Mexico’s competitive manufacturing costs are attracting significant investments by multinationals large and small, including $1.27 billion in investments by Japanese automaker Honda in the past two years.
In 2011, Honda announced plans to move the production of the Honda Fit for the Mexican, US and Canadian markets from Japan to Mexico. Construction of an $800 million production plant started in March 2012, and soon construction will begin on a $470 million expansion where Honda plans to produce transmissions.
The two plants in Celaya, a city about 2 ½ hours northwest of Mexico City, are projected to house up to 4,700 jobs.
Relatively low labour and energy costs are increasingly giving Mexico an edge even over China, the low-cost manufacturer of choice in the past decade, research by the Boston Consulting Group suggests. In 2012, average Mexican manufacturing costs adjusted for productivity dropped below China’s. By 2015, they will be 6% below China’s and 20% to 30% lower than in Japan, Germany, Italy and Belgium, BCG projected.
“Mexico is in a strong position to be a significant winner from shifts in the global economy,” Harold L. Sirkin, a BCG senior partner, said in a press release. “That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It’s also good news for America, since products made in Mexico contain four times as many US-made parts, on average, as those made in China.”
By 2015 Mexico’s average manufacturing labour costs are projected to be 19% lower than in China, where wages are rising quickly. Average electricity costs are already about 4% lower than in China, and the average industrial natural gas price is 63% lower than in China.
Mexico’s cost advantages are becoming so attractive, companies are willing to deal with concerns about crime and a lack of skilled workers in the country, according to BCG.
“Companies investing in Mexico must balance the economics with the potential downsides,” Sirkin said in the press release.
“When the economics are compelling,” Michael Zinser, a BCG partner who leads the firm’s manufacturing work in North America, added, “companies will invest in additional security and training to address these issues.”
Related CGMA Magazine content:
“Why the US Manufacturing Rebound Could Turn Into a Revival”: Domestic manufacturing has gone through a rebound in the past four years, but structural changes that go way beyond rising labour costs in China may be able to sustain a revival of US manufacturing, a PwC analysis suggests.
“Pay Raises Rampant in Emerging Markets”: Projected raises for workers in emerging economies far outpace those of workers in developed areas such as Western Europe and North America. A study by Hay Group shows that pay in some emerging markets is expected to increase 10% in 2013.
“Economists: China’s Economy Needs an Overhaul”: China’s economy seems to have avoided a “hard landing”, but the slowing of the economic boom reveals problems that China must battle to build a modern, high-income society.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.