Mexico finally starts setting its path towards a strong economy. With many structural reforms to its Constitution, especially the finally-approved energy reforms which benefit both the country and foreign investors, the Latin American country is quickly beating China and becoming the manufacturing base of many companies. Even Chinese companies are looking for opportunities in Mexico. This may come as a surprise considering the fact that many shifted to East Asia due to the higher crime rate among other issues. However, Mexico offers more advantages, all of which can make it the next top manufacturing hub, specially in the automotive sector.
One of the biggest perks of carrying out manufacturing procedures in Mexico is its manufacturing wages. China’s wages have increased immensely and are expected to be 30% higher than Mexico’s come 2015. Unfortunately, companies couldn’t get an equally high labor productivity rate. Mexico, on the other hand, boasts superior worker productivity and quality for less. This is definitely an incentive for companies limping their way out of the last recession period.
Mexico’s large number of free-trade agreements also acts as a catalyst for the country’s evolution into a manufacturing hub. Mexico boasts 44 free-trade agreements, including the profitable North American Free Trade Agreement (NAFTA). This number exceeds its rival China’s agreements (18) and its North American neighbor the United States (20 partners). Through these agreements, Mexico can import raw materials and export deliverable products for fewer to no customs. This helps both the country and foreign manufacturers achieve a unique win-win scenario. The negotiations of Mexico to enter the Trans-Pacific Partnership would come to fruition to increase its market to major global economies.
Also driving the Mexican manufacturing boom is the lower energy costs. This may sound impossible, especially considering the fact that the Mexican manufacturing industry pays comparable or higher rates than that in the United States. However, thanks to Mexico’s green power ventures, companies are taking advantage of their own solar panel arrays and backing them up with windmills. Mexican solar potential is high. As a result, they can produce their own electricity, connect to the Comisión Federal de Electricidad (CFE) grid, and down-load it to others for a low “wheeling” fee. What’s even more tempting is the fact that electricity rates vary by region as well as time of day and type of off-taker. Therefore, factories commonly built in Sonora, Nuevo Leon and Baja California don’t pay much despite running their air conditioners non-stop for six months. Now Energy reform would allow private companies to generate and deliver energy allowing manufacturers to make NAFTA-throughout deals with regional energy suppliers.
U.S. natural gas exports are also being used to fuel the Mexican manufacturing sector. According to Bentek Energy, two billion cubic feet a day have been exported from the U.S. through the southern border and the number could double in the upcoming years once the new pipelines from Texas and Arizona are opened. While Mexico does have its own rich shale resources, its lack of expertise and technology prevent it from tapping into them. “The Mexicans have an incentive to import U.S. gas because it’s basically dirt cheap for them compared to other sources of energy,” commented RBN Energy LLC analyst Sandy Fielden.
The Mexican Minister of Energy also pointed out that choosing U.S. gas over oil and diesel is bound to reduce electricity costs and give the economy a much needed push. This explains why the CFE is currently seeking bids for three natural-gas pipelines from the U.S. Operations through these are expected to start by the end of 2015 according to the vice president of GDF Suez, which is in charge of building the Los Ramones pipeline from Eagle Ford Shale in South Texas to Central Mexico.
With so much to offer, Mexico’s industry clusters will grow and reel in more people. By 2013, it has ready ascertained its position as a major auto manufacturer with 89 out of 100 global auto part makers setting up factories in the country. The appliances market also grew with 70 manufacturers there and busy producing large and small appliances. It won’t be long before other manufacturers follow suit and choose Mexico as their main production hub.
Photo credit: PAACE Automechanika Mexico City 2014 by Alberto Esenaro
Photo credit: Corona Extra by YEAH!!! Design
Ministry of Economy announced that, during first six months of 2013, direct foreign investment in Mexico (FDI) soared 2.5 times in respect to the same period of 2012, reaching a historic record of $23.8 Billion USD.
FDI was 58% for new investments, 24% for profit re-investments and 18% for inter-companies operations.
By sector FDI was: 83% in manufacturing; 8% in trade; 3% in construction; 2% in professional, scientific and technical; and 2% in transport, courier and storage. Remaining 2% to diverse.
By country was: 56% from Belgium, 23% from USA, 4% from UK, 4% from Japan and 4% from Netherlands; remaining 9% was disperse between 55 countries.
The unusual soar resulted from the AB Inbev-Modelo purchase. However, if this operation is taken off from the FDI number, there is still an increase of $11.5 Billion USD (10% increase).
