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.
Mark Crawford, Staff Editor, Area Development (November 2010)
Mexico is a top location to do business, according to recent global competitiveness surveys. In its 2010 Global Manufacturing Competitiveness Index, Deloitte's Global Manufacturing Industry Group and the U.S. Council on Competitiveness rank Mexico seventh overall behind China, India, Korea, the United States, Brazil, and Japan. The report also called Mexico an emerging leader in manufacturing competitiveness over the next five years. And according to the UN Commission on Trade and Development's World Investment Prospects Survey 2010-2012, Mexico is the sixth best country for attracting foreign direct investment.

Despite these favorable appraisals, the World Economic Forum (WEF) says Mexico's economy is not advancing as quickly as emerging countries such as Uruguay, Turkey, and Vietnam, largely due to the deeper toll of the global recession on Mexico and its slow progress on advancing key reforms. Mexico received its best rankings from the WEF for market size and macroeconomic stability. Although its growth is far from torrid, Mexico has made significant progress over the last decade to minimize fiscal deficits, strengthen banks, and bolster foreign reserves.

With an estimated population of 111 million, a $1.14 trillion GDP in 2009, and the benefits of NAFTA, Mexico is well positioned for a solid economic recovery. (That's closely tied to American economic performance, as about 80 percent of Mexico's exports ship to U.S. markets). The industrialized Mexico-U.S. border, where many modern factories (maquiladoras) and light industries are based, will also propel the country forward. Mexico's working-age population is forecast to grow 1.3 percent for the next 10 years. Current unemployment in Mexico is only 6.3 percent, lower than other industrialized countries. And low labor costs remain a business draw.

"Fully fringed labor rates for skilled trades in Mexico are often only 20 to 30 percent of the same salary levels paid in the U.S. and Europe," says Gary G. Swedback, president of NAI Mexico, a network of commercial real estate firms with Mexican assets. "Non-skilled assembly operators can be sourced for $2 to $2.50 per hour with all benefits, as compared with fully loaded rates exceeding $12 to $13 in the U.S."

Major companies are considering expanding in Mexico, including Flextronics, Kimberly-Clark, Honeywell, Hewlett-Packard, Hawker Beechcraft, DHL, and Fisher & Paykel.

"Many companies are creating Mexican production platforms for global export, not just to U.S. markets," Swedback says. "These include truck and auto firms from China, electronics firms from Korea, aerospace firms from France, medical device firms from the U.S., and food processing and logistics firms from North America. Over 100 foreign firms will establish facilities in Mexico during 2010, with investment from Asia and Europe estimated to be $25 billion during the next three years."

Solid Economic Growth
After contracting in the first quarter of 2010, the Mexican economy grew 3.2 percent in the second quarter, driven by a 13.4 percent jump in manufacturing and a 7.4 percent surge in the services sector - the largest increases in over a decade. The Mexican economy, however, will continue to rise and fall according to U.S. economic trends. Overall, most analysts expect Mexico's GDP to grow between 4 percent and 5 percent in 2010, compared to last year's 6.5 percent contraction.

"Mexico has returned to growth at rates close to 1 percent quarterly, supported by the cyclical boost from U.S. demand," says Adolfo Albo, chief economist for BBVA Research in Colonia Xoco, Mexico. "The expansion of exports has been maintained and, in general, among manufacturing activities is linked mostly to the production of durable consumer goods. This boost, which will lead to growth close to 4.5 percent in 2010, has been supported, or at least not hindered by, the cost of the use of capital and financing from the public and private sectors."

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.

Aviation and Aerospace
Mexico's aerospace industry has grown from 100 manufacturers in 2004 to over 300 in 2009. Cessna, Bombardier, Honeywell, Zodiac, Safran, Goodrich, Triumph, GE, Bell Helicopter, Pratt & Whitney, Hawker Beechcraft, and Daher all have a presence in Mexico. Aerospace companies employ about 30,000 people and generated more than $3 billion dollars in exports last year.

Mexico ranks first in the world in attracting manufacturing investment in the aerospace sector, Deloitte says, with $33 billion dollars invested from 1990 to 2009. Deloitte also reports that the aviation sector will receive 2,500 billion pesos in loans in 2010.

Queretaro, which rapidly built its aerospace cluster after attracting Bombardier in 2005, is Mexico's best-known aerospace center, including large factories that produce aircraft parts for Boeing and Airbus. Four states - Baja California, Chihuahua, Nuevo Leon, and Sonora - have larger aerospace clusters than Queretaro's that also include manufacturing facilities. In Sonora, an aerospace cluster is rapidly growing in the border town of Nogales, including a new Daher factory that is expected to employ 1,000 people by 2012.

Mexico's electronics manufacturing clusters in Tijuana and Guadalajara produce computers, mobile phones, televisions, stereos, and video equipment, as well as their components, including integrated circuits, light-emitting diodes, indicator panels, and cathode-ray television tubes.

Low operating costs and skilled labor continue to attract new companies such as Flextronics, the world's second-largest custom electronics manufacturer. Flextronics wants to move additional operations from China to Mexico, citing a 20 percent annual rise in labor and worker's compensation costs in China. And Foxconn is consolidating its electronic manufacturing operations in Juarez, which will require up to 3,000 new employees. Foxconn already has more than one million square feet in industrial buildings in the Jeronimo Industrial Campus and a labor force of over 12,500 people in Chihuahua.

Ready for Growth
The Mexican economy is projected to expand by a respectable 3.8 percent in 2011, according to government estimates, and will rise and fall with the U.S. economy. Its diverse mix of positive business attributes - low labor and operating costs, skilled manufacturing talent, close U.S. ties, and NAFTA position - continue to make it an attractive, low-cost country that brings major investments even in a down economy.

"The 25 percent devaluation of the peso (additional labor savings), the 20 to 25 percent decline in industrial lease rates in most markets, and shorter supply chain are combining to produce an even larger offshore advantage for Mexico," Swedback says. "While Mexico has been desired by manufacturers and logistics firms since 2000 for its near-shore advantage, it has emerged in 2009-2010 as the best-shore competitor. Its long history with foreign manufacturers has created a labor pool of experienced operators and mid-level Mexican managers who can launch and grow operations in all sectors, from garment operation to semiconductor packaging. The U.S. has developed a closeness to Mexico that goes far beyond physical proximity; the deep integration of the North American economy will continue to accelerate and proceed over the long term."