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17 Jan 2013

Automakers: All Aboard for Nearsourcing - 

More and more people are jumping on the train to Mexico – and financial analyst Jim Cramer is one of the latest to buy a ticket.

Cramer: Mexico Is In Great Shape photoRecently, Cramer – a former hedge-fund manager and host of CNBC’s “Big Money” – was raving about railroad company Kansas City Southern (ticker KSU). “Why, oh, why do I like this company so much?” the host queried. “Its geography.”

Kansas City Southern is an intercontinental railroad running north to south, with 6,600 miles of track uniformly divided between the States and Mexico, “and the network is only one interchange away from every single major market in North America,” he notes.

"Thanks to a phenomena that’s being called nearsourcing, thanks to rising wages in places like China and rising transportation costs, it now makes sense for auto companies to build their factories in a place like Mexico where wages are low,” Cramer adds, “and it’s easy to ship the cars they build to the U.S. via the rails. Yep, Mexico’s probably the cheapest place on Earth to make stuff to send to the United States."

Nissan, Volkswagen, Honda and General Motors are only a handful of the automakers “on board” with nearsourcing, recently announcing expanded business efforts in Mexico. One of every 10 cars sold in the United States last year was made in Mexico; in fact, every new taxi added to New York City’s fleet in 2013 will be assembled in Nissan Motors’ Mexico plant.

But there are still other reasons beyond the ones cited by Cramer, such as inexpensive labor and lower shipping costs, driving automotive manufacturers south of the border. NAFTA and Mexico’s other free-trade agreements with a multitude of countries have made it an attractive platform for doing business. For instance, Mexico’s trade deal with Argentina and Brazil made it possible for Volkswagen to avoid a 35-percent tariff by shipping cars made in Mexico to Brazil. Volkswagen pays 25 percent in taxes when shipping a European-made truck to the States, but there are no such tariffs upon sending the same vehicle – this time hecho en Mexico – to the same destination.

With scenarios like this, it’s no surprise that other industries, including aerospace and electronics, have discovered doing business in Mexico is a smart choice.

Watch Cramer: Mexico Is In Great Shape video on CNBC. (Link opens in a new window.)

Watch Cramer video on Mexico PhotoIn his broadcast, Cramer noted Mexican auto production is expected to surge from 2.5 million vehicles a year to3.5 million. “I think that’s low versus what will ultimately be,” the financial analyst concluded.

If you are interested in learning more about setting up manufacturing in Mexico operations to reduce your operating costs with The Offshore Group nearsourcing, please contact one of our expert advisors by submitting this contact form.

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