Renaissance for Mexican manufacturing?

November 7, 2011

Guest editorial by Dr. Chris Kuehl, economic analyst for FMA

The dominant story from Mexico today is one of violence and corruption. The drug wars are a very real part of Mexico these days, and nobody would underestimate the challenges that lie ahead for the government.

However, another story that hasn't made the headlines yet is perhaps far more important to the future of the country. In June CNBC reported that Mexico’s economy is expected to grow by 4.5 percent this year. Contrast that number with the 1 percent growth expected in the U.S. and the 0.5 percent pace in Europe. The Mexican economy is outpacing some of the faster-growing regions in the world, and it is estimated that Mexico will be the eighth-largest economy in the world by 2050. In March The Wall Street Journal reported that unemployment in Mexico fell to 4.6 percent and is at the lowest level since December 2008. Contrast this rate with more than 9 percent unemployment in the U.S.

Mexico has signed 13 free trade agreements that involve 44 nations. Part of the reason for that surge in trade activity is that since 2005, the cost of manufactured goods from China has risen by 40 percent. Wages in China have risen rapidly over the past five to six years to almost the same rates as in Mexico. It is projected that wages in Mexico will continue to rise in the next 10 years, but only one-third as fast as those in China.

In addition, one of the most significant advantages that Mexico has had in its competition with China and other Asian nations is transportation costs. It is 80 percent cheaper to bring goods over the border to the U.S. than it is to bring them from Asia. In terms of cross-border trade statistics, trade has returned to the level that existed prior to the recession — a recovery faster than that with any of the other U.S. trading partners.

Another important factor is that the population of Mexico is rapidly becoming one of the most competitive in the world. The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year 90,000 engineers graduate from Mexican universities — three times the number that graduate from U.S. schools. Today Mexico has the ninth-largest pool of IT professionals in the world.

The recession in the U.S. was a severe blow to Mexican manufacturers, but it also may have been a blessing in disguise, as many Mexican operations found opportunities to do business with other nations. Those trade agreements allowed expansion into other markets, but so has the increase in foreign direct investment, which reached $18.6 billion in 2010. The advantages that Mexico has will become ever more appealing to operations in other parts of the world as production in Mexico has the added benefit of being close to the U.S. market.

Mexico is in a position to be at the forefront of the development taking place in other parts of the Americas. The economies of Brazil, Colombia, and Chile are developing fast, and opportunities exist for the Mexican manufacturer to become fully engaged in these countries as well as in the U.S.

If its young, educated population finds few opportunities to use their skills, they will become frustrated and angry, and Mexico could well experience the same challenges affecting governments in the Middle East. If the economy expands and the business community takes advantage of that skilled, talented, young population, the country stands to grow quickly.

The U.S. is rapidly coming to a crisis from the other direction as its labor pool decreases and the skills needed start to vanish. The average age of a fully qualified welder in the U.S. is now 63; this points to an emerging problem. It will be next to impossible for the U.S. to address that issue in any way except through mass immigration, and that is simply not politically feasible in the foreseeable future. That puts greater emphasis on production outside the U.S., and Mexico becomes the most logical candidate if there is attention to the needs of a growing industrial sector.

The U.S. manufacturing community is in an ideal position to link with its Mexican counterparts as both nations start to see the predicted shift in production. As the Boston Consulting Group and others have pointed out for the past couple of years, China is losing its edge, and there is an opportunity for others to grow at its expense. Higher wages, higher production costs, and higher transportation costs will make China less competitive in the years to come and give Mexico a distinct advantage.

This is a very different story from the one that dominates the media, and it is the story that has the most significance for Mexico in the years ahead. This is not to say that Mexico doesn’t have issues to address. Inhibitions to growth, such as corruption at various levels of business, must be dealt with sooner rather than later.