Thursday, May 07, 2015

Mexico's manufacturing boom

The 'Make In India' campaign could learn from the manufacturing success story of Mexico which has come to be called as a 'rising global star in manufacturing'  and 'the China of the Americas'.  Prime Minister Modi could also get inspiration from President Enrique Penha Nieto who has brought about a dozen major reforms by forging a historic consensus with the opposition parties through the 'Mexico Pact'.The Indian business should pay more attention to Mexico which is quietly building itself as an economic power with market access to forty four FTA partner countries

Mexico's manufacturing boom

Mexico has overtaken China in 2013-14 as the world's top destination for automobile investment, according to Financial Times of 21 April 2015. Mexico had attracted 12.6% of global FDI in auto manufacturing as against 12.4% of China in 2013. In recent years, many global automakers have opened or announced plans to set up manufacturing units in Mexico whose car production projected to increase to 4.7 million vehicles by 2020 from 3.2 million in 2014. Mexico accounts for 20% of the vehicle production of North America and is the seventh largest producer of cars in the world. It has become the fourth largest exporter of vehicles in the world and exports 80% of its total production. Mexico's auto exports earned 85 billion dollars in 2014. 

Mexico has become competitive vis-a-vis China whose labour costs have gone up significantly. Average manufacturing labor costs in Mexico are now almost 20 percent lower than in China, whereas in 2000, Mexico’s labor costs were 58 percent more expensive than China’s. Chinese wages ( 5726 dollars per year) have become significantly higher than Mexico's annual wage of 3645 dollars for unskilled workers in the auto sector. Mexican productivity-adjusted labor costs are now estimated to be 13 percent lower than those of China
Boston Consulting Group in its August 2014 report 'The shifting economics of global manufacturing' has called Mexico as "a rising global star in manufacturing". BCG estimates that Mexico now has lower average manufacturing costs than China on a unit-cost basis. A decade ago, average direct manufacturing costs in China were estimated to be 6 percentage points cheaper than Mexico’s, Now, Mexico is estimated to be 4 percentage points cheaper. 
Mexico offers other advantages over China which poses increasing challenges to American multinationals. It has a large and growing young population unlike the ageing Chinese society. It offers better protection to intellectual property rights unlike China.  Not surprisingly, US imports from Mexico have started rising faster than those from China and Mexico is being talked of as the "China of the Americas".
Besides the lower wages, Mexico has made itself attractive for export-oriented manufacturing by its FTA with 44 countries. Mexico is a member of NAFTA, Pacific Alliance, APEC, OECD and TPP.Most foreign manufacturers use Mexico as the export platform for NAFTA.
Mexico has developed manufacturing clusters : Queretero for aerospace; central and northern industrial heartlands for automobiles; Gudalajara as a silicon valley ; and low-end manufacturing of goods like clothing and textiles in the southern part of the country. It also has a conducive ecosystem for manufacturing and exports with an integrated supply chain, reasonably good infrastructure, logistics and transport network as well as stable and predictable policies and tax regimes. 
Unlike the raw materials exporting South America, Mexico has emerged as a major exporter of manufactured products such as automobiles, electronics and aerospace equipments. Manufactured products account for 83% of the total exports of Mexico. Mexico is largest maker of  flat screen TVs and two door refrigerators and is a leading producer and exporter of white goods. 
The "Make in India"  campaign can learn from the manufacturing success story of Mexico which ranks 39th in World Bank's 2014 survey of 'Ease of doing business index' in comparison to India's 142nd. Of course the Indian growth model is different from the Mexican one of manufacturing for exports. India should, therefore, draw only the appropriate lessons for its own path and needs.  Prime Minister Modi could also get inspiration from President Enrique Penha Nieto who has brought about a dozen major reforms by forging a historic and unprecedented consensus with the opposition parties through the ' Mexico Pact'.
The Indian business would find it worthwhile to give more attention to Mexico which is quietly positioning itself to be a major economic force in the long term with its competitive manufacturing strength and market access through FTAs with a large number of countries. With a population of 114 million and GDP of over 1.3 trillion dollars Mexico is the second largest market and the largest trading nation in Latin America with exports of 398 billion dollars and imports of 400 billion in 2014.
India's exports to Mexico have made an impressive 30% increase, reaching 3727 million dollars in 2014 from 2720 million in 2013. Mexico is a regular source of crude oil imports of India. The imports in 2014 were 2291 million dollars. Over 30 Indian companies have invested in Mexico and eight Mexican companies have invested in India. The Indian IT firms use Mexico as the base for near-shore operations to service their North American clients. 
India's exports to Mexico are disadvantaged by tariffs vis-a-vis the products coming from Mexico's FTA partners which enter duty-free. The government of India needs to push for FTA negotiations with Mexico. 

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