As has been noted before, Mexico’s appeal for production continues to grow among companies interested in near-shore opportunities. That’s increasingly true for companies concerned that China’s labor pool is becoming shallower, labor costs are climbing as workers demand higher wages, and manufacturing costs are increasing overall as land and energy prices escalate. There also are long leads times for companies to manage; it can take 15 to 20 days for cargo ships to reach U.S. shores from China.
Continuing the argument for adding operations in Mexico, a SupplyChainBrain article notes that the ever-improving supply chain infrastructure, a low-cost but increasingly skilled labor force, short shipping distances, and successful economic reform efforts combine to make Mexico more attractive for cross-border industrial opportunities, according to a new report by Jones Lang LaSalle (JLL).
The aptly named report, “Five reasons to consider Mexico for manufacturing and logistics,” highlights key reasons investors should look closely at Mexico’s industrial opportunities. For starters, Mexico’s economy is strengthening, and the impact of crime is not significant in most markets. For example, Mexico is now the seventh-leading auto manufacturer in the world and the second-largest supplier of electronic products to the U.S. market. While violence related to drug trafficking and organized crime rose by 11 percent in 2011, despite common opinion, the problem is mainly a regional one, the report states.
Next there is Mexico’s low-cost yet highly skilled workforce. Interestingly, Mexico’s labor costs are lower than many of its global competitors but the skills of its workforce are rising. Furthermore, the pool of working-age individuals is approaching 62 million, and workers are becoming increasingly affluent and well educated. Indeed, the literacy rate now is more than 93 percent, the report states.
I was surprised to learn that investment in Mexico’s supply-chain infrastructure, spurred by the privatization of the country’s major industries, has resulted in $226 billion in rail, roadway, and port improvements since 2006—a 50-percent increase over the previous six years. Specifically, Mexico’s rail shipments as a percentage of overall freight shipments have risen from 8 percent in the 1990s to about 20 percent today, and U.S. rail companies are investing in infrastructure improvements to capitalize on growing trade volumes at major ports such as the West Coast port of Lazaro Cardenas.
At the same time, truck shipments, which rose by 11.4 percent in 2011, still eclipse freight volume by approximately 300 percent. Encouragingly, the Mexican government continues to invest in improvements to its major highways and border crossings to speed up delivery times. It is worth noting that goods shipped from Central Mexico can reach Chicago in about three days.
Finally, perhaps most importantly, Mexico is an eager business partner. Investors increasingly benefit from Mexico’s trade agreements, export programs, and overall movement toward operational transparency. Mexico now has free-trade agreements with 43 nations, compared to 20 in China and 15 in the U.S. Additionally, in a move to encourage foreign investment, Mexico has created export promotion programs to reduce or eliminate import, value-added, and customs operation taxes.
All of this is not to imply that manufacturers should necessarily leave China and relocate operations to Mexico. It does point out, however, that when considering total landed cost, it may make sense in some cases to give the idea careful thought. That’s even more true when other factors such as that electricity is less expensive in Mexico than it is in China, and that trans-Pacific freight costs are expected to increase five percent annually over the medium term, are evaluated as well.
What do you think? Is your company considering moving some operations to Mexico, or perhaps launching new operations there?