In what is already being called the “American manufacturing renaissance,” many companies have been re-shoring or, more accurately, near-shoring operations to Mexico in recent years. The shift has come as the Chinese yuan continues to appreciate and wages rise, combined with growing complications in global supply chains and skyrocketing fuel costs.
“A big beneficiary of rising Chinese labor costs and U.S. economic growth has been Mexico,” writes Business Insider. “China has lost market share to Mexico in both the U.S. and the European Union.”
In fact, wages in China have jumped by more than 14 percent since 2002. At the same time, the cost of labor in Mexico’s manufacturing sector is expected to be at least 19 percent lower than China by next year (2015).
Another key factor in the success of Mexico’s manufacturing sector is its large number of free trade agreements, including the North American Free Trade Agreement, which also benefits companies throughout the U.S. and Canada. But that’s not all – Mexico actually holds a total of 44 free trade agreements, which is more than any other country.
In addition, natural gas prices in much of Mexico are closely tied to the U.S.,making them much lower than most other parts of the developed world. Add to this the results of a study by Boston Consulting Group (BCG),which shows that electricity costs in Mexico are at least 4 percent lower than China, and it’s easy to see the big picture for the future of manufacturing in Mexico.
“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,” stated Harold L. Sirkin, a senior partner at BCG who reported on Mexico’s growing cost advantage. "All of this means Mexico will be a winner for years to come.”
In other financial news coming out of Mexico this week,Bloomberg reports that the nation is expected to enjoy an even greater boost to its economy throughout the remainder of 2014 as key interest rates are being kept at record lows and inflation has slowed even more than expected to hit the ideal target range, which is all good news for businesses conducting operations here.
“An improved growth outlook in the second half of the year will keep the bank on hold in 2014, after inflation slowed more than economists expected to within target range,” stated Marco Oviedo, who serves as chief Mexico economist for Barclays. “The central bank is confident that the economy will accelerate.”
Also of note,Bank of Mexico Governor Agustín Carstens told the Wall Street Journal last week that Mexico has been busy building up its currency reserves to record highs in recent years. This move will provide a buffer against market volatility and has opened up a flexible credit line of more than $75 billion with the International Monetary Fund.
“We have to be prepared,” stated Carstens at a meeting in Washington this spring. “That’s what we have been doing by keeping strong fundamentals, by keeping a strong external sector, and by promoting growth through structural reforms.”
These efforts have already paid off big time for Mexico in recent years by boosting the nation’s growth potential, and this will be especially true throughout the rest of 2014 and beyond. Of course, the fact that Mexico has opened up its oil and natural gas sectors to private development and foreign investment for the first time in more than 75 years is also playing a crucial role in the nation’s growth, and is expected to boost the GDP by at least a full percentage point in the very near future.