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Mexico regains standing as leading low-cost manufacturer

23 Dec 2014

For many years, Mexico has undergone a significant decline in terms of manufacturing. When the People's Republic of China became a member of the World Trade Organization in 2001, Mexico's viability as a low-cost manufacturing base to offshore was weakened considerably because of higher labor costs and a lower supply of manpower. In addition, increased competition from nations south of its border such as Honduras and Guatemala eroded the appeal of the maquiladoras along the northern border.  However, the economic situation has changed dramatically in the last several years and Mexico is suddenly seeing a resurgence in the manufacturing sector.

A desire for competition
Recently, the Boston Consulting Group released its report "The Shifting Economics of Global Manufacturing," covering all the major manufacturing nations both in the developed and developing worlds. While several nations were facing steep declines, including China, only two nations posted any significant gains in terms of competitiveness. One of them was Mexico. According to their statistics, several key performance metrics showed the country performing exceedingly well in comparison to other developing and developed nations. For example, worker productivity increased 53 percent over the course of 10 years up to 2014, almost double the average with the other 24 nations in the survey. Meanwhile, the cost of natural gas, a critical resource in energy use, was down 37 percent, which was in high contrast to the average going up 98 percent. The Mexican peso has also depreciated 11 percent over the course of that decade, while the average nation saw a 7 percent appreciation.

Consequently, that has led to far lower productivity-adjusted labor costs, making the country the leading low-cost manufacturer in the world once more. To compare to other nations, Mexico's labor costs are now 13 percent lower than China's, which is very significant given the situation 10 years prior. In terms of total costs with energy included, the price of doing business here is 5 percent less than China, 10 percent below Poland and a major 25 percent difference between it and Brazil. The only other nation that performed as well in the labor markets was the United States.

The tides have shifted
There are various reasons for the Mexican resurgence. Some of these situations have much to do with what happened in China itself. A combination of improved living conditions, productivity stagnation and higher labor costs have cut down on the country's competitiveness. The average yearly manufacturing wage has increased nearly fourfold over ten years from RMB 12,496 in 2004 to RMB 46,431 in 2014 ($7,554), according to the National Bureau of Statistics of China as cited by Trading Economics. While a small number, it translates to a productivity-adjusted hourly wage of $12.47 per hour, a 187 percent increase over 10 years ago. The competitive advantage China possessed has eroded so much that even against the United States, China barely does better in terms of total costs.

Meanwhile, Mexico enjoys some distinct advantages that have strengthened their position. For one, the 67 percent rise in wages was offset by equal productivity gains, as reported by BCG in another study. Mexicans have been known to work longer hours and less likely to cause labor conflicts that lead to work stoppages. Most importantly, though, is that Mexico has the most free-trade agreements in the world with treaties between 44 nations, including the all-important North American Free Trade Agreement with Canada and the country's leading trade partner, the United States. NAFTA allows goods to enter the United States duty-free, which helps ease offshoring concerns. As a consequence, even Foxconn, the leading investor in China, is producing 8 million PCs a year in a maquiladora in San Jerónimo in Chihuahua State, which is across the border from New Mexico.

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