The Mexican economy can be baffling to Americans. News headlines of horrifying gang violence tend to overshadow the booming manufacturing sector and burgeoning middle class. And comparisons to other emerging economies often generalize as much as they illuminate: Mexico is the new China for manufacturing, the new Brazil of Latin American power and the new India of domestic consumption.
Instead, shippers and transportation providers looking to understand and tap Mexican growth should look at how much the country has changed during the past 20 years. After seeing production of cheaper goods shift to Asia, Mexico lessened its dependence on commodity exports, namely oil and cement, and climbed the manufacturing value chain by attracting major automakers.
Even apparel production that was lost to Asia after the turn of the century is returning, as U.S. export factories, known as maquiladoras, enjoy skilled labor and proximity to the United States. As Brazil realizes the error of relying on commodity exports and India stumbles in producing goods for the global market, Mexico is best placed to tap the near-sourcing trend.
“We have seen a lot of business lost to China come back,” said Jordan Dewart, vice president for Mexico and Laredo, Texas, at Yusen Logistics (Americas). Mexican “manufacturing took a big hit in 2002 and started coming back in 2009-2010.”
Shippers can cut costs by transporting products from Mexico instead of betting on demand months in advance, as required through ocean shipping from Asia. Cheap natural gas via the U.S. energy boom also helps Mexican plants stay competitive with their Asian rivals. Rising Chinese labor costs and robust Mexican infrastructure investment — ranging from improved freight rail networks to highways — have further increased near-sourcing’s appeal for shippers.
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“Everybody ignored or didn’t notice except engineers that (Mexico) during its crime wave was able to complete these infrastructure projects,” said Walter Kemmsies, chief economist at Moffatt & Nichol, an engineering company.
He pointed to the near completion of the Durango-Mazatlan Highway project, a 140-mile toll road aimed at more than halving the transit time from interior Durango to the Port of Mazatlan on the Pacific Coast. The gem of the $1.5 billion project is the Baluarte Bicentennial Bridge, a 1,321-foot cable-stayed structure spanning the Sierra Madre Occidental mountain range.
Mexico has spent some $30 billion on transportation infrastructure in the last five years, with about 20 percent coming from the private sector. Focused spending on high-tech manufacturing education also has helped move the “Made in Mexico” tag from cheap T-shirts to the high-end suit you’ve been eyeing, the Cadillac in your driveway or your teenager’s Fender Stratocaster Electric Guitar.
The automakers led the comeback, with Chrysler, Ford and General Motors spending billions of dollars on high-tech plants. The high Japanese yen (about 78 to the dollar) also has helped spur Honda, Toyota, Nissan and Mazda to shift production to Mexico. More than 1,000 suppliers, including Goodyear and Siemens, and major heavy-truck manufacturers, such as Daimler and Volvo, have followed suit.
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The benefits of near-sourcing to U.S. and other markets in the Americas aren’t limited to automakers, with white goods manufacturers General Electric, Whirlpool, Daewoo, Samsung and others expanding their footprints in Mexico.
Similarily, Mexico has attracted some 250 aerospace companies, many of which have opened factories in Guaymas to serve markets in Arizona and California. Aerospace giants such as Honeywell, Bombardier and Cessna boosted exports to $4.3 billion last year, and the Mexican government expects exports of engines, landing gear and other equipment to approach $12.3 billion by 2020. Mexican pharmaceutical manufacturers now are turning their attention toward exports, after an industry study revealed the sector’s factories are running at only 70 percent capacity, according to The Wall Street Journal.
Mexico’s total exports in 2011 jumped 57.7 percent to $336.3 billion from 2007, while exports to the U.S. expanded 33 percent to $262.9 billion in the same period. Eighty percent of Mexican exports by value in 2011 went to the United States. Paralleling sluggish U.S. economic growth, Mexican export expansion in the second quarter fell to 1.5 percent and is expected to slow further.
Still, the Mexican market appears to be riding out the global slowdown far better than most of its major emerging economic rivals. Mexico’s GDP expanded 0.9 percent in the second quarter from the first, compared with 0.8 percent growth in Brazil and the sixth straight quarter of slowing expansion in China.
“You see a lot of politically charged conversations about (the North American Free Trade Agreement), but NAFTA was a success, and you can see it in the growing industrial sector and the middle class having more money in their pockets,” Dewart said.
Multinationals are noticing the latter. Accounting for inflation, GDP per capita nearly doubled to $13,929 in 2010 from 20 years earlier, according to the International Monetary Fund. Lowe’s, Target, Bed, Bath & Beyond, Best Buy and Abercrombie & Fitch are looking to join Wal-Mart, which has been in Mexico for about 20 years, Dewart said.
Perhaps the truest sign of the rising disposable income of Mexico’s middle class is its members’ willingness to pay more than 25 pesos (roughly $1.90) for a cup of coffee from Starbucks, which entered the market in 2002 and is selling like “gangbusters,” he said.
Financial crises, particularly 1994’s dramatic devaluation of the peso, have pushed Mexicans toward deleveraging long before the global financial crisis struck in 2009, said Isaac Franklin, chief financial officer of Ferromex, one of Mexico’s largest railroads. “The middle class will continue growing and spend more,” he said. “You can (see the rise of the middle class) in the growth of credit cards, housing and appliance purchases.”
Mexico has plenty of problems, though. Customs processes, although improving, are lacking, as reflected by its 62nd-place ranking when it comes to clearing international moves, according to the World Bank’s Logistics Performance Index Survey for 2010. Mexico ranked 50th overall and 44th in terms of infrastructure. Federal bureaucracy hampers businesses, and the recent bribery allegations against Wal-Mart speak to a culture in which “gifts” expedite the permitting process.
The existence of Pemex, the sole oil producer, and America Telecom, a telecommunications monopoly owned by Carlos Slim, the world’s richest man, fuels critics’ complaints that a few larger players enjoy too cozy a relationship with the government.
Much more damning is the bloody war between drug cartels and the federal government, which has resulted in some 50,000 deaths and 10,000 disappearances, according to reports. Measuring the precise harm to economic development is tricky, but the signs are plentiful: Ferromex spends $1 million a month to protect its trains, and bodyguards chaperone Mexican executives from their U.S. homes to their factories.
Attention now focuses on how incoming conservative President Pena Nieto will handle the drug war differently than his predecessor, Felipe Calderon, who drew widespread blame for the spike in violence through his military crackdown on drug czars. Nieto says he wants to take another approach but is coy on details.
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Kansas City Southern Railway, which has a booming intermodal network in Mexico, had a good relationship with Nieto when he was governor of the state of Mexico for six years, said Jose Zozaya, president and executive representative of the carrier’s Mexican subsidiary. The railroad “is confident that he will continue the way he was as governor, promoting foreign investment and supporting private business,” Zozaya said.
That Mexico attracted $19.4 billion in foreign investment in 2011, a 4 percent decrease from the prior year, despite the violence is a testament to the country’s potential.