Mexican Manufacturing:New Foe for China

The factory of high voltage devices of Siemens is located in the place two hours’ drive from the Mexico City. In the factory, workers are moving about on the shining floors, assembling and testing the circuit breakers of transformer stations.

These large devices have protruded electrodes, similar to the scenery tools for Frankenstein’s laboratory. Several months ago, the 160 components of those devices are to be assembled in China or India.

Now, the assembly is done in Mexico. Moreover, most of the 160 components will be made in Mexico from next March, though they are now produced in Asia and Germany. Siemens chooses to establish a new surge arrester project in Mexico, instead of expanding its production in China.

Claude Steffen Raab, general manager of Siemens Mexico’s high-voltage department, said: “We are moving to the regional center for faster reactions to each of our markets.”

The moving of Siemens’ production line is a part of the revolution to the manufacturing of Mexico. This revolution is rarely known by others but related with the industries of automobile, plane, refrigerator and computer. This is the first time that the second largest economy of Latin America turns out to be an opponent for China in ten years.

In the first half of this year, Mexico contributed to 14.2% of the imports volume of products of the US, the largest importer in the world. In 2005, however, this figure was only 12%. Unexpectedly, China, which accounted for a big share in the imports market of the US, is losing its grace. In 2009, 29.3% of America’s imported goods were from China, but now, the proportion is only 26.4%.

When Mexico is increasing its presence in the US market, it also diversified its clients. Ten years ago, 90% of Mexico’s exportation flew to the US. Last year, this figure dropped to below 80%. Suddenly, Mexico seemed to be the first choice for multinationals when they plan to supply commodities for Americas. Furthermore, multinationals are gradually upgrading this country as the best place for production bases to provide goods for the other areas. Today, the exports volume of products from Mexico is larger than the total volume from other Latin American countries.

This reversion might be different from the intuition. For example, Chrysler takes Mexico as the base to provide a part of Fiat 500 sedans for the Chinese market. Chrysler spent 500 million US dollars establishing this base. In the completion ceremony of the production base, Mexican president Felipe Calderon told the whole country, “I think it is the first time that Mexico exports cars to China, at least the first time in these years… Previously, we all believed that those things would not happen.”

Chrysler is not alone. The German automaker Audi is thinking of producing components for Audi Q5 in its Mexican factory. These components will be supplied to China where they are assembled.

The newly-formed competitiveness of Mexico is recognized by a lot of people. As Marco Oviedo with Barclays summarized, “the Mexican manufacturing was once 10 years behind China in terms of export. But from 2008-2009, it began to take the upper hand. We believe that the change might be structural and sustainable.”

Everything seemed to be impossible at the beginning of this century. At that time, China quickly jumped onto the world stage after becoming a member of WTO in 2001, while Mexico was trapped in the plight.

For other Latin American countries on top of Mexico, China is a main client for their agriculture and mining. However, Mexico considered China as an unbeatable opponent as it produces same things with Mexico at a much lower cost.

Against this background, it is no wonder that Mexico will become the last country to say yes to China’s joining in the WTO, after a long and tough negotiation.

But from then on, several important reforms improved the comparative advantages of Mexico, making it a country with emerging and energetic manufacturing. At first, Mexico is one of the few countries that put great efforts in developing trade and enhancing the opening-up.

Mexico signed free trade agreements with 44 countries, twice as much as China, or four times Brazil did. The free trade agreements allow Mexican companies to purchase components and all kinds of resources from many countries and usually they do not need to afford the tariffs.

This somewhat improved the ratio of the exports and imports volume of Mexico against its GDP to 58.6% in 2010. The ratio in China was 47.9% and in Brazil, it was only 18.5%. HSBC Mexico City forecasts that the ratio of Mexico could improve to over 69% this year.

These agreements also enhanced the country’s confidence. In 1994, Mexico reached the North American Free Trade Agreements (NAFTA) with Canada the US. Luis de la Calle, an economist and trade expert that joined in the negotiation and settlement of the NAFTA on behalf of Mexico, said: “The NAFTA set up a legal system. Some people might not believe that laws conformed to the status quo of Mexico, but laws can force you to do right things constantly.”

In order to prove this, de la Calle designed an unorthodox index: he divided the number of letters that the US Trade Representative used to describe a country in the “annual report about barriers the US encounters in export and investment by the exports volume of the US to this country. Last year, 22 countries were put into his list. Mexico defeated Canada as the“best behaved” country. Pakistan took the bottom place of this list while China is ranked at the 10th place from the bottom.

