Why Manufacture in Mexico?

Transcription

1 Why Manufacture in Mexico? Almost 25 years ago, Mexico began its journey towards greater economic openness with a strong focus on international trade liberalization and attracting investment. Along the way, significant changes were made to the Foreign Investment Law and free trade agreements signed with the world's leading economies. The country also achieved a solid and stable macroeconomic environment that has brought certainty to companies' investment decisions. Today, Mexico has an attractive business environment, legal certainty, the world's largest network of free trade agreements, widely developed economic sectors and an extremely competitive cost profile. It is also progressing in terms of infrastructure to make it a world-class logistics platform. This document provides an overview of Mexico's strengths and advantages that make it an excellent alternative to supply end products and inputs to the European and US markets, particularly in respect to China. COMPETITIVE LABOR COSTS Mexico offers significant savings in labor costs, even when compared to China. Graphs 1 and 2 show its preeminence in this area. GRAPH 1 Unit labor costs in selected countries Salaries paid per employee in the year; numbers in thousands of dollars GRAPH 2 Forecast for unit labor costs Index 2012=100, from annual salaries per employee, in dollars, selected countries SOURCE: Global Insight, May 2013 SOURCE: Global Insight, May 2013 As shown in the graphs, while salaries in Mexico are not lower than in China or India, it does have a clear and wide comparative advantage in terms of growth. 1

2 MANUFACTURING COSTS Mexico has a better manufacturing cost profile than many countries, including Russia, India and China. Graph 3 shows the most updated comparison of manufacturing costs between Mexico and the US in 2010, published by Alix Partners. 120% GRAPH 3 Index of manufacturing costs compared to the US 2010 US value=100%, selected countries 110% 100% 90% 80% 70% 60% EUA Vietnam China Rusia México Rumania India FUENTE: Alix Partners 2011 Furthermore, consulting firms such as Boston Consulting Group, AT Kearney, Alix Partners and KPMG have recognized Mexico's advantages for production investment. FACILITY OF OPERATION The procedures and time required to open or close a business, or to obtain a construction permit, are critical to success in international business. In Mexico, investors require only 6 procedures and 9 days to open a business, and 10 procedures and 69 days to obtain a construction permit. These numbers are noticeably lower than Brazil, India or China, as shown in figure 1. Moreover, only 1.8 years are required on average to close a business in Mexico, and the recovery rate for creditors and shareholders is 67.3%, significantly better than countries such as India, Russia and Brazil, among others, as shown in figure 2. 2

3 FIGURE 1 Comparison of days and procedures required to open a business in 2012 SOURCE: World Bank Doing Business 2013 FIGURE 2 Comparison to close a business in 2012 SOURCE: World Bank Doing Business

4 OPERATION COSTS There are several factors that affect operation costs and, therefore, company profitability, such as taxes paid on profits, the number of tax payments (which affects administrative costs) and insolvency proceedings costs. Figure 3 shows Mexico's advantages over other countries in these areas. FIGURE 3 Comparison of operation costs in 2012 SOURCE: World Bank Doing Business 2013 As the table shows, operations in Mexico lead to significant tax savings compared to economies such as China, India and the United States. In terms of number of tax payments, Mexico requires only six payments per year, which is much more favorable than the average in Latin America and OECD countries. While it may appear that Mexico is at a disadvantage compared to countries such as Brazil and Canada in terms of insolvency costs, it is important to note that according to Global Insight, in 2012 labor costs in Mexico were 4

5 30% lower than Brazil and 87% below Canada. Because of this, severance payments in Mexico - essential to closing a business - are lower than in many countries included in the comparison. ACCESSIBILITY TO LARGE MARKETS FREE TRADE AGREEMENT NETWORK Mexico has 12 free trade agreements (FTA) with 44 countries, making it one of the most open countries to international trade, with preferential access to more than 1.2 billion potential consumers and up to 60% of the world's GDP. Graph 4 shows how Mexico is clearly above China in this area. 1 GRAPH 4 Free trade agreements signed by Mexico and China, 2012 SOURCE: Ministry of Trade of China and Ministry of Economy of Mexico In addition, the average tariff rate in Mexico in 2012 was 4%, which increases the profitability of companies established in Mexico, because they can access inputs and final products at competitive prices. TARIFF BENEFITS Mexico's network of FTAs gives it preferential access to the US and European markets, compared to goods from other economies, like Brazil, for example. In addition, when using land transportation, Mexican goods have tariff-free access to the United States, which is a clear advantage over competitors from around the world. FOREIGN TRADE OPERATIONS PROCEDURES On the other hand, exporting and importing procedures in Mexico are few, with only five documents required to complete an export procedure and four for import procedures. Mexico has an advantage over many countries in terms of foreign trade procedures, as it is shown in figure 4. 1 China has free trade agreements with Pakistan, Chile, New Zealand, Peru, Costa Rica and ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) 5

