« Insights > Industrial / Manufacturing

Four Reasons Why Mexico Is Becoming a Global Manufacturing Power

exeqfind | 28.06.2013

As executive search consultants growing increasingly busy in the pursuit of A-grade talent in Mexico, we have seen a substantial increase in demand for key management and leadership talent of late.

As executive search consultants growing increasingly busy in the pursuit of A-grade talent in Mexico, we have seen a substantial increase in demand for key management and leadership talent of late.

The reason, you ask?  It’s invariably related to new manufacturing start-ups and expansions of existing operations.  If you read any of the blogs in our subsidiary sites, you’ll see numerous references to recent periodicals touting Mexico’s competitiveness, and particularly how it ranks next to Asia.  So here’s another one…

Bloomberg Businessweek’s Peter Coy produced an article yesterday (June 27, 2013) titled, “Four Reasons Mexico Is Becoming a Global Manufacturing Power”.   The online version has a nice photograph taken in our client’s (Volkswagen AG) auto assembly plant in Puebla.  Volkswagen engaged us for some key roles in 2012 and the success from that work led them to introduce us to Audi for which we now have a 24 month contract to support their facility startup.  Audi’s new Q5 SUV plant near Puebla is a direct example of the start-up and expansion trend that’s taking place in Mexico at the moment.  Audi has been joined by startups from competitor BMW and Asian OEMs such as Honda and Nissan.  Mexico seems to be hot and getting hotter!

Coy’s article in Businessweek goes on to reference a new report from the Boston Consulting Group.  He says the report shows that Mexico’s gain over China is a net gain for the US because Mexican factories are using four times as many American-made components as factories in China do.

Coy’s article outlines the following four key advantages that Mexico offers to manufacturers:

1.  Manufacturing wages in Mexico are likely to be 30 percent lower than in China by the year 2015 adjusting for Mexico’s superior worker productivity.

China’s wages were about one-quarter as high as Mexico’s in 2000 but have been rapidly catching up and will be slightly higher than Mexico by 2015.  Metrics show that labor productivity is higher in Mexico, even though the gap is narrowing.  The crossover point was 2012, when unit labor costs in China grew to equal those in Mexico (i.e., wages adjusted for productivity).  By 2015, Mexico will be around 29 percent less expensive than China.

2.  Mexico has signed more free trade agreements than any other country.

NAFTA provides Mexican products with easy access to the world’s largest market – the United States, as well as Canada.  In addition to NAFTA, Mexico has free trade agreements covering 44 countries which is more than the US (20 partners) and China (18 partners) combined.

3.  Mexican manufacturing has a significant advantage in energy costs.

Natural gas prices in Mexico are tied to those of the US which are exceptionally low because of a glut in supply.   China pays from 50 to 170 percent more for industrial natural gas than Mexico does.  Mexico also has an edge over China in electricity costs, although power isn’t as cheap in Mexico as it is in the US.

4.  Industry clusters are growing, especially in the auto and appliance sectors. Over time Mexico has developed a national expertise in certain industries which makes it more attractive for companies to locate or expand manufacturing plants there.  Since Mexico is a major auto manufacturer, 89 of the world’s top 100 auto parts manufacturers have production in Mexico.  The companies are concentrated in five Mexican states which serves to keep transportation costs low.  In terms of appliances, more than 70 appliance manufacturers are in Mexico ranging from components producers to assemblers of both small and large appliances.

Boston Consulting Group’s Harold Sirkin states to Coy in an interview, that Mexico’s progress relative to China is great news for the country because manufacturing accounts for 35 percent of Mexico’s GDP (versus 12 percent of US gross domestic product).  He goes on to say that the US benefits from this in two ways.  First, by selling more components to Mexican manufacturers and secondly, by selling more consumer products such as American grown beef to Mexicans, who will have more disposable income for imported products as their standard of living increases.

Source:  Article featured in the Global Economics section of Bloomberg Businessweek and authored by economics editor – Peter Coy.