North American competitveness: Mexico rising

imagesCA5X3P70In several previous posts and in my Ted speech I talked about the “renaissance” of the North American manufacturing industry with emphasis on our energy and petrochemical industries. Let me now broaden this to include Mexico, our NAFTA neighbor, which is a growing part of this picture, including also other industries. Our neighbor to the South is starting to seriously challenge China as a trading partner we will depend on more and more.

Mexico is endowed with very abundant hydrocarbon resources, particularly crude oil, both onshore and offshore, though Pemex, its national oil company has, for various reasons, not developed the country’s full potential in producing both oil and gas, and its petrochemical arm has also lagged. Now, as a result of investment by Braskem and Grupo Idesa, Mexico is building a huge new petrochemical complex, based on Mexican ethane priced (by Pemex)  to be competitive with low cost U.S. ethane from shale gas.  Also, Mexico has a very large shale gas reserve that will eventually be tapped for inexpensive natural gas. In petrochemicals, Mexico is and will be far better off economically than China, which will have high feedstock costs and therefore high priced petrochemicals far into the future.

The new cracker is another important step in making Mexico a highly competitive manufacturing location, placed within a huge, rapidly growing market. In many respects, Mexico is starting to challenge China as a formidable trading partner with the U.S( Canada being the largest), having also the great advantage of being a neighbor.

This was also the subject of an interesting article in the New York Times a few days ago entitled: Mexico: The New China. Mexico has, of course, long been part of the supply chain of many U.S. companies. Dell’s supplier Foxconn (also a major supplier to Apple) is in Juarez, General Motors makes transmissions for its Corvettes in Queretaro and some elements of Boeing’s 747 Dreamliner are also made in Mexico. What is particularly interesting, according to the article,  is a cooperative “manufacturing hub” that now exists in the San Diego-Tijuana area. Using the model established long ago between Hong Kong and Shenzen (business, design and finance in Hong Kong; manufacturing in Shenzen), San Diego and Tijuana have become a world-beating manufacturing hub for electronics, with easy movement back and forth (passports, of course, required). The article also points out that Mexico graduates 115,000 engineering students per year and that there is an ample supply of machine specialists, accountants experienced in production economics and other highly skilled workers.

While China still has lower average wage rates than Mexico, the difference is shrinking as Chinese workers demand more compensation. Also, Mexico’s proximity not only means much lower shipping costs for exports to the U.S., but a far more flexible supply chain that allows quick changes when product demand shifts occur.

We still buy more from China than from Mexico. But the situation is starting to change.

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