Four Reasons Mexico Is Becoming a Global Manufacturing Power
“Mexico is beginning to beat China as a manufacturing base for many companies… according to a new report from Boston Consulting Group. Mexico’s gain is a plus for the U.S. because Mexican factories use four times as many American-made components as Chinese factories do, says the consulting firm. Here are Mexico’s four key advantages:”
China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000. But today, wages in Mexico average 11% lower than in China. And when adjusted for Mexico’s superior worker productivity, it’s actually more like 30 percent lower than in China.
Mexico has more free-trade agreements than any other country. The North American Free Trade Agreement gives Mexican goods easy access to the world’s largest market, the U.S., as well as to Canada. But that’s not all. Mexico has free-trade agreements covering 44 countries. That’s more than the U.S. (20 partners) and China (18) combined.
Mexican manufacturing has a significant advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S., which are exceptionally low because of a glut of supply on the market. China pays from 50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.
Industry clusters, especially in autos and appliances, are growing. Mexico has developed a national expertise in certain industries, which makes it more attractive for companies to locate or expand plants there. Because Mexico is a major auto manufacturer, 89 of the world’s top 100 auto parts makers have production in the country. The companies are concentrated in five Mexican states, reducing transportation costs. In appliances, more than 70 manufacturers are in the country, ranging from components makers to assemblers of both small and large appliances.
“Mexico’s progress relative to China is major good news for the country because manufacturing accounts for 35 percent of Mexico’s gross domestic product (vs. 12 percent of U.S. GDP), Harold Sirkin, the report’s lead author, says in an interview. The U.S. benefits in two ways, he says. First, by selling more components to Mexican manufacturers. Second, by selling more consumer products, such as American-made beef, to Mexicans, who will have more money for imported products if their living standards rise.”See original article
CHART OF THE DAY: Mexico Is The Clear Winner In The American Manufacturing Renaissance
“The American manufacturing renaissance has become one of the biggest emerging economic stories in the world. The basic idea is that rising overseas labor costs and falling domestic energy costs will encourage manufacturers to bring production back to the U.S. This is bad news for many of the emerging markets, which tend to be the low-cost producers.
However, one emerging market could come out a big winner: Mexico.
Here’s Morgan Stanley’s Manoj Pradhan and Jonathan Garner on the basic points for Mexico:
The clear likely beneficiary here for three reasons: i) recent outperformance on competitive grounds – it has gained market share in the US and automobile production remains an indirect threat to other less efficient LatAm manufacturers; ii) Mexico has always been strongly plugged in to the US manufacturing cycle and should remain a key part of the supply chain, thanks to NAFTA; and iii) Mexico’s structural reforms are likely to reduce structural rigidities at the same time as the tailwinds outlined above kick in.
Morgan Stanley’s Nikolaj Lippman and Luis Arcentales add to the conversation:
A sustained manufacturing revival in the US – driven by factors including a weaker US dollar and lower energy costs – will create a new competitor for the EM world, but a partner for Mexico, and the benefits could be felt across the Mexican economy for years, perhaps even decades.”
“Persistent market share gains by Mexico in recent years, importantly, suggest that the Mexican industrial sector has been restructuring just in time to benefit from renewed US competitiveness.
Countries like China are well known for offering cheap labor. But those costs have been rising rapidly, and they are on the verge of passing Mexico’s labor costs.”
Here’s a chart from Lippman and Arcentales: