On the global economic stage, China has played the role of the unstoppable cost competitor to perfection by producing cheap manufactured goods. But an old actor is making a comeback. For the first time in a decade, Mexico is becoming a credible competitor to China. Mexico’s share of North American production has tripled to approximately 20% since 1994. Coupled with the 2008 recession, this has heralded a significant shift of production to Mexico from both the US and Canada. By 2020, Mexico will have the capacity to build one in every four vehicles in North America, a massive leap from one in six in 2012. Low labor costs, geographical proximity, and government incentives have each helped spur the shift, and with such favorable conditions, transnational companies based in China are now considering relocating to Mexico to better serve the NAFTA region and its surrounding markets.
Since NAFTA, trade relationships between the US, Canada, and Mexico have significantly strengthened. Economists have identified that the American economy benefits far more by outsourcing manufacturing to Mexico rather than to China since there is more production sharing. For example, 40% of the parts used in Mexican manufacturing come from the US, while only 4% of parts used in China have a US origin. Also, Mexico has more FTAs than any other nation, covering 45 countries, which is more than the US with its 20 partners and China’s 18 combined. Mexico’s close proximity to the biggest consumer market in the world, the US, is another major advantage. Shipping times between Mexico and the US are significantly less versus China and the US, which results in a cost advantage and the opportunity to create leaner supply chains. Additionally, if quality issues with products should arise, it is easier, less expensive, and more efficient to send products back to Mexico for reprocessing. In fact, goods can be shipped from a manufacturing site in Mexico to North America in less than a day thanks to existing road and railway connectivity. However, to ship from China to the NAFTA region can take several weeks, and factors such as customs delays can introduce potential unknown costs.
There are other less obvious advantages to manufacturing in Mexico, one of them being the protection of intellectual property. It is important that a nation’s legal infrastructure ensures the security of products and a company’s ability to secure its investments in product development. Mexico has clear norms delineating this issue and companies seem to have more confidence in Mexican courts enforcing intellectual property rights. Notably, the automotive industry is going on a spending spree of US$10 billion for manufacturing sites in Mexico. The main pillar that has helped Mexico lure billions in foreign investment and spur the creation of a dynamic manufacturing sector has been its cheap labor. Traditionally, China’s greatest advantage was its low labor costs that were a fraction of the hourly wage of factory workers in Europe or the US. Nevertheless, the wage gap between China and Mexico has been closed, with a Chinese factory worker earning about US$4.50 per hour compared to US$2.70 for their Mexican counterpart. Mexican wages that were once nearly double China’s are now 20% lower, and are predicted to be 30% lower by 2015. Additionally, Mexican factory wages are considered to be among the most stable in the world, even when accounting for inflation. This stability is attractive to companies looking to make long-term investments in new offshore manufacturing sites. Some regions in China have even experienced wage increases of up to 20% per year. Cheap labor costs have proven to be a double edged sword for Mexico’s economic growth and stability. While these stood as a pillar for attracting FDI, they are predicted to drag the economy in the long term. Between 2005 and 2012, labor income per capita in Mexico fell 6% according to the National Council for the Evaluation of Social Development Policy (CONEVAL). Lower income means less private consumption, which in turn represents two-thirds of the GDP. Approximately 58% of the active Mexican labor force is informally employed, which signifies weak tax revenues and many workers having little power to demand higher pay.
As Mexico treads the wage tightrope, the commercial relationship between China and Mexico is evolving. According to ProMéxico, Mexican exports to China in 2013 amounted to US$6.4 billion while imports from there reached US$61.3 billion, of which 92% corresponded to the procurement of parts and components. In the past, this commercial deficit with China was seen as a disadvantage, but Mexican companies can now be competitive in the global value chain. Furthermore, close ties with China enable Mexico to increase its exportable portfolio of goods to balance out and counteract this commercial deficit. As more investors evaluate the possibility of relocating to Mexico, the second step will entail incentivizing Chinese investors to move to Mexico to better serve the NAFTA region. China is no longer seen as an invincible opponent from the point of view of competitiveness, but as a strategic partner. According to Ildefonso Guajardo, the Minister of Economy, both countries will benefit far more from a strategic collaboration than simply moving from trade conflict to trade conflict.