Morningstar: Why Mexico’s Interior Offers Solutions Not Found in China’s Interior

Commentary by John Paul McDaris

The contention that Mexico is a sustainably viable alternative to China manufacturing is not a new one. Outlets from the New York Times to Boston Consulting Group have been focusing on this for a while, emphasizing that workers in Mexico are more productive than their Chinese counterparts, shipping costs and duration to North American markets are less, and that the currency and political outlook is more stable.

Yet when I see Morningstar’s latest report “Made in Mexico: An Increasingly Viable Alternative to Chinese Outsourcing,” examining the situation from a higher macro-economic level, I am even more confident that Mexico’s preeminence as a low-cost manufacturing location is not just a passing fad.

Here are some of the facts and data Morningstar cite in their report:

  • This April, China had its bond rating lowered on Moody’s, while Fitch Ratings downgraded China’s long-term local currency credit rating. Both agencies remarked on the risks associated with excessive local government borrowing.
  • “Mexico has emerged as a viable, appealing alternative to China for US companies looking to expand or relocate their manufacturing facilities.” (Note: I would just add here – it isn’t only US companies that benefit from manufacturing in Mexico. European- and even Asian-based OEMs and suppliers are benefitting from Mexico’s low-cost labor, low- or free-tariff duty and proximity to the world’s biggest market).
  • Mexico moved up to number 48, from number 53 the previous year, in the World Bank’s 2013 Ease of Doing Business Index. In the analysis, which measures business regulation environments across 185 economies, China held steady at number 91.

Geography Also Key

But where Morningstar’s report really gets interesting is when they focus on specific regions in China and Mexico, respectively, that are changing the whole game for competitive manufacturing locations. According to Morningstar, in China, most manufacturers are located along the coast, which facilitates transport but also carries higher costs for both real estate and labor. A move to the interior does not bring appreciable cost savings with it, because wages inland are not much lower and transportation infrastructure is inadequate; it can cost more to ship goods from China’s interior to its coast than it costs to ship from Shanghai to New York.

By contrast, the hottest destination in Mexico manufacturing is the interior. As costs at the border rose, foreign manufacturers eagerly transitioned to central Mexico. There they are realizing lower labor costs, reliable infrastructure and excellent transportation that still keeps them within a day’s drive to the US border. According to Reuters, over the past three years, manufacturing jobs in the central states of Guanajuato, Aguascalientes, Queretaro and San Luis Potosi have climbed 30%, largely due to growing auto and aerospace businesses.

These Mexican states have done their part by committing to education and training in the area, delivering new universities and technical institutes to ensure a steady supply of engineers and skilled technicians in the area.

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