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Mexico's cost advantage will benefit companies in 2014

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23 Dec 2013

Executives at North American companies aren't strangers to budgetary challenges and efficiency issues, and are often the ones to drive their businesses to find alternative solutions in order to produce profits. According to an article on HSBC Global Connections by Elizabeth Millard from the The Business Journals, more manufacturers are looking to Mexico to reap its cost saving rewards as additional companies make the shift to offshore manufacturing near to the U.S. border. Investors in the U.S. are taking notice of this drive to manufacture in Mexico.

The Washington Post recently interviewed investors about where they feel the markets are heading. According to the interviews, some companies are looking to expand to Mexico to boost their profits rather than send their production processes across the Pacific or Atlantic Oceans.

"Definitely, Mexico should be on any company's shortlist when considering a manufacturing strategy," Michael Zinser, a partner at Boston Consulting Group (BCG) who leads the firm's manufacturing work in North America, told the Journals.

Reports highlight Mexico's growing advantages
Numerous studies and reports have noted that Mexico's low cost manufacturing climate in addition to its more affordable labor is what's giving Mexico the advantage over other offshore destinations. Mexico's wages have been competitive for some time. According to a previous article in Reuters, Mexico's hourly wages were approximately one-fifth lower than China's in April 2013. The Journals reported the BCG found that by 2015, Mexico's labor costs will be 19 percent lower than China's, making Mexico the best long-term cost-saving bet for North American countries. 

"The labor rates are one of the main drivers that make Mexico so attractive to manufacturers, especially because the reason why many companies switched production to Asia was because they could get lower labor costs," Zinser said.

But lowering costs by manufacturing in Mexico doesn't mean companies have to sacrifice their product quality. The Journals reported three times as many engineering students graduate from universities in Mexico annually compared to the U.S. This is because Mexico already has established industrial sectors, resulting in Mexican workers being more productive and providing stronger work than many executives may perceive.

Flexible policies and supply chains
Dan Ivascyn, a fund manager at an investment company in California, told the Post that he believes Mexico's rise in 2014 will be due in part to the country's strong policy flexibility, which gives manufacturers room to innovate and remain profitable. Mexico is flexible for companies in more than one aspect. According to the Journals, with Mexico being a nearshoring destination for North American companies, it offers shorter, more adaptable supply chains compared to offshore destinations like China and India. The Journals reported consulting firm BC Strategic Advisors estimates importers spend 40 percent of their shipping costs just on fuel. It's a wise move for North American businesses to keep their supply chains as short and as flexible as possible to keep these logistical costs low. 

Mexico is already a top offshore destination for businesses, but its affordability for North American companies ensures the country's manufacturing sector will become more competitive in 2014.

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