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Mexico is the world's biggest exporter of flat screen TVs and refrigerators, the author points out. (Photos: Sharp and Samsung)
Table 1: Narrowing wage gap: Average manufacturing wage (US$ / h). (Source: AMI with HSBC data)
Table 2: Trade, Infrastructure and Doing Business. (Source: AMI with World Bank data)
Wednesday, June 19, 2013
Perspectives

Mexico's Manufacturing Renaissance

The resurgence of “Hecho en México.”


BY GUILLAUME CORPART

After years of being overshadowed by China, Mexico is experiencing a manufacturing renaissance and is challenging China’s dominance in the global export manufacturing business. While Mexico has a long history of manufacturing, it has recently regained a competitive edge as a global manufacturing hub thanks to two significant shifts: on the one hand, Mexico has gained ground relative to China in cost efficiency; and on the other hand, the Mexican economy has concentrated on higher value-added export manufacturing activity that benefits both from proximity to the U.S. market and from robust domestic demand.

Mexico’s competitiveness gains relative to China

Ever since erupting onto the global manufacturing stage—and especially since joining the World Trade Organization in 2001—China has competed directly with Mexican manufacturing exports in every sector from textiles to electronics, at a fraction of the cost. The impact has been significant: Mexican manufacturing exports grew at an average of just 4.5 percent between 1997 and 2012, compared with an astounding 18 percent over the same period in China’s case.

However, after years of Chinese supremacy in manufactured exports, the cost of Chinese labor—for years its primary source of competitive advantage—has now risen to such levels that many investors are reconsidering their decision to keep production in China. Indeed, coupled with rising fuel costs and the distance and delivery times to U.S. and European markets, rising Chinese labor costs have dented the country’s competitiveness.

Mexico has reaped the benefits in two mutually reinforcing ways:

  • First, the resurgence in U.S. consumer demand since 2010 and the European Union’s recent slump have benefited Mexico relative to China. The Mexican economy is much less exposed to the E.U. compared to China’s and is much more integrated to the U.S. economy. While the United States and E.U. account for 17 percent and 16 percent of China’s trade, respectively, Mexico sends only 6 percent of its exports to the E.U., while 78 percent of its exports are destined to the United States. This currently plays in Mexico’s favor since the United States, even though it is still recovering from a severe recession, is nevertheless faring a lot better than Europe’s economy, where the recession continues unabated.
  • Second, another critical factor propelling Mexico’s manufacturing sector relative to China’s is the narrowing wage gap between the two countries (see table 1). In 2001, Mexican hourly wages were 5 times higher than Chinese wages. However, labor costs in the Chinese manufacturing sector have been growing on average about 20 percent a year, while Mexico’s have remained fairly flat. In 2011, Mexican hourly wages were only $0.47 higher than in China and estimates show that this narrowing gap is likely to close in the coming years as Mexico reaps the full benefits of its predominantly young population with fairly good training.

As the gap tightens between Chinese and Mexican manufacturing labor costs, and the U.S. economy continues its recovery, Mexico’s complementary attributes begin to stand out in its favor (see table 2):

  • Mexico’s proximity to the U.S. market has become a more decisive factor, especially considering the current high fuel costs.
  • Additionally, Mexico boasts an efficient and reliable export-driven infrastructure along its border with the United States. Whereas it can take up to four or five weeks to ship goods from China to the United States, Mexican exporters can transport their products across the border in a matter of days.
  • Mexico-based manufacturers are also taking greater advantage of integrated supply chains with U.S. counterparts. This makes the country an especially attractive provider of just-in-time components for companies with vertically integrated supply chains, facilitating import of necessary inputs and combining that with export of final products in a timely fashion.

Mexico’s newfound competitive advantage in high-value sectors

Mexico’s specialization in high-value manufacturing products, such as automobile, aerospace, and telecommunications equipment, has enabled it to gain an edge over other manufacturing bases. To counter the reliance on low-paying, labor-intensive industries such as textiles, Mexico specialized in these types of high-value sectors that typically have higher barriers to entry.

  • The automotive industry grew 6 percent in January 2013, while the production of telecommunications equipment grew 7 percent. Mexico is now the world’s 3rd biggest manufacturer of computers, the biggest exporter of flat screen TVs, the biggest exporter of refrigerators, the 3rd biggest exporter of mobile phones, and the 4th biggest exporter of cars, while the aerospace industry is also growing substantially.
  • Aerospace manufacturing has been growing almost 20 percent annually since 2006. Over 260 aerospace companies now operate in the country, exporting some $4.3 billion in aircraft and parts in 2011. Mexico is, in fact, the 6th largest supplier of aeronautical products to the European Union and 9th to the United States. The Mexican government has set a target of $12 billion in such exports by 2020, which would make Mexico surpass Brazil and Spain as an aerospace exporter.
  • Mexico’s automotive industry—which comprises both automobile assembly as well as auto parts and components—is a critical engine to economic growth, accounting for 20 percent of the national manufacturing industry and 23 percent of total exports. Mexico is the 8th largest automobile producer in the world. Production in 2012 amounted to 2.9 million vehicles, and it is expected that automotive production will double by 2018, thanks in part to investments in manufacturing capacity totaling about $6 billion announced by Nissan, Honda, General Motors, Ford Motor, Chrysler, and Volkswagen.

Mexico is an attractive destination for manufacturing companies to set up shop for several reasons: proximity and preferential access to markets in North and South America, a commitment to an open trade policy, extensive experience in the workforce, and a robust local market. Indeed, this last characteristic has become a key to the economy’s success: Mexico is itself also a major market for these products. Nearly 1 million cars were sold domestically in 2012, a 9 percent increase over the previous year.

Opportunities and trends

Mexico is resurging as an attractive manufacturing hub, not only because it represents a good production base for the U.S. market, but also because it offers the possibility of tapping into its vast domestic market—a population of 115 million people with an emerging consumer class that grew 7 percent between 2000-2012. While the export sector remains the main driver of the economy, higher levels of consumption, supported by the expansion of consumer credit, are strengthening the domestic market, making Mexico more than just a platform for export manufacturing.

Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.

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