TMASC

The increasing attractiveness of Mexico

Why journey across the Pacific when you could simply drive across a border?
U.S. and multinational companies are realizing they don’t have to go further than Mexico to find the manufacturing solutions they need to competitively supply North- and Latin-American markets.

Import trends show Mexico winning back a share of the U.S. market it had been losing to China for several years. According to the U.S. International Trade Administration, Mexico produced 12.2% of U.S. imports through June 2010 (up 1% from year before), while China produced 17.7% (down 1%).

Source: ITA, U.S. Department of Commerce, Trade Stats Express, http://tse.export.gov

For automotive-related trade during the first half of this year, Mexico accounted for 25.8% of U.S. imports (up 2.7% from year before), and China for only 4.3% (down 1.2%).

Given the time and costs required to relocate manufacturing production, this indicator could easily be lagging a larger move of new foreign direct investment. Watch this space for future U.S. import figures tracking the magnitude and persistence of this trend.

Analysts and Businesses Agree on the Attractiveness of Mexico

Separate 2010 studies by the KPMG and Alix Partners consulting firms rank Mexico as the top destination for manufacturing investment, above China, Brazil and India. KPMG’s study, for example, identified the TMASC region’s own Monterrey, Mexico, as the most cost-competitive city in the world for business. Based upon costs for labor, facilities, transportation, utilities and taxes, the report found Mexico’s major cities to have an 18.2% business cost advantage over the U.S.

A Bloomberg article earlier this month (“Mexico Beats China as…Wages Converge with Shipping”) noted that, as the wage gap narrows between China and Mexico, companies are increasingly coming to appreciate Mexico’s competitive advantages, especially during difficult economic times.  The combination of benefits Mexican locations offer includes lower wages, stable labor relations, lower landed transportation costs, favorable currency exchange rates and reasonable tariff costs.

Regarding labor costs, Chinese manufacturing wages are on average just less than $2 an hour, or only 14% less than Mexican wages, according to Mexican Finance Ministry estimates given in the Bloomberg article. As for shipping, the Alix Partners study compared different countries’ full landed costs as a percentage of U.S. costs and found that China has from about 5% to more than 10% higher full landed costs than Mexico for products not characterized by higher labor/value added and low shipping costs.

The article quoted the advanced device manufacturer Flextronics’ CEO Michael McNamara putting it this way: “Every year that goes by, we’re going to see Mexico becoming more and more attractive as an alternative to China.”  Global auto maker Volkswagen endorsed the advantages of Mexico just this week with its announcement that it will be building a new engine facility in Silao, Guanajuato, capable of producing 330,000 engines annually for VW assembly plants in Puebla, Mexico and Chattanooga, Tennessee.

Mexico’s Gains Enrich the Region

With each additional new production facility or expansion of operations in TMASC, the region gains jobs, capital investment, logistics assets, and the conditions for innovation. Moreover, the arrival and expansion of manufacturing creates larger markets for labor, skills, education, and professional services.

Economic development teams in the region are in a special position to capitalize on growth in Mexico because they are able to market a larger portfolio of corporate customers for upstream supplier prospects, and they will have new opportunities to find strategic markets for their own local small and medium enterprises.

Moreover, communities in Texas who are able to attract a manufacturing facility or other operation connecting to one of the supply chains in the region will have additional opportunities.  New industrial operations allow communities to align local educational institutions and human capital development with a greater variety and sophistication of industrial activities, and to mobilize public and private resources to upgrade infrastructure, logistics and other assets which support these activities.

Looking Ahead

How will you participate in the manufacturing growth occurring in the region?

Find out more about U.S. trade flows to follow which countries’ and which states’ products are winning which markets.  Consider what’s on the minds of manufacturers weighing the trade-offs of low-cost country manufacturing strategies for their respective industry. Monitor dispatches from this blog about new facilities or expansions announced for the TMASC region and neighboring areas. Most of all, successfully market your community or business to prospects by leveraging your knowledge of the region’s full range of manufacturing capacities, industrial activities and related assets.

