A Renaissance for Mexican Manufacturing? Part One

Wages have increased 218 percent in China compared to 25 percent in Mexico. It is projected that wages in Mexico will continue to rise, but only one-third as fast as China.

By DR. CHRIS KUEHL, Economic Analyst, Fabricators & Manufacturers Association International (FMA), & Managing Partner, Armada Corporate Intelligence

CHRIS KUEHLThe dominant story from Mexico today is one of violence and corruption. The drug wars are a very real part of Mexico these days and nobody would underestimate the challenges that lie ahead for the government.

However, there is another story, not in the headlines yet and perhaps far more important to the future of the country. In June, CNBC reported that Mexico’s economy is expected to grow by 4.5 percent this year. Contrast that number with the 1 percent growth expected in the U.S. and the 0.5 percent pace in Europe.

The Mexican economy is outpacing some of the faster growing regions in the world — such as Russia — and it is estimated that Mexico will be the eighth largest economy in the world by 2050. In March of this year, the Wall Street Journal reported that unemployment fell to 4.6 percent and is at the lowest level since December of 2008. Contrast this rate to the 9 percent plus rate in the United States.

Mexico is not far from breaking out as one of the key trading nations in the world. It now has signed 13 free trade agreements that involve 44 nations, and is clearly less dependent on the performance of the U.S. economy than in the past. This should not be misconstrued that the U.S. is not an important trading partner, as imports from Mexico rose by over 30 percent in 2010 and are on pace to exceed that in 2011.

Part of the reason for that surge in trade activity is that, since 2005, the cost of manufactured goods from China has risen by 40 percent. Wages in China have risen rapidly over the past five to six years and now they are almost the same as the wage rates in Mexico. Wages have increased by 218 percent in China compared to 25 percent in Mexico. It is projected that wages in Mexico will continue to rise in the next 10 years, but only one-third as fast as those in China.

In addition, one of the most significant advantages that Mexico has had in its competition with China and other Asian nations is transportation costs. It is 80 percent cheaper to bring goods over the border to the U.S. than it is to bring them from Asia, and that will increase in the years ahead as energy prices drift back up. This benefit grows when one looks at issues of speed, reliability, insurance and security.

In terms of cross-border trade statistics, trade has returned to the level that existed prior to the recession — a recovery faster than that with any of the other U.S. trading partners. It is almost twice as fast as the recovery that took place between the U.S. and Europe.

Another factor: The population of Mexico is rapidly becoming one of the most competitive in the world. The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year 90,000 engineers graduate from Mexican universities — three times the number that graduate from U.S. schools.

Today the nation has the ninth largest pool of IT professionals in the world — behind only the U.S. in this hemisphere. Since the start of the NAFTA trade agreement, foreign direct investment (FDI) in Mexico has tripled, and that investment has been divided between more than a dozen industrial states from Europe, Asia, and North America. In 2010, that FDI number reached $18.6 billion and there are 75 additional FDI projects in development between now and 2015.

In short, this is a very different story from the one that dominates the media and it is the story that has the most significance for Mexico in the years ahead. This is not to say that Mexico doesn’t have issues to address. For example, there are problems with corruption at various levels of business that can make getting paid awkward and complex at times. These are the kinds of inhibitions to growth that must be dealt with sooner rather than later.

Look for the second part of this blog in tomorrow’s Chem.Insider Daily e-newsletter.

Dr. Kuehl is the author of Fabrinomics, a biweekly economic analysis e-newsletter for members of the Fabricators & Manufacturers Association. For more information, please visit fmanet.org/fabrinomics.