Photo credit: Factory in the Mirror by Ruthanne Reid
To anyone who’s been watching Mexico’s economy for the past few years, it will come as no surprise that it’s growing by leaps and bounds compared to other countries in the world that have been effected by the global economic downturn. Because of the Spanish-speaking country’s prowess in automobile manufacturing, both German and Japanese automakers are in a rush to build new factories and plants to take advantage of one of the world’s most efficient and skilled workforces, favorable tax laws and almost innumerable free-trade agreements.
Despite the global downturn in financial affairs, Mexico is doing well thanks to its automobile manufacturing industry. German automaker Audi has recently announced that they will probably be doubling production in their new Puebla plant, which will be operational by 2016. Honda recently invested $800 million in a new plant in Guanajuato, and announced in May of this year that an additional $470 million will be invested in a new transmission plant in the same state.
Mazda and Nissan have also heavily invested in manufacturing plants in Mexico recently, and all major auto firms that are manufacturing in the country are planning on increasing production. All of this means that there are plenty of opportunities for auto parts suppliers.
Honda, as seen above, decided in 2013 to invest $470 million dollars in a new transmission plant in order to meet their own auto manufacturing needs. The plant is expected to produce over 2 million transmissions, more than the 1.92 million they will be needing. The company explained its decision: it was simply more cost effective to manufacture the auto parts in the same country rather than transport them from elsewhere, even if the labor costs abroad were cheaper. Shipping costs are now incredibly high, and in order to save money and guarantee quality, it’s just best to make the parts in Mexico.
“We are establishing a production base with outstanding global competitiveness in CVT production in the same location as our new automobile plant in Celaya,” said COO of Honda North America Regional Operations Tetsuo Iwamura. “As we continue to advance our commitment to build products close to the customer, we appreciate the strong support we have received here in Mexico.”
Japanese auto parts suppliers are in a rush to set up operations in Mexico: along with selling their parts to the big auto manufacturers, they can also take advantage of the same things the auto manufacturers take advantage of: Mexico’s prized geographic location central to all markets in the Americas, free trade agreements with literally dozens of nations and trading blocs, and a business-friendly, tax friendly environment.
With German car makers, American car makers and Japanese car makers rushing to increase production capabilities, they will need car parts. While some suppliers are still relying on shipping to get their product to customers, they’d be much better off setting up shop in the same areas as their main customers in Mexico. The problem of shipping will be completely eliminated, and surplus items can easily be shipped to other markets in North, Central, and South America via Mexico’s excellent and reliable transportation infrastructure.
According to Audi CEO Rupert Stadler, Audi is on the path to strengthening already strong sales in the North American market with the laying of the foundation stone of automaker’s new plant in San José Chiapa, Mexico. “[This is] an important future element of the global Audi production network,” he stated recently in an Audi press release.
The new $1.3 billion Audi AG plant, set to become operational in 2016, will create 3,800 new jobs in the state of Puebla, where the plant will be located. This will be the first factory in the Americas for Audi, and the vehicles manufactured in the plant will be the automaker’s popular Q5 SUV.
While the plant at first was intended to manufacture 150,000 units, executives at Audi have stated publicly that the plant will be large enough for 300,000 units, and there could very well be production of a Q6 SUV along with the Q5 models.
The goal of Audi AG is to make North America one of their top three markets. Said Stadler at another press conference: “In 2020 every seventh Audi from our worldwide production will go” to North America, Stadler said in a speech at the groundbreaking ceremony in Mexico over the weekend. “Then we have reached our goal and strengthened America as a third pillar of our sales in addition to Asia and Europe.”
He further remarked at the laying of the plant foundation ceremony in Puebla: “With the production of one of our most successful models here in Mexico, we will give significant impetus to our global growth and supply the extremely popular Audi Q5 from here to the world market. By setting up a new car plant in North America, we are establishing a presence on another continent that is very important to us. In this way, we are strengthening our international competitiveness and consistently pursuing the Audi growth strategy.”
The plant will contain a paint shop, body shop, assembly line, and press shop. The 400-hectare facility will be the Audi’s most modern and technologically advanced, and Mexico presented many benefits to the automobile maker. The Mexican workforce is highly educated and famed for their strong work ethic, and the country’s well-developed infrastructure along with its numerous international free-trade agreements made it the ideal place for Audi to set up shop.
Furthermore, Mexico offers the best tax and business environment for automakers. “With Mexico, Audi has made the best choice to help it develop and secure its growth,” emphasised Mexico’s Economics Minister Ildefonso Guajardo Villarreal in the same ceremony celebrating the start of the plant’s construction.
Rafael Moreno Valle, Puebla’s governor, further stated: “Our country and the new Audi location in San José Chiapa in Puebla offer the best conditions for the successful development of the entire American market. We are proud that with Audi México, the first international premium manufacturer in the automotive industry is at home in our federal state.”
