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.”