Publish in Perspectives - Wednesday, June 19, 2013
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)
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:
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 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.
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.