Mexico v China Manufacturing: Two Perfect Storms
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Transcript of Mexico v China Manufacturing: Two Perfect Storms
Mexico versus China Manufacturing :
Two Perfect Storms
Hong Kong Association of Southern California Meeting
August, 2012
• Introduction: ¿Quién Soy?
• Early 2000s & Maquiladoras’
Perfect Storm
• Manufacturing 2010’s: Perfect
Storm - Round 2
• Mexico’s Rebound: Winning
Round 2?
• Summing it Up
OVERVIEW
• Kenn Morris
• Founder & President/CEO of Crossborder Group Inc.
• Gerente General de Crossborder NS, S de RL de CV
• Nearly 20 years of business consulting, market
research and policy research in Mexico, the US-
Mexico border region, and Central America
• Former Director of “Crossborder Innovation &
Competitiveness Initiative” at UCSD San Diego
Dialogue
• In 2008, appointed by Secretary of Commerce as
founding member of US-Mexico Border District
Export Council
INTRODUCTION: QUIEN SOY?
• Founded in 1996 in San Diego
• Crossborder Group Inc. (1996, US)
• Crossborder NS, S de RL de CV (2007, Mexico)
• Key consulting & research staff in two offices:
• San Diego, USA
• Leader in US-Mexico market research and strategic consulting
• Includes expertise & specialization in:
• Industry & B2B research
• Siting studies
• Manufacturing cost models
• Highly regarded by US & Mexico organizations and companies for
accurate data and insights on border & binational issues
• Surveys and focus groups
• Market studies & strategies
• Market-entry plans & assistance
INTRODUCTION: WHAT CROSSBORDER GROUP DOES
• Tijuana, Mexico
A FEW OF CROSSBORDER’S CLIENTS
…and many others – ranging from major corporations,
to government agencies, to NGOs, to small start-ups…
Early 2000s &
Maquiladoras’
Perfect Storm*
*Image of “Perfect Storm” movie courtesy of Warner Brothers Pictures
• Early 2000’s, Mexico’s maquiladora manufacturing industry was hit
by “perfect storm” – a confluence of several factors:
• Taxation uncertainty: initial Federal decision to treat
maquiladoras as permanent establishments in 2000 (later
changed)
• Implementation of Article 303 of NAFTA: Preferential duty
treatment of NAFTA-content inputs (i.e.: new duties on non-
NAFTA items…later modified under ProSec rules)
• Wage inflation amongst maquiladora workforce
• Early-2000’s recession in the U.S.
• …In the meantime, China was working toward stronger global
integration and increasing competitiveness of its industries
• 1990’s: privatization push for state-owned companies
• Late-2001: China’s accession to the World Trade Organization
(and reduction of tariffs)
ROUND 1: MEXICO VERSUS CHINA
• What happened?
• Fast maquiladora growth of 1994 NAFTA agreement dropped off, as
did manufacturing FDI
• Sectoral declines in electronics & textiles
EARLY 2000’S: PERFECT STORM
In early 2000s, many Mexico industry professionals saw it this way:
EARLY 2000’S: RESULTS OF ROUND 1
…and assumed China had won.
“China VS Mexico” image by José Quintero (Mexico), used via Creative Commons license
Manufacturing 2010’s:
Perfect Storm - Round 2
• In 2010’s, seeing new “perfect storm” and confluence of factors –
this time in China
• Like Mexico in late-1990’s, seeing labor wage inflation: labor rates
nearly doubled between 2000-2005, then again between 2005-2010
• Estimates: over US$5.50/hr by 2016
ANOTHER PERFECT STORM?