With these numbers, Mexico confirm its appeal to international investors, but also shows interest of international corporations to merge Mexican-made enterprises. Will second have another merger on Mexican company and show higher numbers?
Despite the global recession, Mexico is actively seeking out investment from Chinese companies. One of the major investment sectors being targeted is the automotive industry. With this in mind Mexico is participating in the Auto Shanghai annual event for the first time, to showcase Mexico’s suitability and meet with potential investors.
There have already been several commitments from Chinese companies looking to invest but many other companies have already begun researching and feasibility studies to determine whether setting up factories in Mexico would be a sound investment. The Shanghai event has allowed Mexico to begin talks with some of the largest Chinese automakers who attended a ProMexico seminar at the event.
Mexico has a number of advantages which would provide opportunities for Chinese companies, including the proximity to the United States. The U.S is the largest consumer of vehicles worldwide, which represents a huge market share. While Mexico also has a number of trade deals which allow privileged access for Mexican exports to over forty nations. Investment in Mexico for operations and infrastructure would save on logistical costs and delays to facilitate more efficient export to the United States and Canada.
Of course, the current economic climate has had an effect on Chinese investment. The automobile market in North America has halted or delayed a number of investment plans, but many companies look set to establish operations in Mexico should the situation improve. Mexico is currently the tenth largest producer of auto-motives in the world, but this could grow considerably should investment plans become a reality.
However, the Mexico-China relationship is not limited to the automotive industry. Many Chinese manufacturers have begun to establish operations in Mexico over the last ten years. China based firms in the textile, cellular telephone and electronics industries have set up operations. By 2005, there were over twenty Chinese manufacturers operating in several Mexican states. Many of these investments were considered small, but they have created thousands of job opportunities.
Mexico has also signed agreements with Chinese companies to cover equipment, technology and ships to support the Mexican oil industry. The line of credit from the Bank of China allows for the acquisition of equipment and ships needed for offshore activities and includes the possibility for finance for the overhaul of the state owned Permex fleet. These agreements lay the groundwork for potential cooperation for oil pipelines in the future. Since Pemex is the fifth largest oil producer in the world and is one of the only firms to handle all aspects in the production chain, this represents a great opportunity for China.
With rapid rises in costs including transportation and wages occurring in China, Mexico represents a good opportunity for Chinese companies to cut costs and improve productivity. Since many also believe that the Yuan may also be adjusted upwards against the U.S dollar, this could also highlight Mexico’s competitive position.
Many experts believe that we may soon see factory cities being established close to the U.S border which will present great investment opportunities for Chinese companies while boosting Mexico’s economy. It is certainly a development that many will be watching in the future.
Despite the fact that Chinese look for a free trade agreement without restrictions with Mexico, there are a lot of laws, benefits and breaks that Chinese are eligible. For example, Chinese-investment corporations are still eligible for IMMEX (export incentive programs), automotive production benefits, tax breaks from local governments, free-granted land from county governments, and many vast programs that are making Mexico attractive for auto manufacturing, regardless of the nationality.
Photo credit: Leaving on a jet plane by McPig
For years, Mexico has been quietly but steadily building itself into a manufacturing powerhouse, and automobile manufacturers have known for decades that Mexico’s highly skilled and ethical workforce are among the world’s best. It’s a well known fact that the automobile industry in Mexico is expanding at an astounding rate to meet demand and that there are plenty of opportunities in Mexico for foreign auto makers and foreign auto parts manufacturers.
However, one industry that is also booming and might not be receiving as much press as the automotive sector is the aerospace sector. And just like in the automotive industry, there are opportunities for many foreign companies.
But first of all, it’s necessary to have a look at why a foreign company would want to set up shop in Mexico. Sometimes, some companies will set up shop abroad to take advantage of lower wages; however, this can prove to be disastrous if the workforce is not highly skilled or educated. Mexico has a highly educated, highly skilled, and hard-working pool of human resources, making them the ideal employees for high tech and specialised manufacturing. While their wages may not be as low as the wages employees in Asian countries may receive, they are still much lower than their U.S. and European counterparts. Therefore, foreign companies get the best of both worlds: great value for money.
Foreign companies operating in Mexico also get to take advantage of the free trade agreements that Mexico has with dozens of other countries. This means access to virtually all markets in the Americas, the European Union, and some Asia-Pacific countries.
The third reason why companies, especially aerospace companies, should consider Mexico is the fact that companies can be 100% foreign owned, which is not the case in other countries trying to attract investment. This means that the company has full control over how their business is conducted.
