Ricardo Castro
Labor Partner
Baker & McKenzie

Human Capital Has Become a Critial Success Factor

Tue, 09/01/2015 - 10:29

Globally, the automotive industry has been on a growth rampage, which has led to many new companies in the sector hunting for the world’s best investment locations. For that reason, countries across the globe are working to become more competitive and attractive for investors, competing for a rightful place in the ranking.

There are international organizations such as the World Economic Forum (WEF) that are constantly monitoring the development of each of their members. These institutions analyze countries in terms of infrastructure, macroeconomic environment, health situation, education, market access to goods and services, the labor and financing market, technology, business sophistication, and innovation. Particularly, WEF prepares studies to provide a clearer idea of how countries have advanced throughout the years, comparing them with others to determine the best location to invest. According to the last WEF 2014-2015 report, Mexico is currently ranked 61 among 144 countries in terms of the labor market, as well as how new investments impact the country’s human capital conditions. However, in the previous report Mexico was ranked 55th. This was mainly because WEF placed more importance on factors like innovation and skills as key aspects for economic development. In the last decade, Mexico has shifted its reputation as a cheap labor country, and is now well-known for its highly qualified workforce, translating to increased job availability and competitive salaries. Nevertheless, Mexico’s labor costs represent less than US$1 per hour, per worker, including all the mandatory benefits stated by Mexico’s Federal Labor Law. Therefore, compared to the top ten countries affiliated to WEF, its labor cost is significantly lower.

Recently, with the support of federal and local governments, Mexico received several foreign investments that have generated thousands of well-paid jobs. Each state competes against each other to obtain the largest investments, and even though there is no legislation that prevents workers from quitting and finding better opportunities, labor satisfaction has become one of the main priorities in already established companies. For that reason, instead of looking for ways to prevent other companies from establishing in the state, the objective is to look after the workforce for as much as the company’s resources allow it. Another relevant factor related to foreign investment is age difference, given that a single company can house up to four generations at the same time. Each of these has its own particular objectives and priorities, so foreign companies are now implementing strategies to reduce turnover and costs, while boosting productivity. This new market implies that all new companies must embrace these practices, adapting to the reality of the Mexican market in order to remain strong and competitive in the country.

The real question is how these new investments can affect normal salaries by bringing foreign talent. The National Minimum Wage Commission (CONASMI) determined that from January 1st, 2015, the new general minimum wage would be MX$70.10 (US$4.67) for every eight working hours, which equates to US$0.58 per hour. Nevertheless, it is complicated to find a company that pays this minimum wage, since it is entirely common for these players to offer twice or even three times the amount. Aside from the basics in terms of labor relationships, every company has to have sufficient understanding of the market where it will invest, as well as the type of companies surrounding it, the union situation, and the level of labor peace or conflict perceived in the region. Furthermore, these players have to be aware that if they bring foreign personnel, they must take into account working conditions and benefits from their home countries as well as Mexico.

In recent years, the federal government has applied new fiscal regulations for all industries, making social welfare no longer 100% deductible. Now, companies can only deduct up to 47% of their benefits in one year, or 53% in the next if they did not deduct anything during the first year. However, this does not apply to IMMEX companies, which can still deduct 100% of their social welfare benefits. This was managed through long discussions with the government, as well as the rest of the players that have an impact on the automotive sector. Another common phenomenon these investments bring is an increase in the cost of living within the region. Given that companies often pay for rent and leasing services rather than individual directors and executives, this translates into higher costs prevailing in the market, further affecting the final salaries in the region. Bringing economic development to a region not only helps it to grow, but also has a deeper impact on how its attractiveness is perceived by other sectors. The automotive industry has been a crucial player in the national economy’s development. The country is preparing to receive an enormous amount of new investments, which means that these companies will need experts to help them determine the best locations in the country.