6 FIGURE 4 Comparison of procedures required for foreign trade operations in 2012 SOURCE: World Bank Doing Business 2013 LEGAL CERTAINTY FOR FOREIGN INVESTMENT Executing Reciprocal Investment Promotion and Protection Agreements (RIPPA) is part of the Mexican government's engagements to grant Mexican and foreign investors a legal framework that strengthens the protection of foreign investment in Mexico and Mexican investment abroad. Generally, RIPPAs cover investment definition, scope, promotion and admission, investment treatment, expropriation, transfers and Investor-State/State-Investor dispute settlement. As shown in table 1, Mexico has signed 28 RIPPAs to date, the latest executed with Singapore. Country Year Country Year Country Year Country Year Switzerland 1996 Germany 2001 Cuba 2002 T. and Tobago 2007 Argentina 1998 Austria 2001 Belgium/Luxembourg 2003 Spain 2008 Holland 1999 Sweden 2001 Czech Rep India 2008 France 2000 Korea 2002 Panama 2006 Slovakia 2009 Portugal 2000 Italy 2002 Iceland 2006 China 2009 Denmark 2000 Uruguay 2002 Australia 2007 Belarus 2009 Finland 2000 Greece 2002 United Kingdom 2007 Singapore 2011 SOURCE: Ministry of Economy of Mexico TABLE 1 RIPPAs signed by Mexico Partner country and date of entry into force Mexico and Kuwait signed a RIPPA in February 2013; however, the agreement was submitted for review and, if applicable, approval by the Senate of the Republic and the National Assembly of the State of Kuwait. On the other hand, a RIPPA between Mexico and Bahrain whose negotiations were completed in 2009 is pending signature. 6

7 Furthermore, some of Mexico s free trade agreements include an investment chapter similar to a RIPPA, such as the agreements signed with the United States, Canada, Chile, Colombia and Japan, among others. This institutional framework provides legal certainty to companies that decide to establish operations in Mexico. LOW TRANSPORTATION COSTS Another advantage is Mexico's closeness to the world's main consumer centers, which enables companies to be more responsive to sudden changes in demand and reduces inventory costs. Table 2 shows the number of days required to transport a container by sea from China and from Mexico (columns) to important distribution and consumer centers (rows). The following maps illustrate the distance from these two countries to various ports around the world. TABLE 2 Comparison of days distance by sea from Mexico and China Selected departure and arrival ports. Mexico China New York 6 31 Los Angeles 4 17 Hamburg Cape City SOURCE: Sea Rates MAP 1 Sea routes to New York from Mexico and China Selected departure ports. Source: Sea Rates. 7

8 MAP 2 Sea routes to Hamburg, Germany, from Mexico and China Selected departure ports. Source: Sea Rates. INFRASTRUCTURE Mexico communicates through 27,000 kilometers of railroads and 374,000 kilometers of roads. It has various domestic distribution terminals that connect to the main sea ports, enabling reduced costs and speedy arrival and departure of goods. In brief, Mexico has: 76 airports (12 domestic and 64 international). 117 ports: 58 on the Pacific Ocean seaboard and 59 on the Gulf of Mexico and Caribbean seaboard. 49 customs offices, of which 11 are inland. 3,152 kilometers of border with the United States and 1,149 kilometers with Guatemala and Belize, with a total of 63 border crossings. MACROECONOMIC STABILITY According to the World Economic Forum's (WEF) latest report on Global Competitiveness, Mexico ranked 40th among 144 economies, in terms of Macroeconomic Environment. Figure 5 shows Mexico's strength over other countries in important macroeconomic variables. To contribute to the country s economic stability, several tax measures adopted recently in Mexico reinforce the sustainability of public finance in the medium term and the government s ability to continue to support improvements in the transportation and communications infrastructure. Mexico's monetary policy has enabled it to reach inflation levels close to our main trade partners. As evidence of this, in 2012 the country closed with 3.9% inflation, according to INEGI, and the IMD s most recent 8

9 competitiveness report ranks Mexico as the second country with the lowest cost of living in the world. Furthermore, WEF's report places Mexico in 38st position out of 144 in terms of credit risk score. FAVORABLE EXCHANGE PERFORMANCE In coming years, Mexico will have a better exchange performance in real terms, compared to many of its competitors in international markets. For example, figure 5 shows a graph of the behavior of the real exchange rate for Mexican, Russian, Chinese and Brazilian currencies over the US dollar. Of these, Mexico's exchange rate offered the greatest advantages, generating a relative reduction on goods expressed in dollars. FIGURE 5 Comparison of macroeconomic stability indicators SOURCE: IMD World Competitiveness Yearbook 2012; International Monetary Fund 2013 Final Remarks A large number of factors make Mexico one of the best choices to locate operations. The country will continue to progress in several areas: infrastructure, legal certainty, deregulation, safety and commercial openness, among others, to raise the competitive profile of the business environment. The road travelled and the goals set by the Mexican government and society will make the country an economic power in the next decades Companies that choose Mexico as their operations center will certainly exceed their medium- and long-term goals. 9