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Special Investment Report: Mexico's Labor Costs, Skill Keep Investment Up

With its low labor costs, skilled manufacturing work force, and proximity to the United States, Mexico is encouraging major companies to plant roots.

November 2010
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Banco de Mexico says inflation remains "within tolerance," and the peso remains stable. Recent inflation data has been better than the markets and Banco de Mexico predicted. The bank also predicts a "higher probability that inflation will remain below the lower limit of the bank's forecast, and that interest rates will remain at their current record low of 4.5 percent until 2012." This would give Mexico a considerable advantage over other Latin American outsourcers, such as Brazil, Chile, and Peru, which have been tinkering with interest rates to head off inflation worries.

The Mexican government recognizes that low costs and high efficiencies are the keys to economic growth, especially if it wants to compete against China. "Although Mexico shows important progress in manufacturing competitiveness, neither NAFTA nor the country's geographic advantage have served to prevent China from occupying the first position in the U.S. market," says Albo. "Mexico faces great and urgent challenges in terms of manufacturing trade competitiveness."

Attempts are under way to address these issues. "We have implemented actions to foster innovation, facilitate commerce, promote government purchases, and simplify regulations," says Lorenza Martínez, Mexico's Industry and Commerce Undersecretary. Continuing and planned efforts include simplifying tariffs and border procedures, organizing special programs, and improving incentives for foreign investment. "Our goal is to completely eliminate the unnecessary cost to fulfill procedures and regulations, as well as harmonize the Mexican and internationals standard norms," Martínez says.

Manufacturing Performance
Manufacturing is the backbone of the Mexican economy, with key industries in food and beverages, chemicals, steel, textiles, motor vehicles, aerospace, consumer durables, electronics, and energy. With over 40 years as an outsourcing destination, and foreign companies that have invested billions of dollars in infrastructure and work force development, Mexico has an impressive track record of manufacturing success and a labor pool of well-trained, highly experienced workers.

In 2010, manufacturing has been "characterized by a generalized growth of the large sectors of the economy, especially the auto sector, including heavy vehicles and auto parts, computer equipment and machinery and equipment, services, trade, and transportation," Albo says. "Even though sectors such as construction and financial and professional services are still lagging behind, most of them will also be experiencing a growth phase sometime this year."

The automotive sector is one of the most dynamic clusters in Mexico. Mexico is the tenth-largest vehicle producer in the world, with the automotive industry accounting for nearly 20 percent of the country's manufacturing sector and 3 percent of its GDP. Mexico City, Monterrey, Tijuana, and Guadalajara are home to strong auto clusters. Mexico produces about two million cars annually, three-quarters of which are exported.

Automotive companies continue to invest in Mexico, attracted by the lower labor rates and facility costs. "Ford is developing a plan to scale up global production hubs, and re-activating its Mexico City plant in May 2010," says Swedback. "Nissan and Navistar are sending additional investment to take advantage of the labor differential, and two automotive operations in Juarez have plans to hire an additional 3,000 employees."

Volkswagen recently announced a $550 million investment in a new engine plant in Guanajuato to strengthen its position in the North American market. The new facility, scheduled to begin production in 2013, will supply engines to other Volkswagen North American operations and create at least 700 jobs.
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