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Mexico's Manufacturing Economy Continues to Move Forward Despite Drug Related Violence

21 Feb 2012

The Government of Mexico's President, Felipe Calderón, has waged a war against Mexico's drug cartels since his assumption of office in 2006. Since then, and up until the present, approximately 35,000 people have died from drug-related violence in the country. The majority of those that have perished have been directly involved, on one side or the other, in the ongoing battle against criminal drug cartels. Despite this state of affairs, however, Mexico's economy is presently one of Latin America's best performing. What is behind what appears to be a surprising paradox?

News headlines in the United States have, for the most part, created the perception that once one crosses the border into Mexico, one is immediately engulfed in civil strife, war and chaos. This is not an accurate portrayal of the situation on the ground. The fact is that four-fifths of drug-related murders have occurred in just seven percent of the country's municipalities. In other words, the drug-related violence in Mexico is, for the most part, geographically isolated and mainly concentrated in the area along the U.S.- Mexico border. In general, the situation in the interior of the country is quite different than what one sees portrayed on the nightly news or what appears in print in the evening newspaper.

The fact is that during 2011, Mexico's GDP grew at a healthy rate of around 5%, while the United States growth in GDP for the entirety of 2011 was a lethargic 1.8%.

To an extent it is accurate to say that, thus far, Mexico's economy has remained resilient and impervious to the narco violence troubles that are affecting some parts of the country. To further highlight this point, counter to what one might expect,industrial investments from overseas flowed into Mexico in the amount of $18 billion dollars during the last calendar year.

Nowhere was foreign investment in Mexico in 2011 more high profile than in the automotive sector. Over the course of twelve months, the Mexican automotive industry produced a record number of light vehicles. Automotive assembly plants in the country churned out 2.56 million light vehicles. This number of units was a record for Mexico. Eighty percent of this production was exported, and most of it was sent to the United States. Interestingly, however, exports to markets in South America increased by fifty percent. Part of Mexico's economic health has come as a result of the diversification of its export markets. During 2011 large investments were made by automotive manufacturers such as Nissan, Mazda, Fiat and Honda. As a result new jobs will be created in Mexico by these OEMs over time, as well as by the automotive parts suppliers that will follow them in order to support their production.

In the face of widespread news of drug related violence in Mexico, it seems counter intuitive that its manufacturing economy would be making significant strides forward. For some, however, this set of circumstances is not a surprise.

Major multi-national manufacturers are placing their bets in support of Mexico's long term viability as one of the premier export platforms in the America's. As Chinese wages steadily rise, and manufacturers that ship product from China face scaled back government incentives and worker shortages in coastal areas, the option of manufacturing in Mexico has become an increasingly attractive and viable low-cost solution that is closer to home. During the last several years, international corporations have come to a greater appreciation of the country as a manufacturing location that mitigates the risks that are inherent to long supply chains that, by their nature, translate into long turnaround times, greater susceptibility to interruption and risk of product obsolescence. Additionally, manufacturers that are located in Mexico, rather than in China, are less prone to feel the full negative impact of fuel price volatility.

Despite the continuing narco violence that is reported in some areas of Mexico manufacturers seem to have made the long term committment to be there. According to Rosalind Wilson, CEO of Canadian Pacific Railway, "we have never seen a company go home" because of the violence that is transpiring between the narco traffickers and the Mexican security apparatus.

Manufacturers that are interested in exploring Mexico as a locale at which to site a low-cost manufacturing facility would be well served to visit The Offshore Group's industrial parks in order to determine for themselves if the situation on the ground is corrollary to that presented in the print and visual media.

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