SOURCE: The Boston Consulting Group

The Boston Consulting Group

June 28, 2013 00:01 ET

Mexico's Growing Cost Advantage Over China, Other Economies Will Boost Its Exports -- and U.S. Manufacturers

Lower Labor and Energy Costs Are Expected to Propel Mexican Manufacturing Exports, Adding $20 Billion to $60 Billion in Output to Mexico's Economy Annually by 2017; U.S. Suppliers Also Will Benefit, Predicts The Boston Consulting Group

CHICAGO, IL--(Marketwired - Jun 28, 2013) - Within five years, higher manufacturing exports due to a widening cost advantage over China and other major economies could add $20 billion to $60 billion in output to Mexico's economy annually. And thanks to the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for everything from automobiles to computers assembled in Mexico also stand to benefit, according to new research by The Boston Consulting Group (BCG).

The key drivers of Mexico's improving competitive edge are relatively low labor costs and shorter supply chains due to the country's proximity to markets in the U.S. Another important advantage is that Mexico has 44 free-trade agreements -- more than any other nation -- allowing many of its exports to enter major economies with few or no duties.

A tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China. By 2015, BCG projects, average total manufacturing costs in Mexico are likely to be around 6 percent lower than in China and around 20 to 30 percent lower than in Japan, Germany, Italy, and Belgium.

"Mexico is in a strong position to be a significant winner from shifts in the global economy," said Harold L. Sirkin, a BCG senior partner. "That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It's also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China."

The research is part of BCG's ongoing "Made in America, Again" series on the changing global economics of manufacturing, produced by its Operations and Global Advantage practices. BCG has previously released research predicting that rising U.S. exports, combined with production "reshored" from China, could create up to 5 million new U.S. jobs in manufacturing and related services by the end of the decade, thanks largely to significant labor- and energy-cost advantages over Western Europe and Japan and rising costs in China.

Global companies are expected to continue moving production to Mexico despite concerns over crime and safety. Research by the World Economic Forum has found that companies view violence and corruption as the most problematic factors of having operations in Mexico -- as well as significant costs of doing business. Another drawback is the perception that Mexico lacks enough skilled workers.

But the cost advantages of producing in Mexico are becoming so attractive that many companies are finding ways to mitigate these perceived risks. "When the economics are a wash, U.S. manufacturers often keep production in the U.S.," said Michael Zinser, a BCG partner who leads the firm's manufacturing work in North America. "But when the economics are compelling, companies will invest in additional security and training to address these issues."

Mexico's labor costs are especially competitive when productivity differences with other economies are factored in. By 2015, for example, average manufacturing-labor costs in Mexico are projected to be 19 percent lower than in China, where wages are rising rapidly, and around 30 percent lower when adjusted for output per worker. In 2000, Mexican labor was 58 percent more expensive than in China. Mexico will also have lower energy costs than many other economies. Average electricity costs are around 4 percent lower in Mexico than in China, for example, while the average price of industrial natural gas is 63 percent lower.

The industries expected to see the biggest production gains are likely to be transportation goods, computers and electronics, appliances, and machinery. "These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico," explained Eduardo León, a BCG senior partner based in Monterrey. Due to Mexico's growing cost advantage, production in these industries could increase between 7 to 19 percent by 2017 over and above the projected level if current growth trends remain the same. This could result in 300,000 to 900,000 direct manufacturing jobs annually in Mexico and 1.5 million to 3.5 million jobs in related services jobs.

"Companies investing in Mexico must balance the economics with the potential downsides," said Sirkin, who, along with Zinser and BCG partner Justin Rose, is coauthor of "The US Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback" (Knowledge@Wharton, 2012). "But the economic advantages are becoming so pronounced that global companies should include Mexico on a shortlist of locations for their next manufacturing plant."

To arrange an interview with a BCG expert, please contact Alexandra Corriveau at 212 446 3261 or at corriveau.alexandra@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offices in 43 countries. For more information, please visit bcg.com.

About bcgperspectives.com

Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed by PC, mobile, iPad, Facebook, Twitter, and LinkedIn.

Contact Information

  • The Boston Consulting Group
    Alexandra Corriveau
    Media Relations Manager, The Americas

    Tel +1 212 446 3261
    Fax +1 212 446 2801
    corriveau.alexandra@bcg.com