Dean Barber

The China of the West: Why Mexico is in the Driver’s Seat

In Manufacturing, Places on October 27, 2013 at 7:04 am

As a consultant, my business is solving other people’s problems, so when the call comes in, I listen.

Sometimes I immediately know if I can help. Sometimes I immediately know that I can’t. And sometimes I have to ponder on it for awhile.

So I got this call this past week from a company that wants to expand into Mexico. For reasons of confidentiality, a sacred oath in corporate site selection, I cannot say more.

But as some of my past blogs have indicated, I have a great interest in Mexico, and not only because I live in neighboring Texas, where I am exposed (and attracted to) a strong Hispanic culture. Here I frequent Tex-Mex restaurants, where I will invariably practice my rudimentary Spanish, usually to the embarrassment of my wife.

(There was a time when I could ask for a beer and the restroom in seven different languages. I think I’m now down to four.)

Winning as a Habit

But aside from my miserable attempts at speaking pigeon Spanish, I continue to find Mexico an intriguing place for corporate investment. The reason is quite simple — it continues to win. And that becomes habit forming.

Coincidentally this past week, I added a tagline to my email signature, which reinforces that point. It comes from Aristotle, a pretty smart fellow even if he did prescribe goat urine as a cure for baldness.

“We are what we repeatedly do. Excellence, therefore, is not an act – but a habit.”

Bear Bryant summed it up similarly: “When you get in the end zone, act like you’ve been there before.”

Well, Mexico has been getting into the end zone a lot lately, and, and could very well be among the world’s 10 biggest economies by the end of this decade as its manufacturing sector is competing very well against the likes of China, India and Brazil. Heck, it’s competing very well against the automotive industry in the southeastern U.S., which should raise some concerns there.

Billions in the Pipeline

Earlier this month, Chrysler CEO Sergio Marchionne said his company will invest $1.249 billion in two Saltillo facilities creating 1,570 jobs.  About $1.085 billion will go toward the construction of a new assembly plant to produce the Ram ProMaster commercial vehicle. An additional $164 million will be invested in a new production line to assemble Tigershark engines at an existing engine plant.

Nissan, which built 683, 520 cars in Mexico last year making it the largest vehicle manufacturer in the country, will open its third plant next month, the $2-billion Aguascalientes No.2. The new factory will turn out an additional 250,000 vehicles.

The No. 2 automaker in the country, General Motors, said in June it would invest $691 million to expand its Mexican operations. The plans include a new factory in Silao in central Mexico to build 8-speed transmissions and an upgrade to an existing factory in San Luis Potosi that will make next-generation transmissions.

Watch for BMW, Hyundai, Toyota and Mercedes-Benz to announce at least $2 billion of deals in the next year or two, in addition to $6 billion in announced plants by Nissan, Honda, Mazda and Volkswagen.

The China of the West

Joseph Langley, a senior analyst with the Michigan-based research firm IHS Automotive, told Reuters that Mexico is fast becoming “the China of the West.” By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.

Last year, Mexico attracted $3.7 billion in announced automotive investments, matching the U.S. total, according to the Center for Automotive Research in Ann Arbor, Michigan.

Since 2000, overall auto industry employment in North America has fallen from 2 million to 1.5 million — partly because of robotics and automation. The march of technology, creating greater productivity, is an overriding reason why our manufacturing sector in the U.S. will not grow by millions of jobs, despite what some so-called experts continue to say. Don’t get me started on that.

But Mexico has actually been adding automotive jobs. And now about 40 percent of all auto industry jobs on the continent are in this nation of 115 million, the second largest economy in Latin America.

Being on the doorstep of the U.S., where most of the product will go, certainly provides for a key advantage, as does lower wages, a strong supply base and a global web of free-trade agreements that actually surpass that of the U.S.

Free Trade Agreements Helped

Indeed, it was Mexico’s free trade agreements that were central to Audi choosing it over certain Southeastern states for a new $1.3 billion assembly plant that will produce 150,000 Q5 sport-utility vehicles a year starting in 2016.

