Mexico Stands Out in KPMG Competitiveness Study
Commentary by Doug Donahue
KPMG’s biennial study on international business locations examines the relative costs of doing business worldwide. Mexico is not only the lowest-cost country included in the study, it’s also the sole emerging market KPMG included. The rest of the countries included are nine of the usual mature market suspects: US and Canada and leading economies in the EU and Asia Pacific.
Here are the key findings with respect to Mexico:
- Mexico has an 18.7% percent cost advantage over the United States, similar to in 2010.
- Mexico is the lowest-cost nation across all categories analyzed, but its greatest cost advantage relative to the US baseline is in the corporate services subsector, with costs 46% lower than in the United States.
- Total labor costs are lowest in Mexico by a wide margin.
- Mexico has among the lowest costs for: factory lease costs, utility costs, property-based taxes.
First off, it’s important to remember this is not just a manufacturing study. This KPMG analysis is pan-industry. That said, Entrada’s experience has been that Mexico’s cost advantage in manufacturing compared to the US is more than 19%, and actually closer to 40%, depending on elements like freight and labor. Of course, labor costs vary tremendously across the regions of Mexico. We typically use $1.50 per hour for fully fringed basic operators as a baseline cost at our industrial park facility in Fresnillo, Zacatecas.
Efficiencies and cost-competitive labor have made a great combination for Entrada Group for over a dozen years in Zacatecas. In fact, we invested heavily in our headquarters service center there due to our faith in that combination. It led us to expand our service offering to the point of now being able to offer general and administrative support services to foreign manufacturers all over Mexico.
While KPMG’s study is correct that Mexico has the lowest labor rates among the ten countries examined by a wide margin (compared to the US baseline) it’s also essential to remember that labor costs in Mexico are also rising, again relative to the US baseline. At the same time, Mexican labor costs are still far, far lower than the prevailing wage in developed markets and will stay that way for the foreseeable future. But make no mistake about it, they are on the rise, just as everywhere else.
One area where our experience at Entrada varies from the results in the KPMG study is with respect to factory lease costs and utility costs, as we have not found them to be lower than parallel costs in the US. In fact, our experience has shown those costs to be double what they are in the US. Utility costs are higher due to Mexico’s relatively high utility tax rate. Mexico’s utility costs may be less than other countries (including China), but at $.16/kw hour they are roughly double the going fare in the US.
Factory lease costs are greater because there is a shortage of land in Mexico that has not yet been industrialized. This results in new buildings costing as much or more than their US counterparts.