With rising costs of Chinese businesses and with support from northern neighbors, U.S., Mexico is experiencing a second spring, in the manufacturing sector.
11th June 2013
Mexico and Peru’s popularity among foreign investors will see them as emerging economies and a favorite among investors looking to push cash into Latin America. Brazil, which was once considered as the preferred investment destination for foreign investments has been overshadowed by Mexico and Peru. Mr. Clinton Carter, director of research at Frontier Strategy Group said “A lot of funds are looking into Latin America as sort of a portfolio of opportunities. Brazil has become less attractive compared to Mexico”. International Finance Magazine gives an exclusive report on the developments in its manufacturing sector, progressive policies of the government, benefits of being a close neighbor to America and the challenges ahead for the Latin American country.
“The mood in Mexico is clearly constructive. A lot of faith is being put in the ongoing reform process under President Pena Nieto, including deregulation of industries” said Jens Nordvig, global head of currency strategy at Nomura Securities. The President has been instrumental in the economic recovery of Mexico. The government has already approved labor and education reforms and the eagerly awaited telecommunication bill has got its endorsement in March to bring competition into a highly concentrated industry. Key reforms in the energy and finance are also expected by the end of the year. The Mexican economy is expected to grow by 4.5 percent this year. The changes in the energy sector will be a great boost for the economy. The energy sector would likely to hold its share but allow private participants in the costly and risky exploration of off shore and shale gas reserves. Although, some of the investors still believe Brazil is the most preferred destination, the higher profit margins that Mexican companies would offer are driving the investors to invest in Mexico. Brazil, which is the largest economy in Latin America has been confounded by numerous problems which include high inflation and investors are worried about the nation’s low growth prospects.
Mexico, which has a population of 110 million, is (in) famous for its drug cartels, crime syndicates, ineffective laws and a corrupt government. However, it’s a different story now; the Mexicans have decided that their drug related violence is a condition to be lived with and not something to define them for any longer. The Latin American country has signed 44 trade agreements this year, more than any country in the world. As per information from The Financial Times, it is twice as China as and four times more than Brazil. There has been an enormous increase in the technical personnel, engineers in particular and skilled laborers graduating from its schools. It has also been immensely blessed with natural gas finds, and rising wage and transportation costs in China. It has taken the manufacturing market away from Asia, and has attracted global investments in autos, aerospace and household goods. Mexico, exports more manufactured products than rest of Latin America put together. Chrysler, the car manufacturer, is using Mexico as a base to supply some of its Fiat 500s to the Chinese market. Tech startups companies have multiplied using the young work force and due to cheap, open source innovation tools such as cloud computing. America is also closely watching the progress of Mexico, better integration of Mexico’s manufacturing and innovation prowess into America’s would be a win-win situation for both the countries. It would enhance the competitiveness and profitability of the industries and aid for their expansion at home and other territories. An analyst pointed out we do $ 1.5 billion of trade with Mexico and been spending $ 300 million a day in Afghanistan. The rise was not spectacular though, it suffered from severe recession due to the global financial crisis and started its recovery from 2010 and since 2011 it has experienced a 3.9% growth in its GDP.
The main reason for the economic recovery is Mexico’s manufacturing industry. As per, the latest data obtained from U.S. Bureau of Labor Statistics, as on 2012, Mexico represented 12.75 percent of U.S. manufacturing imports while Chinese imports declined by 6 %. Mexico is now the first exporter of flat screen LCD’s and double door refrigerators in the world. In the U.S. market, the “Made in Mexico” labels are increasing and are surpassing the well known “Made in China” brands. The United States is now seeing Mexico as a ‘partner’ instead of a ‘problem’. The NAFTA has played an important part in the recovery of Mexico. The trade security provided by NAFTA and a strong fiscal management system which includes an independent central bank whose primary job is to curb inflation and a finance ministry to balance the budget. International capital flows into the country have outnumbered those to Brazil over the past year. Almost 57 percent of the country’s fixed rates, peso denominated domestic bonds are in the hands of foreign investors compared to less than 30 percent two years ago. Fitch, the global rating agency, has upgraded Mexico’s foreign currency debt to BBB+.
However, there has been a slow down in the economy beginning January 2013, mainly due to poor performance of U.S. industries on which Mexico is heavily reliant. America still accounts for more than 80% of all Mexican exports. Things are however recovering with surge in car production which has seen an increase of 14.75 percent as on April 2013. To bolster its prospects in car manufacturing sector, Audi has started to work on its $ 1.3 billion Mexico plant, which has a capacity to produce 150,000 cars a year. Volkswagen, which owns Audi, is already using Mexico to produce all its Beetles for the world market. Other factors which have brought down the growth in 2013 include the Easter holidays affecting production schedules.
‘Advantage’ America
During a period where America is trying to build itself from a stagnant economy, and when its trading partners around the world have reduced their imports significantly, Mexico has continued to stay with the U.S. According to the office of the U.S. Trade Representative in Mexico, in 2011-12 American exports to Mexico added up to 13.4 % of the total U.S. exports in that year.
Eminent columnist from The New York Times, Thomas Friedman has predicted that Mexico will become a more dominant economic power in the 21st Century than China.