Mexico: The New China?

Especially as the trend of regionalization in supply chains grows, companies need to increasingly look at their long-term supply chain strategy.[1] A long-term supply chain strategy may well find itself as more regional. Companies whose prime consumers are in the United States, therefore, should take a very hard look at the benefits of Mexico.

One of the biggest benefits of Mexico is inherent in its proximity to the United States- reducing transport and emissions costs- as well as its NAFTA membership. Free Trade Zones in general allow for reduced tariff costs as well as reduced barriers to entry.

Source: The Economist.[2]

As seen above, however, there is still room for Canada and Mexico to increase its share in U.S. trade. In addition, Mexico has trade agreements with 44 other countries, many regional, enabling the easier building of a regional supply chain with emerging economies that are demanding more and more consumer goods. In the long-term, Mexico’s labor force is projected to grow by 58% where China’s is expected to shrink by 3%.[3] Finally, Mexico’s wages are not increasing at the rate of that of many Asian economies. China’s wages have increased to almost the level of Mexico’s-[4] and for industries conscious of IP infringements, Mexico’s free trade agreements allow for enhanced protection- something China does not provide.

Finally, companies should pay attention to political and institutional instability. Most developing countries have some instability, corruption or unrest, all of which effects investment. However, supply chain movements incur huge fixed costs. And choosing the correct political environment for a company is a very necessary part of optimizing supply chain logistics.

Let’s continue the China/Mexico comparison. Corruption is something to look at in both economies:

Source: Transparency International[5]

Corruption is higher then, in Mexico. But not so much higher—and the government of Mexico is not disrupting current world power structures. (This is not a judgement of that power transition; merely an observation that China is increasingly seeking to take a higher position within the world, and that can be disruptive politically.)

For example, China’s recent claims on the South China Sea have been seen by many as destabilizing.[6] Combine this with a massive increase in military spending, particularly on China’s navy,[7] and a supply chain analyst may well need to spend significant time analyzing the risk and associated costs of a bellicose China with control over certain sea lanes.

While I certainly don’t think China is currently seeking to secure and close sea lanes, the geopolitical conflicts arising in and near China have a higher risk/price tag than those in Mexico (including the many issues with the drug trade). Anyone seeking a long-term vs. short-term supply chain strategy should take these risks into account. And there are certainly benefits to many industries – especially those looking to protect intellectual property- to moving major operations to Mexico.

Perhaps this analysis is too bleak; China has certainly shown its ability to be surprisingly agile and inventive, and its need to maintain a strong economy has driven change many thought impossible. So what do you think: is Mexico the new China for long-term supply chain investment? Or will China go on to press its advantage in economic and labor markets?

---

[1] Transportation & Logistics 2030. (n.d.).Volume 1: How will supply chains evolve in an energy-constrained, low-carbon world?. Retrieved February 9, 2014, from http://www.pwc.com/en_GX/gx/transportation-logistics/pdf/tl2030_vol1.pdf

[2] NAFTA at 20: Ready to take off again?. (n.d.). The Economist. Retrieved February 9, 2014, from http://www.economist.com/news/briefing/21592631-two-decades-ago-north-american-free-trade-agreement-got-flying-start-then-it

[3] Ibid, The Economist.

[4] Time to rethink offshoring?. (n.d.). The McKinsey Quarterly. Retrieved February 10, 2014, from http://relooney.fatcow.com/0_New_3551.pdf

[5] Corruption Perceptions Index 2013 View Results Table View Brochure. (n.d.).Corruption Perceptions Index 2013. Retrieved February 10, 2014, from http://cpi.transparency.org/cpi2013/results/

[6] US blames China for rising tensions in South China Sea. (n.d.). Financial Times. Retrieved February 10, 2014, from http://www.ft.com/cms/s/0/cdc09e14-91a7-11e3-8fb3-00144feab7de.html#axzz2szOPxemb

[7] Military and Security Developments Involving the People’s Republic of China 2013 . (n.d.). Defense.gov. Retrieved February 10, 2014, from http://www.defense.gov/pubs/2013_china_report_final.pdf