Allow us to help.  Contact Bexar County Economic Development at (210) 335-0872 for market and industry details, and for connections to regional partners, to begin evaluating ways to collaborate with TMASC for development.

Experts expect a 60% likelihood of aggressive market entry

Overview

McKinsey & Co. consultants have put together a brief white paper titled, “Applying Global Trends: A look at China’s Auto Industry” which provides insight for business and economic development strategists on how to approach business planning and recruiting processes in response to China’s rapid economic ascent and entry into the U.S. auto market.

The TMASC group has studied the paper and applied a regional outlook to the case, which TMASC believes could have a significant impact on the region’s automotive manufacturing industry, level of foreign direct investment, and overall quality of life.

The results of the McKinsey study revealed “a 60% likelihood of an aggressive entry by China into developed markets, with Chinese players capturing 3 to 15 percent of market share.”  While China has already begun to show signs of North American market entry, an aggressive move into the U.S. auto market will undoubtedly create waves in the industry.  A Chinese automotive manufacturing facility would be a major win for any community that China finds attractive, which is why strategic planning and marketing is a must for those regions who hope to attract Chinese foreign direct investment.

China Overtakes U.S. as Biggest Automotive Market in 2009

Source: Annual Report on Automotive Industry in China (2010) by the Research Department of Industrial Economy (DRC)

As recently as 2000, the U.S. outpaced China in auto sales by 15 million units.  In 2009, the table turned and gave China a three million unit advantage.  One of the major factors contributing to this achievement is the presence of U.S. automakers with joint ventures in China.  Because China had previously been behind the curve in automotive manufacturing, they welcomed established manufacturers into their market in exchange for the opportunity to learn proven manufacturing techniques.  Expect Chinese auto makers to continue to capitalize on their domestic market, while simultaneously turning their attention to new markets now that they are more proficient in lean manufacturing techniques and quality control processes.

How Will China Enter the U.S. Auto Market?

While China passed the U.S. last year as the world’s largest auto market, such prominent Chinese auto manufacturers as Geely and BYD Auto have either announced plans or are now taking decisive steps to enter the U.S. market during the next few years.  Judging by Geely’s pronouncement that it intends to sell two million cars by 2015, these are ambitious auto makers.

Market entry may take a variety of conceivable forms in the future, whether:

• Via acquisition of one or more auto makers with major sales in developed markets.
  While Geely acquired Volvo last month, Volvo had sold only about 2,600 vehicles year-to-date by the end of August 2010, compared to major auto makers like GM (625 thousand vehicles), Ford (491 thousand vehicles), or even Chrysler (28 thousand vehicles).

• Via reciprocal arrangements with major global auto OEMs who have entered into Joint Ventures with Chinese firms to access the Chinese market.
  Examples of such JVs include GM, Ford, Daimler AG, and Navistar.

• Via direct, steadily improving competition with incumbent OEMs in developed markets. The McKinsey article cites the example of Hyundai, who entered the U.S. market in the late 1980s, “with quality problems and with volumes comparable to those of some smaller Chinese OEMs now.” Hyundai took almost 20 years “to establish a meaningful presence in developed markets by competing on price and slowly building out its sales network while improving its quality and brand image.” What qualifies as a “meaningful presence”? Year-to-date through August 2010, Hyundai had U.S. sales of approximately 275 thousand vehicles. In May of this year, BYD Auto signaled a similar strategy when it announced that it would locate its North American headquarters in California, with plans to sell Chinese-manufactured vehicles in the U.S.

• Via increasing supply chain clout and market sophistication gained through the acquisition of U.S. auto parts firms.
  For example, Pacific Century Motors acquired the Nexteer steering unit from GM and Beijing West Industries acquired Delphi’s brake manufacturing division in recent months.  Additionally, Wanxiang America (chassis components supplier), Tempo International Group (brakes, chassis and power trains supplier), as well as FAW Group and Shanghai Automotive Industry Corp., are Chinese-based firms that have undertaken acquisitions in the U.S.

