Mexico Rising
According to a recent report by The Boston Consulting Group (BCG), Mexico has a growing advantage over China as a manufacturing base. The report predicts that within five years, higher manufacturing exports could add $20 billion to $60 billion in output to Mexico’s economy annually.
Mexico’s gain is good news for U.S. manufacturing because Mexican factories use four times as many American-made components as Chinese factories do. Thanks to the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for everything from automobiles to appliances to computers stand to benefit from Mexico’s rise.
The key drivers of Mexico’s improving competitive edge are relatively low labor costs and shorter supply chains due to the country’s proximity to markets in the U.S. In 2012, average manufacturing costs in Mexico dropped below those of China when adjusted for productivity. By 2015, BCG projects, average total manufacturing costs in Mexico are likely to be around 6 percent lower than in China and around 20 to 30 percent lower than in Japan, Germany, Italy, and Belgium.
Another important advantage is that Mexico has 44 free-trade agreements—more than any other nation—allowing many of its exports to enter major economies with few or no duties. Mexico also has lower energy costs than many other economies. Average electricity costs are around 4 percent lower in Mexico than in China, for example, while the average price of industrial natural gas is 63 percent lower.
Crime and safety concerns still linger
Research by the World Economic Forum has found that companies view violence and corruption as the most problematic factors of having operations in Mexico. Another drawback is the perception that Mexico lacks enough skilled workers.
Global companies are expected to continue moving production to Mexico despite concerns over crime and safety. The cost advantages of producing in Mexico are becoming so attractive that many companies are finding ways to mitigate these perceived risks.
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