• Wage inflation part of the equation…
• Also: Significant appreciation of Renminbi (Yuan) vs US$
PERFECT STORM: ROUND 2
• Also, significant variability (generally upwards) on logistical costs
for shipping from China to US
• Logistics costs, time cost, and inventory carrying cost…
PERFECT STORM: ROUND 2 (2)
• In 2005, China had low-cost advantage (compared to US)…
• …since 2007, Mexico costs dropped below those of China
IMPACT: MANUFACTURING COST INDEX - ALIX PARTNERS
• China: times they are changin’
• Boston Consulting Group: by 2015,
China mfg costs approx. $4.50/hr
• Total costs for manufacturing a
product (and getting it to North
American market) increasing
• Costs benefits for Mexico: from
2000-2010, manufacturing wages in…
• US: increased +41% ($34/hr)
• Mexico: +39% ($6/hr)
• …even Brazil: +130% ($10/hr)
• KPMG: 2012 Competitive Alternatives
study found little difference in
Mexico v China costs
IMPACT - MANUFACTURING COSTS NOW FAVOR MEXICO
Mexico’s Rebound:
Winning Round 2?
• As North American economy crawls back, trade in the combined NAFTA
marketplace of 454 million consumers is increasing…
• …over US$1.2 trillion in trade between NAFTA partners in 2011
• …$460 billion in trade just between US & Mexico (12.5% of total US)
OVERALL, NAFTA TRADE INCREASING…
2012 not going to be economic
“apocalypse” for Mexico…
• GDP growth outlook improving
• 2000s: often lower than US & OECD
countries…
• 2011: Mexico at 3.9%, US at 1.7%
• Some improvement in unemployment
• Rebound in job growth has been
quicker than in US
• Mexico: Slow glide from 5.8% peak
• US: Down from 10.0% peak
• Some synergy & restructuring going
on, esp. in Automotive Industry
(both sides of border growing)
MEXICO’S ECONOMY POST GREAT RECESSION
Economic revival & competitive
advantage leading to recovery in
National-level maquiladora/IMMEX
employment…
• National: 1.9M (similar to 2007)
• Growth automotive sector
(mainly Central & NE Mexico)
• Baja: At 222K (vs. 260K in 2007)
• Tijuana: 146K (vs. 170K in 2007)
• Heavy loss in electronics, but
still big (45K+ employment)
RECOVERY IN MANUFACTURING (MAQUILADORA/IMMEX)
• Foreign Direct Investment has recovered from early-2000’s…
• Great recession still leaving investment weaker than desired…
• Expect return to stronger Mexico FDI in 2013-2014
SITUATION TODAY: FOREIGN DIRECT INVESTMENT (FDI)
• Given long-term trend, should expect growth of tech industries
• True for Baja California & Tijuana:
• TJ: #1 location in North Am. for medical device manufacturing
• TJ: One of top North Am. centers for electronics mfg employment
• Likely to see expansion of these industries as costs change in China
REGIONAL ECONOMICS: BAJA’S ADVANTAGE FOR TECH MFG
Santa Clara County
San Diego County
Orange County
Michigan State
Los Angeles County
Chicago Metro
Boston Metro
New York State
Minneapolis-St. Paul
City of Tijuana*
9,859
10,360
11,528
11,261
12,570
12,789
15,229
18,233
22,099
31,079
2010/2012 Medical Device Mfg Employment in Key Regions*
*data for Q2-2012 *see endnotes for estimation methodology used
Security and perceptions of security improving
• By 2011, security situation of Northwest Mexico significantly improved
• Also, growing perception (by those in Mexico, at least) that overall
security is improving (monthly perception survey)
• Should result in increases in Manufacturing FDI in NW Mexico by 2013+
ECONOMIC REBOUND: REGIONAL SECURITY IMPROVEMENTS
Summing it up…
• In early-2000’s, saw Perfect
Storm of factors that weakened
manufacturing in Mexico – and
spurred investment in China
• Believe that latest Perfect
Storm will likely shift and bring
manufacturing back to North
America…
• …helping Mexico to consolidate
as global economic power-
house (esp. in North America)
…EN FIN
Gracias!
Contact Us at www.CrossborderBusiness.com
1-888-4XBORDER or 619-710-8120