Mexico Wages Undercut China, Fuel Manufacturing Boom – Investor’s Business Daily

by admin on August 8, 2012

China lost its factory wage advantage over Mexico earlier this year, an ongoing trend that has fueled Mexican economic growth past its neighbors to the north and south.

But whether Mexico can maintain that momentum may depend on how much political will President-elect Enrique Pena Nieto has in pursuing reforms that challenge special interests.

In 2005, China’s productivity-adjusted manufacturing wage advantage over Mexico was $1.22 an hour, but that narrowed to 34 cents in 2010, according to the Boston Consulting Group. They switched places this year, and Mexico’s wage advantage is estimated to widen to $1.75 by 2015.

Fast-rising Chinese labor costs are prompting companies to “reshore” production back to Mexico and the U.S., where transportation and other logistical costs are lower.

“Mexico is going to be a big winner in reshoring,” said Hal Sirkin, managing director at Boston Consulting Group, though not as big as the U.S. will be.

Rio Grande Vs. Rio

U.S. exports have helped Mexico outpace economic growth in Brazil after lagging for years. In 2011, gross domestic product expanded by 3.9% vs. 2.7% in Brazil. In Q1 2012, Mexico grew 4.6% vs. a year earlier against Brazil’s scant 0.8%. That was also significantly faster than the U.S.

Mexico’s economy could top Brazil’s by 2022, helped by manufacturing, Nomura analysts predict. Mexico is benefiting from its reliance on the U.S., where manufacturing has recovered, while Brazil sees less commodity demand from China.

Media coverage of gruesome drug violence hasn’t deterred companies like Alcoa (AA) from expanding plants or Nissan (NSANY) from moving production there.

Mexico is once again reaping the benefits of the 1994 NAFTA pact with the U.S. and Canada. Manufacturing production has leapt to new highs, after a lull in much of the last decade when companies rushed into China. Mexico’s auto production from January to July rose 13% from a year ago to a 1.65 million vehicles, a record for that period.

But several obstacles to Mexico’s continued growth remain.

The amount of production Mexico can absorb from China will be limited by the availability of skilled workers, infrastructure, supplier networks and safety concerns, Sirkin says.

Mexico will still get higher-end production, like transportation equipment and machinery, and stands to capture a substantial amount from China, he said. But about three-fourths of the manufacturing reshored from China will flow to the U.S. in the next decade.

Mexico Still Has Problems

China will still enjoy a more flexible labor market, where workers can more easily be added or cut, notes Peter Morici, a University of Maryland economist.

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