• Via production base in Mexico or Texas that sells throughout North and Latin America.
  Caterpillar’s manufacturing plant and distribution center investments in Texas over the last several years illustrate the advantages of such a strategy. Granted, Caterpillar is primarily a producer of construction and mining equipment, with only nascent and much smaller activity in vehicle production. Nonetheless, Caterpillar is a preeminent global OEM that has made a series of significant strategic investments to locate various advanced manufacturing operations in the TMASC region to serve its customers in North American and Latin American markets.

Opportunities for Communities in TMASC

The TMASC region is already an attractive location for continued foreign investment in the automotive sector.  The area’s nine OEM facilities and strategic logistics infrastructure complement TMASC further and provide a solid foundation on which to continue development of the automotive manufacturing industry.  However, TMASC’s continued success will require strategic positioning, planning, and marketing.  Below are several initiatives which should be implemented in order to attract Chinese foreign direct investment in the automotive industry to the TMASC region:

Promote cluster advantages

TMASC believes that through cluster based development the region will perform more successfully than individual entities operating alone.  Successfully implemented, cluster based development can increase the number of high paying jobs, increase the rate of business formation, and enhance the innovative capacity of our local industry.

Promote the TMASC advantage

Manufacturing operations which locate in the TMASC region are able to take advantage of a unique combination of benefits.

Promote Texas as a clean tech business friendly State

Texas must compete with other states, such as California, in the clean tech space, but recent legislation shows signs of improvement in initiatives and incentives for businesses which operate in this space. Recent clean tech legislation includes:

• • Green fleets legislation to promote low emissions and plug-in hybrid vehicles for fleets of major state agencies (HB 432).
  • Legislation to establish green job skills and development funding (HB 1935).
  • Legislation allowing cities to create financial districts to loan money for renewable power and energy efficient technologies (HB 1937).

Economic Impact

Just as leading U.S. manufacturers are locating manufacturing operations in Mexico, it is in the interest of Chinese automotive OEMs and suppliers to invest in new plants in the Texas-Mexico region to take advantage of TMASC’s strategic and cost-effective location.  Any new such foreign direct investment will create immediate positive economic impacts.  In the case of acquisitions alone, Chinese investment can provide much needed capital to support business growth and product development.  If, however, such new foreign direct investment results in the construction of new plants, impacts can include millions of dollars in new capital investment and several thousands of new OEM and related supplier jobs.

When Toyota Motor Manufacturing of Texas came to San Antonio, for example, it brought nearly 2,000 direct jobs and more than as many supplier jobs, as well as approximately $1.2 billion in capital investment.  Meanwhile, the plant’s recent expansion to produce the Tacoma pickup line added 1,000 jobs and an additional $100 million investment to the TMMTX facility.

Next Steps in Promoting the TMASC China Strategy

China has already expressed interest in the U.S. auto market and has developed several joint ventures with established U.S. automakers in their homeland.  Their success at home and their expanding market share are reasons for their U.S. market entry.  The regions that best position themselves to attract the Chinese automotive industry will have an opportunity to capture this business, which would provide significant capital investment dollars for the communities and high-quality jobs for their residents.

In August 2010, representatives from Bexar County made a trade visit to China where they addressed the China Association of Automobile Manufacturers (CAAM) at the China Auto Parts International Symposium on Overseas Market Development Strategies in the State of Texas.  In attendance were over 150 Chinese automotive parts representatives who are eager to develop business in North America.

If experts expect a 60% likelihood of aggressive Chinese entry into developed automotive markets, then embracing them early is critical to the success of the TMASC region.  Bexar County strongly believes that the TMASC region is the best location for China to accomplish their goals and hopes to continue relationships with Chinese automotive businesses.  Organizations interested in participating in future trade missions are welcome, and encouraged, to contact David Marquez, Director of Bexar County Economic Development, at 210-335-0667.