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Mexico, here represented by a maquiladora factory, is now poised to supplant China as the leading source of imports for the U.S, some experts say. (Photo: Guldhammer)
Monday, February 11, 2013
Perspectives

Manufacturing: Mexico Edges Out China

Rising wages and transport costs make Mexico more appealing than China for many U.S. manufacturers.

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

 

In Mexico, U.S. companies can find highly skilled workers as well as a shorter supply chain, lower levels of risk and faster shipping as compared to China, former Wired editor and current head of 3D Robotics Chris Anderson wrote recently in The New York Times. Does Mexico really have the edge over China for U.S. manufacturers? Why? What more do Mexicans need to do to convince North American firms to 'quicksource' their production to Mexico instead of other places? As manufacturing increasingly automates, will low-cost labor become less important a factor in such decisions? 

 

Richard Sinkin, founder and partner of InterAmerican Group in San Diego: Although the financial crisis of 2009 walloped Mexico, Mexican manufacturing is thriving today. This turnaround has several key drivers. Among the most important has been NAFTA and Mexico's commitment to globalizing its economy. With 44 free-trade agreements, Mexico is an attractive site of manufacturing not just for the United States, but for most of the industrialized world. Another key element has been the surge in wages in China, Mexico's main competitor for off-shored manufacturing jobs. In 2000 average Chinese factory wages were 3 cents per hour compared to Mexico's $1.50. Today, Chinese wages average $1.63 compared to Mexico's $2.10. A fourth contributor has been the high cost of fuel, which makes the long supply chain from China to industrial markets very expensive. A final key driver has been the growing concern about the rampant corruption in China and the unlevel playing field for foreign companies there. In contrast, while low-level corruption persists in Mexico, the rule of law is certainly much stronger, thereby lowering the country risk costs. In short, Mexico is now poised to supplant China as the leading source of imports for the U.S. But, in order for Mexico to continue this remarkable turnaround, it needs to implement two major changes. First, the still-closed banking system has to open itself to small and medium business lending to develop a stable supplier base. Second, the woefully outdated and corrupt education system needs a total overhaul to produce trained workers at all levels of the high-automated industrial system.

     

Amy Glover, senior advisor at McLarty Associates and associate researcher of the Center for Dialogue and Analysis for North America (CEDAN) at Tecnológico de Monterrey: Mexico has important advantages over China in attracting U.S. manufacturing investments, both in terms of superior rewards and lower risk. As a strategic economic partner of the United States and Canada under NAFTA, Mexico forms part of a North American production platform, and efforts will continue to facilitate trade and streamline border crossings, reducing the cost of operations even further. Mexico's privileged geography means it can serve as a bridge for U.S. manufacturing into the growing Latin American market. In addition, Mexico is one of the most open economies in the world, providing multiple sourcing options. Mexico gets higher marks for labor quality and availability than China, India and Brazil and is ranked 48th in the World Bank's ease of doing business index, far above China (91st) and the other BRICs. Importantly, Mexico is a consolidated democracy, which favors transparency and decreases political risk. With a flexible exchange rate and a sustained orthodox macroeconomic policy, Mexico provides the foundations companies require for long-term planning. In order to realize its full potential, Mexico needs to prioritize ambitious energy reform, simplify its tax code and implement the recently passed labor reform. More could be done to lower the country's logistics costs, which in some areas of the country are negatively impacted by issues of security, bureaucracy and deficient infrastructure. Education reform is also paramount for long-term competitiveness and to keep pace with technological change. Automation has already made low-cost labor less important in determining manufacturing investments globally and Mexico is trending toward higher value-added production. At present, 53 percent of exports are medium- to high-tech manufactured goods in sectors like aerospace, medical devices and electronics. Many large U.S. companies are locating research centers in Mexico that provide important product innovation support. Mexico is and will remain a global manufacturing powerhouse capable of competing with China and other emerging markets far into the future.


Rogelio Ramirez de la O, president of Ecanal in Mexico City: Mexico indeed has a potential edge over China for U.S. manufacturers. For one thing, China's production costs have risen as its workers are receiving high wage increases. For another, geographical distance provides cheaper transport costs and faster delivery, which is significant at times of high energy costs. Yet this is still a potential edge. For Mexico to represent a true challenge as a manufacturing location base, it needs to show tangible progress. One issue is security not only of plants but also of highways, especially in northern states, which are the hardest hit by violence. Violence has not diminished in the two months of the new government. Another issue is poor infrastructure as compared to China's. Mexican highways are very limited in width and with poor physical conditions while sea ports lack sufficient capacity to handle cargo on large scales. Major infrastructure spending is needed in all transport facilities-land, sea and air. A third issue is monopoly pricing in some services which manufacturers require. This applies to telecoms and transport, gas, electricity and banking fees. The advantage of low labor costs which Mexico has over China is only part of what would make modern manufacturers relocate large production sites. Mexican wages are relatively low at present, but the available supply of skilled labor is very limited, which becomes a problem in terms of high rotation of workers whenever Mexico records growth above 4 percent. This means Mexico must make an effort to improve education and support workers training. In other words, to consolidate a position as an alternative to China, Mexico must make progress on long standing structural problems.

 

Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars: Mexico's edge over China is many-fold. First, the geographical proximity to the U.S. economy and the ability to guarantee just-in-time production means that U.S. firms do not have to worry about carrying high levels of inventory, which can be expensive and expose the company to risk. Second, the same proximity means that transportation costs are low compared to Chinese suppliers. This is especially important during periods when fuel prices are high. Third, there is a higher level of cultural understanding between U.S. and Mexican firms due largely to the fact that we now have 20 years of economic cooperation behind us since the signing of NAFTA. In order to take full advantage of this opportunity, however, there is still work to be done. First, the border is not nearly as efficient as it could be. Substantial investments need to be made in border infrastructure and also in improving technologies and procedures at the border to speed the flow of goods, services and people, while at the same time maintaining desired levels of security. Second, Mexico needs to invest more in its people, and educational cooperation between the two countries remains a relatively unexplored area. Third, Mexico needs to invest more in its national infrastructure to fully integrate all regions of the country and to improve the efficiency of transportation and logistics. Lastly, Mexico should focus on the creation of clusters in its economy, much as has occurred already with the creation of an aerospace cluster around the city of Querétaro. By focusing public and private efforts on these issues, further increases in competitiveness will help to drive the Mexican economy forward and prevent stagnation.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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