Manufacturing in Mexico will increasingly offer cost advantages over manufacturing in China and other major economies, according to new research by The Boston Consulting Group (BCG), which foresees manufacturing adding $20 billion to $60 billion in output to Mexico's economy annually within the next five years.
The group said that, with the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for finished goods assembled in Mexico also stand to benefit.
The group said Mexico's improving competitive edge is driven by relatively low labor costs and shorter supply chains, which results from Mexico's closer proximity to U.S. markets.
Mexico also has an important advantage in its 44 free-trade agreements, which allow many of its exports to go into major economies with few or no duties. Mexico has more free-trade agreements than any other nation.
The group pointed to tipping point that was reached in 2012. It was then that the average manufacturing cost in Mexico, adjusted for productivity, became less than the costs in China. BCG projects that, by 2015, average total manufacturing costs in Mexico could be about 6% less than in China and 20%-30% lower than in Japan, Germany, Italy, and Belgium.
"Mexico is in a strong position to be a significant winner from shifts in the global economy," said Harold L. Sirkin, a BCG senior partner. "That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It's also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China."
The group points to World Economic Forum research that violence and corruption are viewed as the biggest negative factors, as well as costs, from having manufacturing operations in Mexico. Another negative, the group said, is the perception that Mexico does not have sufficient skilled workers.
Despite these concerns, BCG expects global companies to continue moving manufacturing operations into Mexico--with the cost advantages of producing in Mexico convincing many companies to look for ways to mitigate the perceived risks.
"When the economics are a wash, U.S. manufacturers often keep production in the U.S.," said Michael Zinser, a BCG partner who leads the firm's manufacturing work in North America. "But when the economics are compelling, companies will invest in additional security and training to address these issues."
BCG said Mexico's labor costs look particularly competitive when factoring in its productivity differences.
By 2015, average manufacturing-labor costs in Mexico are projected to be 19% lower than in China, with its increasing wages--but Mexico is 30% lower when adjusted for output per worker.
Average electricity costs are reported to be about 4% lower in Mexico than in China. Industrial natural gas is 63% lower, on average, in Mexico.
Appliance manufacturing is one of the industries predicted to see significant production gains in Mexico in the near future, the group said. Other industries include transportation goods, computers and electronics, and machinery.
"These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico," explained Eduardo Leon, a BCG senior partner based in Monterrey.
Due to Mexico's growing cost advantage, production in these industries could increase between 7%-19% by 2017, over and above the projected level if current growth trends remain the same, according to BCG. This could result in 300,000 to 900,000 direct manufacturing jobs in Mexico and 1.5 million to 3.5 million jobs in related services jobs.
"Companies investing in Mexico must balance the economics with the potential downsides," said Sirkin. "But the economic advantages are becoming so pronounced that global companies should include Mexico on a shortlist of locations for their next manufacturing plant."
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