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Analysis

Mexico, a Halfway Polished Diamond

Sat, 09/01/2018 - 12:19

Investment decisions are not made lightly. Many factors must be considered beyond a company’s country of origin and according to KPMG’s latest Competitive Alternatives analysis, Mexico is the most competitive country with the lowest business cost for investment. The report, which analyzed 100 cities in 10 countries and took US investment costs as a basis for comparison, showed Mexico as the ideal investment destination being 22.5 percent more competitive than its northern neighbor. Labor, land, utilities, taxes, transportation and financial or other incentives must be considered to have a clear perspective of which country or region offers the best advantages for a company. Mexico excels in some of these areas such as salaries which remain a sore spot in NAFTA renegotiations. KPMG’s report shows an average annual salary of US$35,168 in Mexico, which is only 32 percent of the US average of US$109,542. This, however, considers all manufacturing and service industries. Taking into consideration only the automotive industry, the difference is much more pronounced.
According to the Friedrich Ebert Foundation, the average annual wage in the automotive industry in Mexico is US$7,198. The US offers an average annual salary of US$63,306, according to the Bureau of Labor Statistics, which is almost nine times higher than the average in Mexico. “All global automotive clusters have a low-cost manufacturing partner,” says Manuel Nieblas, Partner and Manufacturing Industry Leader at Deloitte Mexico. “This means that forcing Mexico, the low-cost manufacturer in the North American region, to increase wages would be unviable and would compromise the dynamics of the region.” Beyond salaries, Mexico also offers advantages in terms of land costs. According to the KPMG report, the total investment cost per square foot in Mexico, considering both land and construction costs, is US$44.7 while in the US it is approximately US$138.6. Utility costs are also advantageous, albeit more moderately. In Mexico, the average cost for electricity is US$0.102/kWh. In the US it is US$0.105.
Government incentives have also played an important role in attracting investment to the country. There are differences among states regarding the benefits that can or cannot be offered but in the end, investment entering the country only boosts national development. This strategy has proven difficult at times, given that some administrations were willing to offer more than their successors, leading to court battles between states and companies, but for Guido Vildozo, Senior Manager, Americas Light Vehicle Sales Forecasting of IHS Markit, this is something that needs to be done for the country to remain competitive.
“Mexican states compete not only against themselves but also against southern US states,” he says. “These regions have historically provided an incentive of approximately 30 percent on investments over US$1 billion. If that is the benchmark against which Mexico needs to compete, then the government should keep playing a role in attracting investment.” That being said, some governments have chosen to move away from the incentive approach and play on the state’s advantages instead. “Guanajuato offers legal certainty above anything else,” says Miguel Márquez Márquez, Governor of the state. “Especially in an uncertain environment, the best thing we can offer companies is confidence regarding their investment, no matter what. We must consider ourselves as account managers, which means that we must follow up on any relationship we establish with new investors.”
Mexico might be KPMG’s designated champion regarding investment competitiveness but the country is far from perfect. The same report highlights transportation costs as a major area of opportunity to increase competitiveness. While the average annual transportation cost per kg of merchandise is US$929 in Japan, the leader in this segment, in Mexico that number rises to US$2,568. Moreover, as production and export operations grow, Mexico’s logistics infrastructure and regulatory framework are now insufficient to cater to the demands of automotive companies. “The biggest challenge we face is the regulatory framework for the transportation sector,” says Miguel Muñoz, Managing Director of Geodis México. “If we compare Mexico to the US or Europe in terms of technology advances or safety regulations, we are far from operating under state-of-the-art conditions. Ports are also saturated and we are operating with fiscal precincts that have technology from the last century.”
Although already being addressed by the government and clusters throughout the country, the local supply chain’s competitiveness is also a worrisome factor for Mexico’s development. “Supplier localization is an advantage for any company and we are open to finding new suppliers in Mexico. However, our customers’ demands in terms of quality, cost and deliveries are extremely high,” says Yasushi Nishikawa, President of Sumitomo Corporation de México. “Only complying with the expectations OEMs have is not enough.”