Over the past decade, China has established itself as a global manufacturing powerhouse, overtaking even the United States in 2011 as the world’s largest manufacturer. “Cheap Chinese labor” became the rallying cry of the global economy, as China’s low labor costs allowed the country to transform itself into the workshop of the world. If you were a U.S. manufacturer, you “had to be in China.”
Among the countries hardest hit by China’s rise — and ascension to the World Trade Organization (WTO) in 2001 — was the manufacturing industry in Mexico. Although a member of the North American Free Trade Agreement (NAFTA), Mexico was unable to match China’s low manufacturing costs as Mexico’s maquila industry shed thousands of jobs as companies picked up and left for the Far East to reduce costs even further.
But today, more and more, U.S. and global companies are choosing Mexico over China. In the past few years, global corporations, such as Volkswagen, GM, Goodrich, Bombardier and Bose have set up manufacturing facilities in Mexico. Italy’s Fiat recently invested $550 million in the Fiat 500 production line in Mexico. On a per capita basis, Mexico’s roughly $20 billion of foreign direct investment (FDI) a year already puts it ahead of its Asian rival.
This is why I’ve dubbed Mexico the “China Next Door.”
The Mexico vs. China Manufacturing Smack-down
The impetus behind the emerging shift toward Mexico is that Chinese labor isn’t as cheap as it used to be. Chinese wages have been skyrocketing — increasing 22% in 2011 alone. While Mexican wages were 237% higher than Chinese wages in 2002, today that cost advantage has shrunk to 15%. The average wage of a manufacturing employee in China is between $1.65 and $1.85 per hour. Mexico has remained stable, averaging between $1.85 and $2.25 per hour. Given the rate of wage inflation in China, 2012 may be the first year that Chinese workers will earn more than their Mexican counterparts.
With Chinese wages now matching wages in Mexico, a whole host of Mexico’s other advantages has made it a more attractive place to do business.
Geography
Sharing the same time zone and a border with the United States, Mexico’s location is ideal for U.S. companies. The average transit time from the moment a shipment departs China to the time it arrives in the United States is 30 days. From Mexico, delivery times range anywhere from a few hours to a few days. Mexico’s proximity, and the ease of land border crossing, also means that Mexico’s shipping costs are much lower.
Managing facilities in China 7,000-10,000 miles away can lead to costly personnel, communication and quality issues. Also, in Mexico, key employees can live in the United States and work in Mexico by commuting every day.
Quality and Experience in Manufacturing
And as recently as 10 years ago, most of the factories lining the U.S.-Mexican border were “sewing blue jeans and crafting Converse sneakers.”
Today, the Mexican manufacturing industry looks very different. In 2012, Mexican companies design, develop and manufacture some of the most complex products in the aerospace, automotive, medical and electronics sector. From pacemakers to airplanes, Mexico boasts companies that provide technical skills and capabilities to compete not only in North America, but also on the world stage, as well.
Currency
Unlike China, Mexico allows its currency to “float” in world currency markets. This has made the Mexican peso much cheaper. Since 2007, the peso has fallen from 10 pesos per dollar to the current 14 pesos per dollar. In contrast, the Chinese Yuan has risen more than 30% against the U.S. dollar over the same period.
Put another way, Americans currently pay at least 30% more for Chinese products and 40% less for Mexican products, compared to 2007.
Legal Framework
Since joining NAFTA in 1994, Mexico’s trade with the United States is duty free. In contrast, duties and tariffs imposed on Chinese products imported to the United States on both finished goods and raw materials hike costs above comparable Mexican products. Mexico also has international trade agreements with 44 different countries. That means companies can open manufacturing plants and source materials from a wide range of countries and avoid hefty duties.
The enforcement of intellectual property rights in China is a serious problem. Mexico also has relatively strict environmental laws, reasonable health and safety monitoring and inspections, as well as strong child labor laws. Just recall the flack that both Nike (NIK) and Apple (AAPL) caught in the past few years for running “sweatshops” in China. Such accusations — and the risks to company reputations — simply would not occur in Mexico.
Culture
Mexico has an advantage over China in culture and language. Along the U.S. border, the workforce is not only bilingual but bicultural, as well. Most university-educated people in Mexico speak English. Meanwhile, Spanish is the most common foreign language taught in U.S. schools. Mexican and U.S. cultures are both western and share more similarities than North American and Asian cultures do.
Mexico: The “Next China”… Or Brazil?
Even while the global economy slows, Mexico has been doing just fine, thank you. Mexico’s GDP economic growth could hit 5% in 2012. Mexican car exports to the United States have now exceeded those from Japan, Korea and Germany. Nomura, an investment bank, has predicted that Mexico will hit an annual growth rate of between 3.5% and 4.5%, and that “Mexico [will] surpass Brazil to become the region’s largest economy within the next 10 years.
Getting in early on a major shift like the one happening in Mexico can generate some huge gains. My recent recommendation related to Mexico in The Alpha Investor Letter is already up 25.54% this year, strongly outperforming the MSCI Emerging Markets Index.
The good news is that the “China Next Door” investment theme has just started.
And there will be plenty of opportunities for you to make your fortune in Mexico over the years to come.
