Four Reasons Mexico Is Becoming a Global Manufacturing Power

Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015

By Peter Coy

Mexico is beginning to beat China as a manufacturing base for many companies despite its higher crime rate, according to a new report from Boston Consulting Group. Mexico’s gain is a plus for the U.S. because Mexican factories use four times as many American-made components as Chinese factories do, says the consulting firm. Here are Mexico’s four key advantages:

1. Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015. China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000 but are catching up rapidly and will be slightly higher by 2015. And labor productivity remains higher in Mexico, even though the gap is narrowing. The crossover point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity) grew to equal those in Mexico. By 2015, Mexico will be around 29 percent less expensive.

2. Mexico has more free-trade agreements than any other country. The North American Free Trade Agreement gives Mexican goods easy access to the world’s largest market, the U.S., as well as to Canada. But that’s not all. Mexico has free-trade agreements covering 44 countries. That’s more than the U.S. (20 partners) and China (18) combined.

3. Mexican manufacturing has a significant advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S., which are exceptionally low because of a glut of supply on the market. China pays from 50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.

4. Industry clusters, especially in autos and appliances, are growing. Mexico has developed a national expertise in certain industries, which makes it more attractive for companies to locate or expand plants there. Because Mexico is a major auto manufacturer, 89 of the world’s top 100 auto parts makers have production in the country. The companies are concentrated in five Mexican states, reducing transportation costs. In appliances, more than 70 manufacturers are in the country, ranging from components makers to assemblers of both small and large appliances.

Mexico’s progress relative to China is major good news for the country because manufacturing accounts for 35 percent of Mexico’s gross domestic product (vs. 12 percent of U.S. GDP), Harold Sirkin, the report’s lead author, says in an interview. The U.S. benefits in two ways, he says. First, by selling more components to Mexican manufacturers. Second, by selling more consumer products, such as American-made beef, to Mexicans, who will have more money for imported products if their living standards rise.