By Bob Cook, Senior Vice President, Latin America, Site Selection Group
The most successful countries in Latin America have created investment laws that encourage foreign direct investment and have assembled professional teams that can facilitate the establishment of operations inside their borders. As you consider Latin America for potential operations, it is important to conduct in-depth analysis on the labor force, infrastructure and the legal/regulatory environment in each country. You must also assess the risk environment in real time—looking comprehensively at the political environment, and any current or emerging issues that may directly impact the security of your people, facilities and supply chain. Be assured, however, there are a number of places in Latin America that will grade out favorably in all these measures.
The Site Selection Group has facilitated both manufacturing operations and white collar operations (such as BPO and call centers) across the region, particularly in Mexico, Costa Rica and Brazil. To find the right location for our clients, we utilize a mixture of purchased data, open source information and primary research conducted by our team of consultants. Purchased data and open source information is typically used to filter down to a narrow list of potentially desirable cities for a given operation. During the filtering process, we use proprietary, internally-developed analytical tools weighted to the criteria that are most important to each of our clients’ individual needs for a given project. Once we have concluded the initial filter analysis, we conduct real-time, extensive primary research on the shortlisted markets which includes all the factors mentioned in the first paragraph.
Foreign Direct Investment Trends in Latin America Show Increasing Interest, Particularly in Mexico and Central America
More than half of the $70 billion greenfield FDI in Latin America last year went to either Mexico (40 percent) or Brazil (16 percent)—with another combined 26 percent landing in Peru, Chile, Argentina, Colombia and Costa Rica. Mexico and the seven countries that comprise Central America (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) saw combined greenfield FDI reach $32.56 billion in 2017—a jump of 9.2 percent from the previous year and the third consecutive increase experienced in the region. Eighty-six percent of Central America’s total greenfield investment last year went to Mexico—and all but Belize and El Salvador experienced increases in FDI as compared to 2016.
Experiencing Increasing Investment from Small to Mid-Size Companies
The value of investment does not come close to telling a complete story, however, as the number of greenfield projects in Latin America totaled 1,293 last year – an increase of 3.27 percent over the prior year and the third consecutive year that the region saw an increase. More than half of the project activity last year was in Mexico/Central America, with Mexico’s 562 projects capturing 43.5 percent of the projects in all of Latin America and 82 percent of those in Central America. Brazil was a distant second for all of Latin America with 197 projects, or 15.2 percent of the total. In Central America—Costa Rica was second behind Mexico with 62 total projects.
This data plus a review of actual projects locating in the region suggests that there is clearly increasing interest in the region, but a major portion of the new interest is being driven by small to mid-size companies—especially in Mexico and Central America.
Why Latin America?
Most countries in Latin America can provide globally-competitive operating costs—particularly related to labor. Labor costs throughout Latin America will be significantly lower than those in the United States. Legal minimum wages in the region range between one-eighth to one-half of the U.S. minimum wage. Keep in mind, however, that other factors of production such as real estate and electricity will likely be higher than what companies may experience in the U.S.
Latin America is also geographically well-positioned to provide efficient access to U.S. markets. One recent study we conducted concluded that products manufactured in Mexico can be shipped to most markets in the U.S. by truck, typically within three to seven business days. In the same analysis, we determined that manufacturing operations in Costa Rica, for example, will tend to ship products by sea and reach most markets in the U.S. within 17-19 days. Depending upon the product, a number of companies in Central and South America can easily opt for shipping products by air if the time frames from shipping via water do not work.
With a total population of roughly 642 million, Latin America provides access to a very large and very young workforce of 309.8 million persons. The median age in the region is 29.5 years (compared to 38 years in the United States), and the countries of Central America in particular are experiencing healthy workforce growth. In fact, seven of the eight countries (except Costa Rica) in Central America are growing faster than the global annual workforce growth rate of 1.23 percent. Interestingly, Mexico and Brazil each added over one million workers last year, while the U.S. added only approximately 860,000. Given the ever tightening labor markets in the United States, Latin America provides a viable alternative for companies seeking to serve the U.S. market. Not only is there rapid workforce growth, labor participation rates in Latin America typically exceed the current global average of 62 percent.
Mexico continues to be the star performer when it comes to attraction of new and expanded manufacturing projects. The country’s access to the U.S. market, large number of global trade agreements, and major investments in higher education are driving this project activity. Over the past two years, a broad range of industrial sectors are represented by the new projects locating in the country. We have analyzed more than 150 deals either completed or announced nationwide since the beginning of 2017, and just shy of 30 percent are in the automotive sector. Almost half (49.5 percent) of the automotive investments, mostly small to mid-size operations, are choosing to locate in the traditional automotive corridor of Mexico called “El Bajio” – essentially portions of the central states of Aguascalientes, Guanajuato, Jalisco, Queretaro, San Luis Potosi and Zacatecas. We should note, however, that we have also observed more than 20 projects each in the plastics and machinery sectors with at least a dozen more in both metals processing and electronics manufacturing operations. We note that over 80 percent of the new projects locating in Mexico over the last two years with at least 500 employees are choosing to locate in communities in the interior of Mexico, where we typically tend to see larger availability of labor at the current time.
