Not so long ago, Asia was the clear destination of choice for companies looking to set up offshore manufacturing and distribution operations. Much of the draw, of course, was low-cost labor—back in the day, the wage savings easily offset the higher transportation and supply chain costs. Now that's starting to change. As wages rise in Asia—and other complications, such as the recent economic and political unrest in China, emerge—U.S. companies are increasingly exploring the possibility of relocating those operations to a country much closer to home: Mexico.
While wages in Mexico are higher than those in Asia, they're still significantly lower than U.S. pay scales. In addition, the economic climate and transportation infrastructure are improving. Security continues to be a concern, but the Mexican government has taken major steps to boost both prevention and enforcement efforts. President Enrique Peña Nieto said his country is "consolidating to be a trustworthy destination to invest in."
When it comes to shifting manufacturing to Mexico, the automotive industry has led the way. Mexico now accounts for about 18 percent of North America's auto production—a figure that's expected to reach 25 percent by 2020. According to the Brookings Institution, employment in the industry has increased 46 percent since 2009. Honda, Nissan, Audi, Kia, and Volkswagen manufacture in Mexico, and Ford, Toyota, and Goodyear all have announced multibillion dollar projects. Mercedes is considering opening a facility there as well. The auto industry has set the pace for other industries through its labor education and quality initiatives.
For those holdouts that continue to buy and/or manufacture in Asia and ship to the U.S., there is a Mexican answer for them as well. Mexican ports on both the Gulf and Pacific coasts are experiencing record growth, and several million dollars are being spent on improvements. During the recent port labor dispute on the U.S. West Coast, a number of importers had considerable success using the deepwater ports of Lázaro Cárdenas and Manzanillo. AEM Global Terminal Network has signed an agreement to design, build, and operate a new terminal at Lázaro Cárdenas, spending over $900 million for more docking space, cranes, and equipment. To encourage the use of Lázaro Cárdenas, the Kansas City Southern railroad offers intermodal service between the port and U.S. destinations. Containers can be shipped from Asia to the port, transferred to flatcars, and moved directly to Kansas City, where they undergo inspection and clear customs. Processing these shipments at Kansas City can eliminate days of delay at the traditional border crossings. Containers destined to other parts of the U.S. move through the import process more quickly as well. And things could soon get even easier. In January, the Department of Transportation declared that after 20 years of dispute, the U.S. border would finally be opened to Mexican carriers. Assuming the move isn't blocked again by Congress or the courts, these additional carriers will help facilitate the movement of goods across the border.
The new megaships currently being placed into service will put added pressure on the West Coast ports. While they may be economical for transport, they are too large to move through the newly expanded Panama Canal. East Coast ports are preparing to receive larger ships, but the megaships still must call at West Coast ports. The ports on the Mexican West Coast can provide a valuable safety valve for this group of carriers.
Whether a company is interested in Mexico as a source country for its products or a port of entry for shipments from Asia, it appears that it can be an important link in many supply chains. I believe that Mexico will soon become a true NAFTA "partner."