On a separate occasion, Stadler mentioned that no jobs at the Ingolstadt factory in Germany would be lost when production of the Q5 shifts to Mexico; the additional demand for production cannot be met at the existing German plants.
Photo credit: Manufacturing plant in Nevada by Jeff Barnes
In a move that is exactly surprising to industry leaders and economic growth experts, Mexico’s manufacturing sector is bringing back jobs to North America that left the continent for China in the 1990s and 2000s. What is partially responsible for the boom, other than the industriousness of Mexicans and their solid work ethic, is the Spanish-speaking country’s concerted effort to ensure that infrastructure can provide the factories with inexpensive and plentiful energy along with the transportation networks to get the manufactured goods to market.
Wages in Mexico are now a little bit higher than the wages that their counterparts in China receive; however, the highly skilled workers can produce higher quantities of quality goods, which is one thing that is influencing companies to set up base there. Mexico has now become the go-to country for industries like automotive manufacturers and automotive parts makers. But the one thing that is seriously making business owners want to go to Mexico is the fact that the country is scrambling to implement energy infrastructure projects in order to take advantage of one thing China doesn’t have: cheap oil and gas that is found in Mexico and also is imported from new energy giant the United States. While the price of energy has gone up considerably in the world, this energy bonanza is making Mexico more attractive than ever for investors in the manufacturing sector.
The energy reserves of both Mexico and the United States are said to be large enough to handle growth for well over a century, and both countries are building new pipelines in order to get those manufacturing jobs back to North America as quickly as possible.
But that’s not all; other massive infrastructure projects that are benefitting Mexico’s manufacturing are transportation projects. Rail lines connecting manufacturing powerhouses in Mexico to markets in the United States and Canada are being built in order to keep up with the manufacturing output. Expansion in the transportation infrastructure will let the manufacturing industries grow with next to no limits; in other countries that lack the roads and rail links, goods get held up in warehouse facilities and cannot get to market quickly enough. Furthermore, some experts are saying that Mexico will also be improving public infrastructure such as national roads as well in order to fuel economic growth in the domestic markets.
Deregulation may also occur in another of Mexico’s key industries: telecommunications. As of now a single company holds a monopoly on this key sector; if proposed deregulation occurs, manufacturing could enjoy another massive boost in telecom equipment as international telecom companies also pour in to set up shop in what could be a massive market.
Opportunities abound in Mexico right now; along with a booming manufacturing industry, transit links between Mexico, the United States, Central America and South America need to be further developed; railways, roads, trucking and maritime links are all being upgraded or will be upgraded in the future. All of this construction of the infrastructure need to support the manufacturing boom will also need energy, as mentioned above. Telecoms could also prove to bring handsome profit to smart investors.
Mexico is growing and is poised to become the next economic powerhouse in Latin America; those who do not invest now will be bound to regret it when it’s too late in the next few years.
Photo credit: Work in Progress by daveynin
Mexico is a country that’s suffered from a rather bad reputation lately; all the media seems to be focused on is the nation’s problems with drug trafficking gangs and politics. Mexico does have its issues; however, what might come as a surprise to many investors that aren’t familiar with the electronics industry is that this Spanish-speaking North American country is a well-known digital manufacturing powerhouse. Most major electronics companies have already set up shop in Baja California in the country’s north, and many businesses that relocated to China in the 1990’s and 2000’s are returning to the shores of the Americas thanks to all that Mexico has to offer.
What companies are in Mexico?
To get an idea of the extent of Mexico’s mammoth role in electronics manufacture, one only has to see the names of some of the companies in operation there. In Baja California alone, Sanyo, Samsung, Sony, Hitachi, Bose Corporation, Daewoo Orion, Kyocera, LG Electronics, Panasonic, Philips Lighting, and Pioneer along with 188 other companies employ over 92,000 people. Being located in Mexico has proven to be so beneficial that the companies that supply the above mentioned corporations have also relocated to Baja California.
Why Mexico over China?
Until fairly recently, relocating to China made good economic sense for electronics manufacturers because wages in China were so low that the additional cost of transportation over long distances could be justified. However, in the past few years, wages have been increasing to such an extent that they are now equal to the wages a similar worker would earn in Mexico. The higher wage in China combined with the now near astronomical cost of transportation makes a move to Mexico the smarter option.
However, there are other reasons why businesses are choosing Mexico over China and other Asian countries; it’s not just about workers’ wages and transportation costs. First of all, Mexico has intellectual property laws that work – a company’s proprietary design isn’t going to get stolen and copied. Second, Mexico produces an astonishing amount of highly skilled workers thanks to its numerous universities, technical institutes, and training facilities. Engineering graduates, production accountants, and all other workers that have very specific skills abound in Mexico – the myth that the country only produces unskilled labor is totally destroyed. Mexico’s workforce is highly educated, specialized, and famously hard-working.
