Boosting Cost Efficiencies in Mexico
Estafeta's distribution center at Millenium Industrial Park in San Luis Potosi State, Mexico. |
Although experts believe there are new evidences of a global recovery by the end of the decade, economic growth is fragile. The World Bank forecast a decline of 2.9 percent by the end of 2009, whereas the World Trade Organization anticipates a merchandise trade contraction of 10 percent in volume terms.
In Mexico, the situation is not that different, as the country is suffering a severe economic setback, with a forecasted contraction of 6.3 percent by the end of 2009. The contraction is due not only to the global crisis but also the adverse effects of the influenza outbreak. The recovery of the Mexican economy will greatly depend on government fiscal and monetary decisions and also on the pace of the U.S. economy. The NAFTA economic convergence between both countries is something Mexico should take advantage of, since geographic proximity for new Foreign Direct Investment (FDI) projects and trade intensity will continue to have a dominant role in the region's economic recuperation. In line with the Scotiabank Group economic analysis, a growing body of macroeconomic and financial data is supporting the view that the U.S. economy is slowly transitioning from recession into the recovery zone.
A New Era of Competitiveness
Once U.S. demand begins improvement, Mexican companies will have to continue proving their ability to tap into new competitive advantages, especially in goods movement. |
Once U.S. demand begins improvement, Mexican companies will have to continue proving their ability to tap into new competitive advantages, especially in goods movement. The economic insecurity is pushing companies to further improve their overall cost structure. In particular, logistics costs are already overwhelming labor cost differences among countries, such as China or India.
According to the AlixPartners 2009 Manufacturing-Outsourcing Cost Index, Mexico moved from third place to first as a result of the favorable exchange rate, relatively low transportation costs and free-trade status. In contrast, China's 20 percent plus cost advantage eroded to about five percent, driven by a wide range of other cost increases. The cost structure analyzed in this ranking considers critical factors impacting the cost-benefit of outsourcing manufacturing from the U.S. to other countries, such as raw materials, labor, overhead, exchange rate, freight, duties and inventory costs.
Revising the Supply Chain
Opportunities exist in Mexico, but not for long. It's a matter of planning and acting beyond the current international trends. Some years ago, trends included the doubling of container imports by 2020; the constraint of most ports to handle the new jumbo container ships, including the Panama Canal; and the limited physical capacity of North American ports to expand their infrastructure. As a result, Asian companies increased the use of the Lazaro Cardenas/Houston corridor as a cost-effective alternative to the Los Angeles/Long Beach ports to access the U.S. market. This trade flow pattern resulted in a boom of warehouse and distributions centers, as well as new inland port projects such as the Guanajuato Inland Port, the Logistik and Interpuerto projects in San Luis Potosi and the Meridian 100 in Nuevo Laredo. Now with the financial crisis and decreased demand in the U.S. market, the expected saturation of maritime ports will be slower. This means that the scope of industrial real estate and infrastructure projects in Mexico, such as Punta Colonet, must be revised. Considering that the Panama Canal expansion program is expected to be ready by 2014, Mexico must respond rapidly to the investors' supply chain throughput expectations.
For 2009, the Mexican government expects a decrease of FDI inward flows of 32 percent, from $21.9 billion in 2008 to about $15 billion. Nevertheless, the country will continue to be attractive for manufacturing and distribution projects looking for a local suppliers' base, import duty-free access and vicinity to the U.S. market. Yet, geographic location and NAFTA access will not be enough in the future.
In this complex scenario, the first step for Mexico is to move ahead on structural reforms to face the competitive challenges of the new investment flows cycle. The political scene, however, will be determined by the renovation of the federal House of Representatives in September, with a majority from the main opposition party, the Institutional Revolutionary Party (PRI). The second step is to increase the manufacturing production and services of sectors with high added value.
Cost efficiency is one of the most important decision factors, but the most valuable one is the certainty. The availability of the right infrastructure and the right skilled labor force, plus an easy logistics environment combined with transparency, represent the ideal scenario for investors to get the right numbers for competitiveness. This is the new recipe for Mexico and there is no time to wait.
By Claudia Avila Connelly, executive director of the Mexican Association of Industrial Parks, AMPIP.
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