012 03:56:06 PM


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.”

Email:; Twitter: @timjohnson4

Mexico most popular for US ‘reshoring’

June 4th, 2012

Financial Times

By Hal Weitzman in Chicago

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.