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BMW expanding to Mexico to begin taking advantage of opportunities

A look at a BMW in a showcase in Mexico.

BMW has recently leaked its decision to begin building a plant in Mexico. The factory is going to cost $1 billion, according to Bloomberg, and it will produce 150,000 cars a year. The factory will be in San Luis Potosi, which is 250 miles away from Mexico City, and a total of 1,500 people will be employed there.

Further details arrived on July 3 when the announcement was made officially. One of the likely reasons for BMW and other auto manufacturers expanding to Mexico includes the low cost of labor (20 percent of what the cost is in the U.S., according to Bloomberg). There are also the excellent exporting opportunities afforded by the North American Free Trade Agreement, which allows vehicles to ship between all three of the North American countries completely tariff free. BMW already has a factory in the U.S., so if it has the option to ship materials from its U.S. factory and assemble them in Mexico. There would be no charge for moving the components back and forth.

After BMW's news about the factory was leaked to the press, the company's stock rose by 1.3 percent to 94.50 euros. In total, the stock rose 10 percent over the course of 2014.

Another auto company flourishing in Mexico
One automotive company that is already flourishing in Mexico is DENSO, which plans to expand a plant in Nuevo Leon, Mexico, to boost its production of auto transmission components. DENSO takes advantage of NAFTA to ship its products north to the U.S. where it sells to automakers there.

DENSO is investing $53.8 million into its expanded factory, which will create 500 jobs by 2018 and increase the size of the facility by 8,826 square feet.

DENSO opened its first Mexican plant in Apodaca in 1996. It has since built factories in Guadalupe City and Silao City. Each factory specializes in building a different kind of part, and all of the products are shipped out of the country to other markets.

Mexico is an excellent place for manufacturing of all kinds
HSBC recently issued its Purchasing Managers' Index (PMI) report for Mexico, and the results point to moderate improvement in Mexico's economy, along with the expansion of factories that are the result of more companies coming to Mexico.

According to the report, production volumes increased for the eighth consecutive month in June, and the monthly rises in volume are starting to speed up. There is additional demand from companies in the U.S. for Mexican products as well. Manufacturing companies are buying more raw materials than last month, and new orders for goods have gone up.

Mexico's growth has been slow, but this slow growth could be good for the country, as it keeps prices low and stable. The country continues to expand its manufacturing, with no signs of going in the reverse direction. This is likely because companies like BMW see Mexico as a developing nation with much promise in terms of supplying inexpensive but effective labor and promoting easy exporting opportunities.

Mexico on pace to outdo Brazil in economic expansion
Mexico is a country that is often compared with Brazil - they are the two biggest economies of Latin America. Unlike Mexico, Brazil is in a period of stagflation, according to Barrons. While prices are going up, the overall value of Brazilian currency is going down. In contrast, Mexico's economy is going much more smoothly. Its manufacturing PMI was 51.8 in June, while Brazil's PMI was 48.7

According to the article, when the U.S. does well, Mexico typically follows because the countries are so closely linked. The Institute for Supply Management Manufacturing Index in the U.S. was 55.3 in June. This suggests that Mexico will continue to do well in the long run.

The Offshore Group: You Manufacture ... We Do The Rest.

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