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Is Mexico the new China?

Skyrocketing fuel costs may lure manufacturing firms back to Mexico.

(Page 2 of 2)



While many analysts are talking about reverse globalization, most companies are still at the early stages of rethinking their logistics networks, says Antonio Boccalandro, vice president for Latin America for i2, a supply chain management solutions company in Dallas, in part because of transportation costs and limited capacity at US ports. Still, two years ago, he says, no one was even interested in such scenarios.

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Even in industries like mining – a primary, labor-intensive industry that once looked to China as its solution – US manufacturers are giving Mexico another chance.

"It was a whisper in the end of 2007," says Lisa Reisman, a metals specialist and managing director at Chicago-based Aptium Global.

Her clients, she says, have warmed up to Mexico as their cost savings in China dropped from a high of 35 percent to about half that. "When they hit that 15 percent range, they started scratching their heads and said, 'in Mexico, there's a shorter supply chain, I have less inventory in my chain, we're on the same time zone, and I can get 20 percent savings.' "

It's not all about high oil prices, either. China's export taxes have risen, and its workers are demanding higher wages, trends aggravated by the rapid appreciation of the Chinese currency against the US dollar. While the Mexican peso has also strengthened against the dollar, the change has been much less dramatic.

"There is increasing cost of labor in China. China still handles the textiles and apparel, but a lot of people on the margin are looking at the exchange rate moving slowly but unfavorably. The quality of labor in China is probably increasingly suspect as well," says Bill Gilmer, vice president in charge of the El Paso Branch of the Federal Reserve Bank of Dallas. "This is all positive for Mexico."

Those companies that remained in Mexico during the flight to China – particularly those in the automobile industry – have since developed more advanced processes and techniques. In recent years, the country has experienced strong growth in high-value-added industries, such as pharmaceuticals, custom-order electronics, and biotechnology.

To be sure, Mexico must confront a number of challenges.

The high costs of raw materials and grid energy continue to weigh on foreign producers. Labor is still more expensive than in Asia, and inflation has ticked up. And Mexico must compete with China's army of technicians and engineers.

"China's strength is not only in its huge numbers," says Greg Cudahy, global managing partner of supply chain strategy at Accenture. "It's also that its educational push has been focused on the kind of skills that build manufacturing capability. Education is really going to have to continue to be pushed by the Mexican government and by the corporations that invest in Mexican manufacturing. That's needed for sustainability."

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