When General Motors, [GM 23.43 0.04 (+0.17%) ] the largest automaker in the U.S., announced last year it would invest some $540 million to expand its plant in Toluca, Mexico, it joined a growing list of manufacturers seeking more bang for their production buck south of the border.
When General Motors, [GM 23.430.04 (+0.17%) ]
the largest automaker in the U.S., announced last year it would invest some $540 million to expand its plant in Toluca, Mexico, it joined a growing list of manufacturers seeking more bang for their production buck south of the border.
With lower shipping costs and increasingly competitive wages, Mexico is enjoying a manufacturing boom, attracting billions of dollars in foreign investment from firms that are building factories to supply the North American market — a concept known as nearshoring.
Most recently, automakers Nissan, [NISA-FF 6.5730.019 (+0.29%) ] Audi
,[NSU-FF 522.00 4.00 (+0.77%) ] Honda [HMC 31.866 0.396 (+1.26%) ]
andMazda [MZA-FF 0.943 0.013 (+1.4%) ]
have all announced plans to open plants in Mexico over the next few years.
Italian tire maker Pirelli & C. [PIL2-FF 5.42-0.08 (-1.45%) ]
said earlier this year it would invest $300 million in new factories in Mexico by 2015, and Swedish appliance makerElectrolux [ELX-FF 19.312 0.11 (+0.57%) ]
moved a plant last year from Webster City, Iowa to Juarez, Mexico.
Blue-chip aluminum producer Alcoa [AA 8.93420.0442 (+0.5%) ]
also expanded its facility in Acuna, Mexico, joining U.S. companies already producing there, such asGeneral Electric, [GE 22.24 0.14 (+0.63%) ]Honeywell
,[HON 60.24 0.80 (+1.35%) ]
and Hawker Beechcraft.
The influx shows no signs of abating.
Foreign direct investment, or FDI, in Mexico reached $19.4 billion in 2011 — with nearly half of that total destined for the manufacturing sector, according to the Mexican Ministry of the Economy.
“FDI in Mexico has fully recovered from the post-2008 decline, and we anticipate continued strength in manufacturing from autos and aerospace to keep up with U.S. and world demand,” writes Sergio Martin, the chief economist on Mexico for investment banking firm HSBC [HSBC'B 25.05 --- UNCH]
in his 2012 report on the Mexican economy.
For manufacturers, much of the appeal is lower labor costs, says Gordon Hanson, director of the Center on Emerging and Pacific Economies and economics professor at the University of California, San Diego. (More: How Mexico's Oil Industry May Benefit US Investors)
“Until very recently, China had been cheaper, more flexible and more accommodating to industry, but wages in China are rising at a remarkable clip, putting cost pressure on manufacturers,” he said. “Mexico didn’t start to win the battle against China until we started the recovery from the recent recession.”
Indeed, the average salary for Mexican workers was $2.10 per hour in 2011, up 19 percent from $1.72 in 2001, according to HSBC.
By comparison, the average wage in China swelled nearly four-fold during those years to $1.63 per hour in 2011 from 35 cents per hour in 2001. Thus, the difference between labor costs in Mexico and China is now just pennies per hour.
There’s also, of course, the cost advantage of proximity, notes Gabriel Lozano, J.P. Morgan’s chief economist for Mexico.
With higher fuel prices, he says, manufacturers worldwide are seeking opportunities to manage shipping costs by producing goods close to their market.
Today, it costs roughly $5,000 to ship a container from China to the U.S., compared with $3,000 to truck the same freight in from Mexico, says Lozano.
“We expect that trend to continue and build into 2013 and 2014,” he said.
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