The Half-Truth of Mexico’s Misfortune
In the eyes of many casual observers and quite a few experts, China’s economic rise has come at the expense of Mexico. An article in the trade journal International Economy once spelled out, “How China is Eating Mexico’s Lunch.” And a few years ago an article in The New York Times noted, “China competes with Mexico and buys from Brazil.”
As it happened, China’s 2001 entry into the World Trade Organization marked the onset of a decade-long slowdown in Mexico, where economic growth averaged 1.8 percent annually. Foreign investment rushed to set up factories in China for one big reason—cheap wages. From 1995-2005, hourly wages in China were among the lowest in the world. For most of this time, a few other factors augured well for China’s export-led growth model, including low fuel prices, which allowed for profitable trans-Pacific shipment of goods.
However, the reality has always been more nuanced. In some industries, such as clothing assembly, China’s low-cost advantage did indeed come at Mexico’s expense. What Ross Perot dubbed “the giant sucking sound” of manufacturing jobs leaving the U.S. for Mexico never materialized, in part because the assembly work that might have gone to Mexico instead went to China. The maquiladora system was quickly overwhelmed by Chinese capitalism, with its pennies per hour wages made all the more appealing by generous government incentives to factory owners.
Across other industries though, the impact of China on Mexico has been more limited than widely supposed. China certainly hasn’t dented Mexico’s growing dominance in agriculture. And overall, the two countries specialize in producing different classes of goods: China’s manufacturing prowess owes to the ability to churn out millions of cheap baubles; Mexico’s comparative advantage was the design and manufacture of household “durables” like dishwashers, and advanced manufactures like aircraft cockpits.
Coming to Terms With A New Era
Now, as it becomes more and more clear that the global economy is shifting gears away from the commodity-driven boom and the rise of the era of the BRIC, the weights are tipping in Mexico’s favor. China has absorbed most of its vast labor pool, driving up wages. Wages across China has doubled in the last four years, putting them on par or above (depending on how you calculate it) the cost of labor in Mexico. And while transportation costs currently be low, the larger lesson of the past 15 years for many companies looking to outsource is that fuel costs are volatile; many have concluded that its best to have production as close as possible to the consumer. China’s 21-day freight time to the U.S. West Coast is major inconvenience compared to the 1-2 day transit from Mexico to the US. On these grounds alone, Mexico appears to have a bright future. Jim O’Neill, the economist who coined the ‘BRIC’, told the BBC last year, “Mexico has a unique opportunity to steal the thunder of no less a giant than China.”
These calculations dovetail with some sober reassessments by many multinationals about how China should fit into their corporate strategy. One of China’s big draws, access to a rapidly growing middle class, has proven less of a godsend than many U.S. and European firms first thought. True, some companies have done quite well; GM sells more Buicks in China than in the U.S. But tech heavyweights like Microsoft have generated scant money from selling in China, largely because the rampant pirating of Windows throughout the country.
Truth is, Mexico offers a more secure intellectual property environment than does China. Othón Ruiz, Nuevo León’s development minister, told The Economist that high tech businesses trust their operations in Mexico more than in China. Such anecdotes are made more credible given the number of business books published for managers looking to move production to China: many of the guides caution to “add elbows” or links to supply chains in order to avoid concentrating proprietary knowledge at one factory, where it can be easily pilfered.
Mexico, A Skilled And Trusted Partner
Perhaps the most underreported difference when it comes to manufacturing in China versus Mexico is the design and testing of products. Mexico is becoming a one-stop shop for large industrial firms like Honeywell and GE that are looking to not just assemble components, but also innovate on-site. Much of Mexico’s success in climbing the quality latter from assembly to advanced manufacturing and, more recently, design, owes to the country’s long-known strength in engineering. Per capita Mexico has three times as many (.pdf) engineering graduates as the United States. To Fortune 500 managers, this is no longer much of a secret. After all, engineers at Ford’s Mexico unit filed for more than 40 patents from 2010-2013.
What’s new here is Mexico’s budding potential in software design. In recent years dozens of Mexican IT development firms have sprouted up; they specialize in helping small and medium-sized companies in Arizona, Texas and California. On a larger scale, Guadalajara’s Software Center is fast becoming a true IT ecosystem that hosts more than 30 companies and draws engineers from Europe, India and elsewhere in Asia.
The trend toward “design in Mexico” is gaining ground just as many metrics and a good deal of anecdotal data suggests that proprietary enterprise is quite difficult for Western firms operating in China. According to the Business Software Alliance, nearly three-quarters of software in China is pirated. And now the U.S. and China are in a tiff over Chinese legislation that requires U.S. tech manufacturers to install backdoors into their software, and share the keys to those backdoors with Beijing. For cyber security activists and a good many U.S. multinationals alike, its just one more indication that China may be plotting to not only monitor its own netizens, but also that China looks to rip off software technology and other cutting-edge technological developments. Similar concerns are not credibly aired about Mexico.
Rising wages in China and the government’s demands on foreign investment are requiring U.S. firms to make more and more uncomfortable trade offs. This growing mistrust of government meddling in the world’s second-largest economy may be beginning to bolster tech design and manufacturing investment in Mexico. Even if the causality remains a matter of speculation, the overall trend is clear: Mexico is a trusted and capable partner when it comes to the manufacture of sophisticated software and IT wares.