There are too many projects to mention, but several projects are particularly noteworthy. Yazaki Corporation (Japan) announced in February of this year that it will add 1,500 jobs to its automotive wire harness manufacturing operations in the state of Chiapas. In June, U.S.-based Plexus Corporation broke ground on its second electronics manufacturing facility in four years in Guadalajara. The new 472,000-square-foot facility will employ a projected 3,000 people beginning next year, taking the company’s total employment in the region to nearly 5,000.
We are keeping our eye on two developments in Mexico that have the potential to impact site location decisions in the country. First, the newly-negotiated trade agreement referred to as USMCA (formerly NAFTA) has specific provisions which address the automotive industry. This deserves an article unto itself, but in summary, the agreement attempts to increase North American content in automobiles and automotive parts in order to qualify for duty-free treatment. The agreement also attempts to drive higher wages in the sector. Other than for the automotive industry, we do not currently see dramatic changes from the prior NAFTA agreement. The principal trade issue impacting Mexico at the current time is the Trump Administration’s 25 percent tariff on steel and ten percent tariff on aluminum, which the new USMCA does not remove.
Secondly, the more significant issue may be the incoming Mexican President’s proposed policies related to border locations. Andrés Manuel López Obrador (AMLO) takes office on December 1st, and he has vowed to double the daily minimum wage in cities located adjacent to their northern border with the United States. This will likely exert upward pressure on all wages in border locations, even though the vast majority of manufacturers already pay double the minimum wage when considering bonuses. AMLO has also promised to cut the current 16 percent value-added tax (VAT) to eight percent for companies locating in Mexican border towns.
Brazil attracted only $11.05 billion in total greenfield investments in 2017, its lowest level over the past 15 years. As demonstrated previously, though, Brazil still comprises a large percentage of the new investment activity in Latin America. Brazil’s project numbers have declined dramatically in recent years averaging just under 200 per year during 2016 and 2017 – a number which is less than half of the annual average Brazil experienced from 2010 thru 2015. 2018 may be looking up, however, as three major automotive investments have been announced so far this year by Toyota, Daimler and General Motors, totaling more than $1.36 billion in anticipated combined investment. Brazil’s policies tend to be very protectionist, however, and many companies are locating there just to serve the Brazilian market.
Costa Rica has long sported the most hospitable business environment in Central America and they have done well historically in attracting foreign direct investment. Costa Rica consistently ranks as the top Latin American country in the World Economic Forum’s global competitiveness report, moving up seven spaces this year from number 54 to 47. Mexico is in second among Latin American countries with the #51 ranking. No question, the country has a proven track record of providing qualified workers (often bilingual) for a diverse array of industries. The country has also established preferential trade agreements with countries that represent two-thirds of global GDP – including pacts with the European Union, USA, Canada, and China. The country’s promotional organization, CINDE, has worked diligently to simplify the process of establishing business operations there.
While the country has attracted more than 300 multinational companies there, they have placed specific emphasis on attracting medical device manufacturers, now claiming 72 companies in this sector with over 22,000 employed. Medical devices are actually the number one industrial export good of Costa Rica. In 2017, the country registered U.S. $2.9 billion exports in medical devices, more than half of which went to the United States. Costa Rica is on the second-largest exporter of medical devices in Latin America, behind Mexico. The country has a relatively young and significantly bilingual workforce. The industrial base has matured well enough that almost one hundred percent of the employees in multinational companies are Costa Rican.
In May of this year, Coloplast (Denmark), announced they will locate a medical device manufacturing facility in the city of Cartago. They will establish a temporary plant in La Lima Free Zone, where the first 100 employees will be hired to produce various “ostomy” devices. The facility will be fully operational by the summer of 2020.
In July of this year, Align Technologies opened its newest facility in Costa Rica, a $50 million office complex located in the city of Belén, with plans to open another multimillion dollar facility located in La Lima (Cartago) by the end of 2018. The company has more than 2,800 employees in Costa Rica, adding more than 1,000 over the past two years. With these new investments, Align hopes to add 400 new jobs by the end of 2018.
We are watching closely, however, the financial situation at the federal level. The country has a budget deficit that is 7.1 percent of GDP, the highest in Central America. This has led the current administration to propose a tax and spending reform package that has been met with resistance by workers in the government and various other sectors. Some workers went on strike in early September thru late October, and now the courts have struck down the proposal. How the situation is resolved will play a role as to how Costa Rica is viewed by site selectors in the future.