So what are the opportunities that exist in Mexico’s aerospace sector? Well, the first big opportunity is the ability to enter the United States market without having to pay the wages that U.S. engineers and employees will expect in factories. In other words, it’s a cost effective way to be a part of the American market and meet the needs of American clientele. Furthermore, Mexico’s effective transport links make it easy to import raw materials if needed and export the finish product across the border.
The second opportunity for foreign companies in the aerospace sector is to set up factories for the Mexican market: instead of paying costly shipping fees and high wages, some helicopter manufacturers from Europe have decided to make the helicopters for their Mexico clients right there in Mexico.
At present, there are over 250 companies in the aerospace sector operating in Mexico: Manufacturing and maintenance firms are expanding and the numbers of companies coming in is expected to grow as Mexico’s government is actively promoting the aerospace industry. Making things especially attractive for foreign firms is the fact that the country provides a “soft landing” for businesses in high-tech manufacturing. Red tape is cut to such an extent that manufacturing can start weeks or months after a deal has been signed; in other countries, this process can take years, affecting a company’s bottom line severely.
Finally, another good reason why an aerospace company should do business in Mexico is IP protection. In an industry where design is so imperative, a rival company stealing a proprietary design can be devastating. Mexico’s laws are strict where intellectual property is concerned.
Mexico’s aerospace industry shows absolutely no signs of slowing down and only growth is predicted; companies that take advantage of what the Spanish-speaking country have to offer will find that the opportunities are almost limitless.
Photo credit: Honda Civic 1,8 Type-S iShift by Dirk Vorderstraße
One of Mexico’s most strategic economic allies is Japan, and thanks to new rounds of talks and agreements, Japanese companies will be investing heavily in Mexico in the coming months. According to Ildefonso Guajardo, the Mexican Minister of Economy, who met with the Japanese Minister of Foreign Affairs, Japan is especially interested in investing in Mexico’s automotive sector.
“There are several Japanese companies analyzing new projects. Mazda is one of them and recently made an announcement; in addition several other companies in the auto parts industry join the assemblers to invest. Investment dynamics in Mexico is extraordinary”, Guajardo said in an earlier interview.
Guajardo also pointed out that trade exchange between the two nations grew by almost 40% in the past seven years, at a rate of 7% a year since 2005. Due to President Enrique Peña Nieto’s recent visit to Japan, the trade relationship has been re-launched, with Honda being one of the major companies to announce a major investment.
Honda, which was one of the first Japanese auto manufacturers to make cars in the United States decades ago, announced that it will be initially investing $470 million dollars to build a brand new transmission factory in Celaya. Honda also very recently invested in a brand new automobile manufacturing plant in the same city, and cars should be coming off the assembly line as early as 2014.
The transmission facility, the third in North America, will be operating by the second half of 2015, and should produce an average of 700,000 continuously variable transmissions per year. There will be approximately 1,500 people hired to work in the factory, as well.
“This will establish an efficient production structure that will maximize our Mexican and North American content,” Honda Executive Vice President Tetsuo Iwamura said at a press conference in Mexico City earlier this month with Guajuardo.
He further stated: “This will be Honda’s third transmission plant in North America and production will increase to 2 million transmissions per year, to support production capacity of 1.92 million automobiles in the region”. The transmissions made at the plant will therefore not only be for the cars manufactured in the adjacent factory; many will be exported to Honda’s other plants in North America and overseas.
Honda’s Celaya $800 million auto plant had been announced in 2011 and as mentioned above, production on the Fit subcompact models will start in 2014. Other major Japanese auto makers who’ve recently made large investments in Mexico include Mazda who is building a $650 million factory and Nissan who is building a $2 billion plant alongside their existing manufacturing facilities.
Honda and Japanese auto manufacturers aren’t the only foreign car firms looking to start or increase production in Mexico. Audi announced back in 2012 that it will be building its first North American plant in Mexico with an investment of approximately $2 billion. Volkswagen, which has long been established in Mexico, will also be investing a further $1 billion over the next three years.
It’s no secret that automakers like Mexico; there’s a hard-working, highly skilled labor force, an astounding lack of red tape, a business-friendly government, plenty of free-trade agreements with dozens of countries and trading blocs, and great transportation infrastructure to get products to market quickly and effectively. Japan’s interest in investing in Mexico shows absolutely no signs of slowing down and is only expected to grow for a long time to come.