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