C&B Notes

Mexican Tailwinds

Mexico has shown a tendency to get in its own way in the past, but its tailwinds for economic growth are strong:  a collapsing wage gap versus the East, falling energy prices, good demographics, proximity to the U.S. which keeps transportation costs down and promotes manufacturing flexibility, progressive national leadership that is reforming labor laws, etc.  Multinationals are making significant investments in the country, particularly in “sticky” manufacturing plants.

AlixPartners, a consultancy, said last year that the joint effect of pay, logistics and currency fluctuations had made Mexico the world’s cheapest place to manufacture goods destined for the United States, undercutting China as well as countries such as India and Vietnam.

Companies have noticed.  “When you wipe away the PR and look at the real numbers, Mexico is startlingly good,” says Louise Goeser, the regional head of Siemens, a German multinational.  Siemens employs 6,000 people at 13 factories and three research centers around Mexico.  From its recently enlarged facility in Querétaro, in central Mexico, surge-arrestors and transformers trundle up to warehouses in the central United States in two days.  Ms. Goeser says that Mexican workers are well qualified as well as cheap: more engineers graduate in Mexico each year than in Germany, she points out.

In Aguascalientes, not far away, Nissan is building a $2 billion factory.  Together with an existing facility it will turn out a car nearly every 30 seconds.   About 80% of the parts in each car are made in Mexico.  By using local suppliers, the company is “armored” against currency fluctuations, says José Luis Valls, head of Nissan Mexico.  “If you are localized, you can navigate through floods and storms.  If you depend on imports of components, you are very fragile.”  In nearby Guanajuato Mazda and Honda are building factories; Audi is constructing a $1.3 billion plant in Puebla.  This year Mexico will turn out roughly 3m vehicles, making it the world’s fourth-biggest auto exporter.  When the new factories are up and running, capacity will be 4m.