Of course, Mexico is not completely free from problems. Its efforts to diversification have seen substantial progress, but its performance is still seriously influenced by the undulation of the US situation.

But what’s worrying foreign investors most is still the deterioration of the security condition in Mexico.

After Calderon ordered the full attack at the drug-dealing groups in Mexico at the end of 2006, the homicide rate in this country almost increased by 200% from 0.008% to 0.022%. In the past six years, the war has already killed at least 550 thousand people, and relevant headlines were frequently seen in newspapers. Head cutting, abduction, massacre and other scary reports were continuously heard from different places.

This year, the situation even made the US Congress publish a travel safety advice, telling US citizens to postpone “any unnecessary travels” in a dozen of areas in Mexico. The US Congress warned that half of the 31 states of Mexico is too dangerous for tourists to travel there.

Violence has applied tiny influence over multinationals by now, because most of them are operating their business in wellguarded industrial parks. But it is hard to keep the criminal organizations in Mexico from blackmailing large foreign companies in the future like they usually do to local small- and middlesized enterprises in Mexico.

Before such things happen, foreign companies will still favor Mexico. This is somewhat because of that China is not a paradise for manufacturing like before. Though multinationals’executives always complained about the risk from bureaucracy and intellectual property infringement in China, they were still willing to counter this risk with the low labor and transportation cost.

However, the increasing salary and oil price in China are pushing up the cost of commodities exported from China to the US. This completely brings out the advantages of Mexico. In 2009, Mexico exceeded China and South Korea as the largest manufacturer of panel TVs. The larger the products are, the more economical it is to produce them in Mexico. According to the Global Trade Atlas, Mexico also has the largest output of French door refrigerators in the world.

The borderline shared by the US and Mexico is about 2000 miles long and the two countries are connected with a lot of railways and roads. Therefore, it costs much less money and time to transport things from Mexico to the US. For example, it takes 20 days or two months to move products from China to the US, but the journey from Mexico to the US only lasts 2-7 days.

Though it is very common for multinationals to care about their cost, the global economic conditions make many multinationals, especially those American companies, think carefully about producing things in Mexico to shorten the supply chain. This can reduce the cost of enterprises – the shorter consignment period means that enterprises can reduce the inventory turnover as much as possible. As Bruno Ferrari, Mexican Minister of Economy, said, “Mexico is close to related country in geography, which can help enterprises lower their financial cost.”

The increasing labor cost in China also brought additional opportunities for Mexico. As HSBC data shows, the salary level in Mexico was 391% higher than in China 10 years ago. Now, the figure has dropped to 29%. It is forecasted that the salary level of China will be higher than Mexico in the next five years.

De la Calle said that the reason is the change of demographic structure as the working-age population in China keeps decreasing in these years.

Compared with China, half of the 112 million people in Mexico are younger than 29. Therefore, this country will have abundant low-cost labor force till 2028. De la Calle said: “If you look into the situation of Mexico, you will find that this country has the best optimized demographic structure in the world.”

Mexico does not only have enough labor force, the skills of laborers are improving as well. The data from the UNESCO shows that the proportion of the number of college graduates from mechanics, construction and other manufacturing industries in the total number of college graduates has increased from 0.04% in 1999 to the present 0.08%. In comparison, the proportion in the US was maintained at 0.06% without any changes.

The improvement of Mexican laborers’ skills provides a more and more attractive environment for hi-tech enterprises and automobile component manufacturers. In recent years, Mexico has already become the major manufacturer of cellular phones and PCs in the world. In addition, nearly all automakers use the components designed by Mexican engineers.

This doesn’t mean that Mexico will replace China as the first choice of global manufacturing in a short while. Over a quarter of commodities imported by the US are made in China. Mexico is no counterpart of the Asian giant in that matter.

The supply chain in China is better established than Mexico. From the Mexican manufacturing center Ciudad Juarez in Texas to the central part of Mexico, many multinationals said that it was hard to recruit local partners.

For example, Siemens has been trying in vain to find a local supplier of air tightness aluminum casting parts in Mexico. Now its suppliers are still from Europe because it is very hard to find a proper substitute in this country.

In spite of that, the current situation determined that Mexico is blessed with a bright future. A dozen of years ago, this country was overshadowed by the dim outlook.

As de la Calle said, “the present is good and the future will be better”.