Why Mexico Is Becoming The New China

June 25, 2014

With labor costs rising rapidly in China, American manufacturers are looking south.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Deborah Frame, vice president of investments at Toronto-based Cougar Global Investments.

Some companies are cutting back in China and heading to Mexico to manufacture an array of products, from plastic toys to high-end products like electronics and pharmaceuticals.

Companies like headset maker Plantronics; hula hoop designer Hoopnotica; toilet brush manufacturer Casabella; grills and outdoor furniture maker Meco Corp.; medical supply firm DJO Global; and industrial cabinet manufacturer Viasystems Group are all making the move across the Pacific Ocean to south of the U.S. border.

Moreover, a number of American companies are also expanding in Mexico—including well-known brands like Caterpillar, Chrysler, Stanley Black & Decker and Callaway Golf—adding billions of dollars in investment and helping to drive economic integration.

All this spells new opportunity for investors through the use of exchange-traded funds that focus on Mexico such as the iShares MSCI Mexico Capped Investable Market ETF (EWW | B-95). But before going too far down the path of how investors should respond to these changes, let’s look a bit more closely at what has happened.

Unlike China, Mexico continues to boast low labor costs and has a huge advantage in terms of proximity to the American market. That’s a shift, because for years Mexico suffered because China’s low wages made it the manufacturing hub of the world.

But recently, the rise in Chinese wage inflation has resulted in the gap disappearing. Mexican wages that were nearly double China’s 10 years ago are now nearly 20 percent lower than in China.

China_Vs_Mexico_Hourly_Wage

Source: TACNA Services Inc. Mexico

Economists say that the American economy benefits more from outsourcing manufacturing to Mexico than to China because neighbors tend to share more of the production.

Forty percent of Mexico’s exports to the United States consist of components made in the U.S., primarily for the automotive industry. That compares with only 4 percent for Chinese imports, according to the National Bureau of Economic Research.

Notably, the Mexican auto industry is about to go on a $10 billion factory-building spending spree, establishing the nation’s rising economic challenge to rivals from the United States to China.

 

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