Other reasons why Mexico’s the powerhouse of digital manufacturing
Along with reduced transportation costs, a highly educated, experienced workforce and relatively low wages, there are other reasons why Mexico is the darling of the electronics-manufacturing world. One of these reasons is the fact that Mexico is a signatory to NAFTA, the North America Free Trade Agreement. This means that businesses that would otherwise be subject to heavy duties and taxes simply will not have to pay them if they manufacture in Mexico, dramatically improving a business’s bottom line. Mexico also has dozens of free trade agreements with other countries and regions; Mexico’s free trade agreements far outnumber those that rival China has.
Another reason is that Mexico is the gateway for all the Americas; the U.S. is right next-door, and access to Central and South America is easy and convenient. Again, the savings on transportation will be significant.
Finally, another reason why Mexico is a huge player in the digital manufacturing industry is that it can offer “just in time” manufacturing. Massive orders do not need to be placed months in advance, and companies don’t need to wait for weeks for parts or products to be manufactured and shipped. Storage facilities are practically eliminated as products are made quickly and shipped in a very short period of time. From Baja California, the American ports of Los Angeles and Long Beach are a hop, skip, and a jump away, while the Mexican port of Ensenada can also offer international shipping services.
Photo credit: Seagate drives being tested by Robert Scoble
Flavius Vegetius Renatus (Circa 375 AD), writer of Epitoma Rei Militaris (The Military Institutions of the Romans) is often quoted for: “If you want peace, prepare for war”. Business was way more simpler back then, and this kind of advice applied easily to every day trades. Today, globalized and technology-based world has created a more complex and competitive business world with multinationals with no nationalities or boundaries.
As we speak, one trend is challenging business in Mexico … There is a re-shoring war upon us. So, if Vegetius allows me, I would re-quote him for the present time: “Mexico-based operation: If you want profits, prepare for re-shoring war”.
There are several advantages of Mexico that US or China may use for making profit on the current re-shoring trend into America, and eventually will allow Mexico to keep some of that re-shoring inside the country.
1. Location, location, location. As in real estate, in manufacturing, location offers the big advantage of working on-time, reducing delivery times and costs. Plus, Mexico has good infrastructure. Mexico has broad cross borders with the US, as well as 102 Ports and 15 hinterland ports to handle charge and export all over the world. It has 78 airports, 264,000 miles of road and 16,000 miles of railroad. Government has been discussing increase of its railroad infrastructure to meet demand by automakers in the center of the country.
2. Free Trade Agreements and Double Taxation Treaties. Mexico has signed 12 FTAs with 44 countries, 28 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). In addition, Mexico is an active participant in multilateral and regional organisms and forums such as the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) mechanism, the Organization for Economic Cooperation and Development (OECD) and the Latin American Association for the Integration (ALADI). Since 2010, Mexico is negotiating its incorporation to the Trans-Pacific Partnership (TPP) with Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. After this Agreement, Mexico will be a world-class connector with reduced or non-existing trade barriers with almost all countries.
3. Export incentives (IMMEX). Through the years, Mexican Government has implemented several export and manufacturing incentive programs for investors. Currently, IMMEX is the program that supports manufacturing companies for exporting. The main benefit is that raw materials are imported under 0% VAT rate (instead of 16%) or certain import duties, and could be transfer among IMMEX companies with same 0% rate. Machinery/tools could be temporary without paying VAT or import duties, too. Finally, at the end of supply chain, if this product/part is exported, VAT is not paid and machinery/tools could be re-exported without paying taxes. One of the main unexploited features of the IMMEX is that the same provisions apply to services. Then, outsourcing services of any kind (i.e. call centers, digital media rendering for video production, etc.) could apply for the same IMMEX benefits.
4. Engineers. Mexico is producing more engineers than ever, having a base of 400,000 software engineers and 65,000 graduating every year, Mexico is an “Engineering Powerhouse“. This number is powered by the fact that Mexico has qualified and skilled employees that have helped to success of diverse industries like consumer electronics, automotive/aerospace, textile and home appliances. In fact, Mexico has become a good ecosystem for clusters of auto/aero and consumer electronics to flourish.
5. Reliable legal framework. As labor law was amended to provide a more flexible labor system, and wages are reasonable, Mexico is competing with labor conditions in Asia. Government and politics are pushing amendments to free telecom and energy markets, and promised to set a more fair tax system. This could happen as soon as this year. El Pacto Por Mexico, a political alliance between the three major political parties, has outlined some of these amendments, and has guaranteed a majority in the Congress to pass the bill.
6. Domestic market. Mexico has a big domestic market of over 110 million people, with an average age of 26 years, Mexico has a great potential for growing inner market with products manufactured in the country.
Globalization is about producing in a place where business conditions, quality and price meet. Many companies will re-shore from China to US and/or Mexico forming a kind of North America manufacturing hub. Mexico has potential for landing any type of manufacturing operation, partially or totally, as can harbor either Chinese or US foreign investment.
As this re-shoring war is showing their first signs of hostility with companies moving away from China, it is time to apply some advice from Sun Tzu´s “The Art of War”: “Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted.”