By Bob Cook, Site Selection Group
If I were writing an article on Mexican competitiveness 20 years ago, there would be one paragraph each on labor cost and one on its location. That’s it – the article would have concluded right there. Certainly, those two items remain as key competitive factors, but Mexico’s advantages go well beyond those today. With a population in excess of 120 million and national GDP at over $2.1 trillion (USD), Mexico is now the 11th-largest economy in the world, and many signs point to continued forward momentum.
All Manufacturing Signs Trending Positive
Mexico is competing well for jobs and investment from manufacturing companies seeking to serve the North American market. Over the past five years alone, the country has received $86.5 billion in FDI for manufacturing projects—approximately one-third of which has come from the United States. Corporations from around the world have selected Mexico to produce food and beverages, medical devices, smartphones, automobiles and aircraft, just to name a few.
From 2009 to 2014, manufacturing employment grew a healthy 38 percent in Mexico – about five times faster than the United States (7.1 percent). More significantly, manufacturing value grew 52 percent over the same timeframe, a clear indicator that the country is making healthy gains in worker productivity, and also lending credence to the rapidly-advancing skills of the Mexican production workforce.
Today, Mexico’s manufacturing workforce stands at approximately 3.6 million people, over two-thirds (68 percent) of whom work for companies that are operating under the IMMEX or “maquila” program. This program consists of a series of laws and regulations in Mexico which gives favorable treatment to global manufacturing companies, allowing them to have duty-free importation of raw materials, component parts, machinery and equipment. While the vast majority of products manufactured by these companies are subsequently exported from Mexico, it is now permissible for a certain amount of the company’s product to be shipped to customers within Mexico. Still, companies which are registered under the IMMEX program are typically referred to as “manufacturers of exports.”
While we could write a feature article on several manufacturing segments that are growing in Mexico, we will focus here on just two—Automotive and Aerospace.
Mexico is now the seventh largest producer of automobiles in the world, with total production of 3.7 million light vehicles in 2015. Production has increased at a compound annual growth rate of 8.8 percent since 2010, and total employment in the sector now stands at over 744,000. Major OEMs include Toyota, Ford, Daimler/Chrysler, Volkswagen, Honda, Audi, Nissan, Kia, Mazda and GM. BMW will be operational with a new final assembly plant by 2019, and other OEMs are expected to make announcements in the coming months. By 2020, Mexico production is projected to be at nearly five million light vehicles, an estimated 25 percent of the total North American volume.
Mexico entered this globally competitive market just over a decade ago, and has already become the world’s 14th largest exporter of aircraft and related components. OEMs include Airbus, Bombardier and Textron (Beechcraft, Cessna, and Bell Helicopter), and there are 300 related industrial facilities in the country that employ an estimated 53,000 persons. Mexican exports reached $6.69 billion in this sector last year, a number which is growing at an annual compound growth rate of 16 percent.
As mentioned previously, location and labor costs have been Mexico’s two principal competitive advantages. Those two items are briefly discussed below, followed by three additional considerations.
Location. Mexico’s proximity to the United States (still the largest consumer market in the world) – is one of its most attractive features. From many locations along the 2,000 mile border with the United States – a Mexico-based manufacturer can gain access to more than half of the major markets in the U.S. within 24 hours by truck (using a team driver concept). Not only does the United States provide a large customer base for consumer goods, but establishing a plant in Mexico significantly reduces supply chain length as compared to offshore locations. This is significant in that over three-fourths (76 percent) of Mexico’s value of manufactured exports is comprised of component parts and materials that have been imported into the country—mostly from the United States. In that light, Mexico represents a great opportunity for U.S.-based suppliers of capital-intensive component parts and materials.
Labor Cost. Mexico still has an abundant supply of competitively priced labor. As seen in the chart below, average production wages (fully burdened) in Mexico are approximately one-sixth of those in the United States, and still compare favorably with many parts of the world. Even for skilled labor, the cost differentials are significant. For example, a welder in the United States which earns between $45,000 and $76,000 per year depending on experience, would earn between $9,960 and $12,500 in Mexico.
Additionally, because of the strength of the U.S. dollar, manufacturing wages have been declining in Mexico. While peso-denominated labor rates in Mexico have increased 23.6 percent in the last five years, due to a significant devaluation of the peso against the dollar—the real cost of wage rates in Mexico have actually declined by about four percent according to Conference Board data. For some companies engaged in the IMMEX program, the reduction in dollar-denominated hourly labor costs has been as much as 20-30 percent, depending upon location.
Free Trade Agreements. In 1985, ten years before the passage of NAFTA, the Mexican government initiated a “radical liberalization” of its economy and began to aggressively pursue trade agreements around the globe. Today, Mexico has established free trade agreements with 46 countries, more such agreements that any other country in the world. Almost two-thirds of these agreements are with countries in Europe, making Mexico an excellent export platform for countries other than the US.
Engineering Talent. In recent years, Mexico has made a significant commitment to producing engineering talent for business and industry. From 2002-2012, Mexico doubled the number of its public two-year colleges and four-year universities. From 2006-2012 alone, the government established 140 new schools of higher learning, almost nine out of ten of which were dedicated to science and engineering. Mexico now ranks #8 globally for the number of students graduating with degrees in engineering, manufacturing and construction. Given the growing levels of enrollment, it will likely continue to move up this list in the coming years. Mexico now ranks as high as #4 globally in terms of engineering enrollment per capita. Mexican engineers receive very high marks, particularly in the areas of quality management and process improvement. Mexican engineers typically take great pride in maximizing efficiency and productivity on the manufacturing floor. While Mexican engineers are not necessarily known for their innovation and design capabilities, the country is making strides in this area as well. Our research reveals that at least 3,000 students nationally are pursuing engineering degrees that specifically relate to technology development and/or design innovation. Companies like Delphi and GE (among others) are taking notice, and have established major R&D/engineering centers in Mexico which are generating impressive amounts of intellectual property.
Infrastructure Investments and Energy Reform. Mexico is making a legitimate attempt to improve operating conditions by making major investments in its infrastructure, and by introducing important new reforms in its energy sector. Both of these efforts are significantly connected. The country is in progress with more than $101 billion in planned infrastructure improvements (2014-2018) related to telecommunications, seaports, railroads and highways. Over this same timeframe, an additional $250 billion injection is projected for the energy sector—with specific plans to modernize the nation’s petrochemical exploration, production and processing capabilities. An additional $46 B is planned for modernization of Mexico’s electric generation, transmission and distribution system. There is also a refreshing new twist related to these investments. Recent federal reforms now allow the private sector to financially participate in Mexico’s energy sector, previously owned and operated solely by the federal government. With these reforms, the country hopes to entice the private sector to take on 27 percent of new investments in the energy sector. These actions should lead to improved energy prices (including electric rates), currently Mexico’s most daunting cost challenge when it comes to attracting manufacturing-related FDI.