Mexico has 12 free trade agreements with 44 countries, while U.S. has 14 trade deals covering only 20 countries. For the European Union, it means a 10 percent tariff on U.S.-built vehicles, which would cost Audi more than $3,000 per Q5. Europe does not apply a tariff on Mexico-built vehicles.

Audi’s choice of Mexico should have been a wakeup call. Suddenly, the South’s dominant position in offering the auto industry lower wages, less of a tax bite and a more favorable (less-active) union environment, is no longer the slam dunk it once was.

Mexico has proved itself to be an attractive alternative in North America. And at around $2.50 an hour, manufacturing wages in Mexico are about 20 percent cheaper than in China, according to a Bank of America study.

Rumors of More

So it is no surprise of reports, you can rightly call them rumors at this point, that BMW, which operates an assembly plant in upstate South Carolina, and Hyundai, which produces vehicles in Alabama, are snooping around Mexico looking for their next assembly plant. I believe the same could be true for Toyota. (Of course, if these companies were really smart, they would hire Barber Business Advisors to help them find that most optimal location in Mexico.)

Just two days before Audi held its groundbreaking ceremony on May 4 at San Jose Chiapa, Honda announced that it would build a $470 million transmission plant in the central state of Guanajuato, near an $800 million assembly plant that is expected to begin production this coming February.

This automotive building spree in Mexico is not by accident. Things happen for a reason. Mexico is the low-cost place for manufacturing, and because of its close proximity to the U.S., the cost of shipping product will always be far far less than what China, or India or Brazil could ever offer.

Mexico is back in the game. It has long-standing governance problems to be sure. The drug cartel violence is not something to be ignored, but foreign-based manufacturers believe it to be an issued that can handled and mitigated, no doubt with some additional security costs involved.

But Mexico has proved to be a worthy bet. And you are going to see more growth as result.

Have Laptop, Will Travel

It should come as no surprise that I travel on behalf of business clients — be that a company in regard to a site search project or an economic development organization that needs my help. In other words, somebody is paying the freight for what is by definition business travel.

So I find it somewhat odd when I am invited by economic developers to come visit their respective communities but with no representation or afterthought of compensation.

At such times, there is often a certain awkwardness that I feel in suggesting that compensation would be involved. But the truth is that this consulting business of mine really is a business. And lending time and expertise is the basis for that business. You would think that would be obvious, but apparently it is not.

So unless I am on vacation, to which you would never see me, business dictates my travel. That’s just the way it is, the way it has to be if this enterprise is to remain a viable concern.

So if a company is not paying me to be at a particular place at a particular time in regard to a site search, then the only other scenario is that a community has contracted for my services. It maybe something of a more in-depth nature — a SWOT analysis or site certification – or it could be something more short term, such as giving a speech/presentation to stakeholders.

Providing that Outside Voice

It has been my experience that economic developers often do need an outside voice to say what they have essentially been saying, but to which has been largely ignored. There is a strange psychology at work here, a variation of familiarity breeds contempt. Even Jesus referenced the difficulty of being viewed as a prophet from one’s own village.

So I will come to a community armed with a briefcase and laptop and give talks/presentations on how the site selection process works and how communities can go about to better compete for corporate investment. Through it all, there is a single strand to my message – You got to invest in yourself if you are to expect someone else to invest in you.

I will be going to Joplin, Mo., this coming week to tour the region and pass along that message (and more) on behalf of the local economic development organization there. I will tell my audiences (I’ll be speaking to three different stakeholders groups in three different communities) the truth — that the recruitment of industry is always a tough nut to crack, but especially so in this new digital machine age that requires fewer but higher-skilled people.  Business retention and expansion is usually the best bet for job growth in most communities.

So let us hope that my message takes in the Show Me State. No doubt, many of my audience members will be astute business people and will get it. If for some unforeseen reason, however, my presentations are met with glassy-eyed stares, perplexed looks or outright rebellion, then I will probably not report that you. It hasn’t happened yet, but there is always a first time.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

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