Mexico?s Cost Advantage to Drive Exports Growth

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. And thanks to the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for everything from automobiles to computers assembled in Mexico also stand to benefit, according to new research by The Boston Consulting Group (BCG).

The key drivers of Mexico?s improving competitive edge are relatively low labor costs and shorter supply chains due to the country?s proximity to markets in the U.S. Another important advantage 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.

A tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China. By 2015, BCG projects, average total manufacturing costs in Mexico are likely to be around 6 percent lower than in China and around 20 to 30 percent lower than in Japan, Germany, Italy, and Belgium.

?Mexico is in a strong position to be a significant winner from shifts in the global economy,? said Harold L. Sirkin, a BCG senior partner. ?That is good news not only for Mexico, which relies on exports for around one-third of its GDP. 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 is part of BCG?s ongoing ?Made in America, Again? series on the changing global economics of manufacturing, produced by its 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.

Global companies are expected to continue moving production to Mexico despite concerns over crime and safety. 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.

But 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.,? said 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.?

Article source: http://www.pcb007.com/pages/zone.cgi?a=93050

Source: http://www.smartgroup.org/industry-news/mexicos-cost-advantage-to-drive-exports-growth/?utm_source=rss&utm_medium=rss&utm_campaign=mexicos-cost-advantage-to-drive-exports-growth

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