Within five years, higher manufacturing exports due to a widening cost advantage over China and other major economies could add $20 billion to $60 billion in output to Mexico’s economy annually.
In addition, thanks to the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for everything from automobiles to computers assembled in Mexico stand to benefit, according to new research by The Boston Consulting Group (BCG).
The key drivers of Mexico’s improving competitive edge, officials say, are relatively low labor costs and shorter supply chains due to the country’s ultra-convenient proximity to markets in the U.S.
Another important advantage, the BCG suggests, is that Mexico has 44 free-trade agreements—more than any other nation—allowing many of its exports to enter major economies with few or no duties.
SWING IN MOMENTUM
A tipping point, BCG suggests, was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China.
Now, by 2015, average total manufacturing costs in Mexico are likely to be about 6 percent lower than in China and around 20 to 30 percent lower than in Japan, Germany, Italy, and Belgium, BCG projects.
According to Harold L. Sirkin, a BCG senior partner, Mexico is simply “in a strong position to be a significant winner” from shifts in the global economy.
“That is good news not only for Mexico, which relies on exports for around one-third of its GDP,” he says. “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 research, Sirkin says, is part of BCG’s ongoing “Made in America, Again” series on the changing global economics of manufacturing, produced by the Operations and Global Advantage practices.
BCG has previously released research predicting that rising U.S. exports, combined with production “reshored” from China, could create up to 5 million new U.S. jobs in manufacturing and related services by the end of the decade, thanks largely to significant labor- and energy-cost advantages over Western Europe and Japan and rising costs in China.
Consequently, global companies are expected to continue moving production to Mexico despite concerns over crime and safety, organizations officials say.
However, that is not to say there are not any concerns. Quite the opposite, as it turns out.
Research by the World Economic Forum has found that companies view violence and corruption as the most problematic factors of having operations in Mexico – as well as significant costs of doing business. Another drawback is the perception that Mexico lacks enough skilled workers.
Nevertheless, the cost advantages of producing in Mexico are becoming so attractive that many companies are finding ways to mitigate these perceived risks.
“When the economics are a wash, U.S. manufacturers often keep production in the U.S.,” says 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.”
Mexico’s labor costs are particularly competitive when productivity differences with other economies are factored in.
By 2015, for instance, average manufacturing-labor costs in Mexico are projected to be 19 percent lower than in China, where wages are rising in a hurry, and around 30 percent lower when adjusted for output per worker. That is a stark contrast from 2000, when Mexican labor was 58 percent more expensive than in China, officials say.
Mexico will also have lower energy costs than many other economies. Average electricity costs are around 4 percent lower in Mexico than in China, while the average price of industrial natural gas is 63 percent lower.
WHO WILL BENEFIT?
The industries expected to see the biggest production gains are likely to be transportation goods, computers and electronics, appliances, and machinery, the Boston Consulting Group indicates.
“These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico,” says Eduardo León, a BCG senior partner based in Monterrey, one of Mexico’s largest industrial cities.
Due to the country’s growing cost advantage, production in these industries could increase between 7 to 19 percent by 2017 over and above the projected level if current growth trends remain the same. This may possibly result in 300,000 to 900,000 direct manufacturing jobs annually 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,” Sirkin explains. “But the economic advantages are becoming so pronounced that global companies should include Mexico on a shortlist of locations for their next manufacturing plant.”
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and reportedly the world’s leading advisor on business strategy. The organization partners with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises.