h&a global outlook - mexico update sping 2016

H&A GLOBAL OUTLOOK

EMERGING MARKET TRENDS IN MEXICOSPRING 2016

© 2016 Hickey & Associates. All Rights Reserved. 2

H&A GLOBAL OUTLOOK - MEXICO SPRING 2016

Hickey & Associates (H&A) is a global leader in site location strategy, economic incentive advisory, and workforce solutions with active projects in the Americas, Asia, Europe, Australia, and Africa. Utilizing state-of-the-art tools and techniques, H&A assists businesses in determining the best location to expand, relocate or consolidate anywhere in the world.

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CONTENTS

4 Introduction

5 Market Trends

7 Sector Trends

8 Key State Focus



As the economy in the United States continues gaining strength, Mexico is moving right along, too.. Outside of the automotive sector, recent reforms in energy and telecommunications have generated substantial investment in the country. Due to a temporary constraint on labor supply, wage rates may continue to see an increase, but given the abundance of young people coming into the market and measures to eliminate the informal economy, this should not be a permanent issue, leaving room to maintain competitiveness into the future. To continue the economic sucess for the long term, political corruption and application of the law will need to progress further.

The following H&A Global Outlook report provides a brief overview of key location factors H&A examines on behalf of our clients. At H&A, our team of seasoned professionals and market experts work to identify the lowest cost, highest skilled, and most efficient workforce that meets the needs of our clients, all while being a cost-effective, operationally-sound marketplace.

INTRODUCTION



ECONOMIC GROWTHAccording to the Organisation for Economic Co-operation and Development (OECD), Mexico´s gross domestic product (GDP) projected growth for 2016 is 2.9%. The projection is effectively more than 50% that of the USA (+1.9%), and significantly higher than Brazil (-4%). Mexico’s unemployment rate is officially estimated at 3.8%, which is the lowest in the last five years, although it does not account for the shadow economy.

Government debt ratio to GDP is at is at 43.2% which makes it manageable, providing financial stability for the foreseeable future. GDP per Capita at Purchasing Power Parity is $18,146 USD GDP. That is 20% higher than that of Brazil and 46% higher than that of China. In all, the economy is looking reasonably well this year.

POPULATION DEMOGRAPHICS - AGEWith a territory approximately three times the size of Texas, Mexico has a population slightly over 120 million people. Mexico is the most populous Spanish-speaking country in the world and the third largest in the Americas, following only Brazil and the United States. Mexico’s population is fairly young, with 27% under 15, and 54% under 30, which makes Mexico a prime opportunity for investment. Not only is the country’s consumer base set to grow significantly, the sizable labor force to come puts downward pressure on wages and will lead to a strong pool of workers, making it a very attractive opportunity for multinational employers from all over the world.

KEY MARKET TRENDS



EDUCATIONThe critical factor of education is challenging in Mexico. Not only is there still a long way to go, the statistics vary greatly. As an example, according to the OECD, Mexicans can expect up to 14.4 years of education between the ages of 5 and 39. Mexico´s percentage of adults that have completed upper secondary education is half the 75% percentage of the OECD. The average student in Mexico scored 417 out of 600 in reading literacy, math and science, the lowest rate for an OECD country, besides Brazil´s 402 score. The recent federal reforms on Education will eventually produce better results, but Mexico still has a long way to go regarding education.

UNESCO Institute for Statistics - World Development Indicators

EMPLOYMENTIn Mexico today, the population over 15 years old is 88 million. The labor force, according to the Instituto Nacional de EstadÍstica y GeografÍa, is 52 million people, which comprises 43% of the total population, compared to 49% in the United States. Unemployment is at 4.23% of labor force, leaving 2.2 million available unemployed workers. These numbers do not account for the informal sector, also known as the shadow economy that involves transactions for services and goods paid in cash that do not declare taxes. Recent reforms in the taxation and banking systems are in place to eliminate the shadow economy, hoping to motivate those informal workers to join the formal economy. This represents a clear opportunity for employers and will result in a more extensively available labor force and a larger tax base.



LABOR COSTS/PRODUCTIVITYGeneral Minimum wage in Mexico is $0.49 USD per hour, lower than China, Argentina, Brazil and Colombia. According to the Mexican Secretariat of Labor & Social Welfare, Mexico´s average daily wages in manufacturing, including benefits and social security, are around $2 USD per hour. By comparison, wages in manufacturing in the United States are approximately $20 USD per hour, setting Mexican wages at nearly a tenth of those of their northern neighbors. Regardless of the differences in wages and education between the two countries, productivity (the real value of output produced by unit of labor during a certain time) is estimated at 112 in Mexico, compared to 105 in the United States, making it very attractive to relocate manufacturing facilities down to Mexico.

MIGRATION/POPULATION DENSITYMexican immigration to the United States has been steadily declining since the Great Recession, thanks to improved educational and economic opportunities in Mexico and ever-tougher border enforcement. According to the US Census Bureau, there are around 35 million people in America listed as being of full or partial Mexican ancestry. This represents about two thirds of all Hispanics and Latinos in the United States. Another remarkable migration movement is the massive internal migration from rural to urban areas and from the impoverished south to north and central Mexico, where the multinational corporations, particularly the automotive industry, have been growing steadily for years.

SECTOR SPECIFIC TRENDSMANUFACTURING SECTORThe primary reason for investing in Mexican manufacturing facilities has been its proximity to the United States, free trade agreements, and the low cost of labor. While wages in Mexican pesos have been increasing over the years, an appreciation of the USD to the MXN has actually made it cheaper for international corporations. On the other hand, the Mexican manufacturing labor force has been steadily increasing its productivity as more workers incorporate into the formal economy and get the proper training. Currently, 15% of employed persons are in the manufacturing workforce, just behind retail trade and services and public administration.

AUTOMOTIVE SECTORMexico produced 3.4 million cars and light trucks in 2015, exporting 82% of the supply, with two thirds sent to the U.S. Brazil produced under 3 million in the same period, losing its place as the automotive manufacturing leader in Latin America. The automotive industry in Mexico has not only attracted American companies, but Asian and European, as well, including Nissan, Volkswagen, BMW, Audi, Kia, Honda, and Mazda. In all, there are approximately 700,000 automotiveindustry jobs in Mexico, and the number continues to increase as with new assembly plants being built.



MARKET TRENDS - STATE COMPARISON

To compare several key manufacturing regions in Mexico, H&A provided an overview of the market trends in five states in the following pages.

TAMAULIPAS

NUEVO LEON

CHIHUAHUA

BAJA CALIFORNIA

SAN LUIS POTOSÍ



BAJA CALIFORNIABaja California is a mature manufacturing destination compared to the rest of the country. However, extreme weather and poor infrastructure make it challenging for newcomers. Nevertheless, the proximity to California and location on the Pacific Ocean make it a highly desirable place for American and Asian manufacturers. Increasing wages and security have been concerns in recent years for the region.

LOCATION

Baja California borders with California, and was one of the first “maquiladora” cities in the country. Although the State is relatively sizable (27,000 sq. mi.), the population and the manufacturing activity is highly concentrated in the bordering cities of Tijuana and Mexicali. Weather is very dry and extreme, ranging from very hot during the day to freezing cold at night. Precipitation is only 200 mm a year.

POPULATION

Total population is 3.1 million people, with 92% concentrated in urban areas. Tijuana and Mexicali have a large floating transient population from Central America and southern Mexican States, many hoping to cross to the United States.

ECONOMY

The state’s GDP represents 2.8% of the national total. In the past couple of years, Baja California has been experiencing a slow growth rate of under 1%. Inflation in Tijuana and Mexicali has been around 2% (below the national average). Strategic sectors are: aerospace, electronics, medical appliances, biotechnology, information technology, medical, transportation and wine. The World Bank classified Baja California almost at the bottom of their report on easiness of doing business in Mexico. Exports reached $33 billion USD, accounting for almost 10% of the national total. Manufacturing of computer hardware, communication, measurement and other equipment, electronic components and accessories represented most of it.

EDUCATION

Average 9.1 years of schooling, slightly over the national average. Analphabetism is at 2.3%, a third of the national average.

EMPLOYMENT

Labor force is estimated at 1.5 million people, with an unemployment rate at 4.1% in 2015.

LABOR COST

Labor costs in Baja California are similar to that of Chihuahua and Tamaulipas, the other border states with Maquiladora programs.

MIGRATION/POPULATION DENSITY

Population is highly concentrated in the border cities of Tijuana and Mexicali. Density in the rest of the state is very low.



CHIHAUHUAThe state in general, and Ciudad Juarez in particular, were among the first in the Maquiladora phenomenon, allowing for easy crossing of American management to run manufacturing facilities in Juarez. The State of Chihuahua is a mature manufacturing destination that has taken advantage of location for many years. Disadvantages are the weather, arid topography and security.

LOCATION

Located in Northern Central Mexico, it borders with New Mexico and Texas. Largest State in the country (95,543 sq. miles). Main Manufacturing city is Ciudad Juarez, across from El Paso, Texas. Very dry and extreme weather, with average temperature ranging from extreme hot to freezing cold given its location in a desert area. Annual pluvial precipitation is 500 mm, accounting for a greener south.

POPULATION

3.4 million. Average age is 25 years. Ethnic composition comprises 60% whites (including Spaniards, Dutch, German, French and Middle Eastern) and the rest Mestizo with a slight percentage of Amerindians. Juarez has a transient population of Central Americans and peoples from Southern Mexican States hoping to cross the border.

ECONOMY

Chihuahua’s GDP represented 2.8% of the national total. Manufacturing industry in Ciudad Juarez for export is by far the strongest. With $42 billion USD in exports, manufacturing makes Chihuahua the number one exporting state in the country. Economy registered a 2.7% growth, with primary industries decreasing, but manufacturing growing over 3%. Inflation was under 2.7% last year, below the national average of 3.06%. Foreign Direct Investment at $1.1 billion USD represented 5.1% of the country’s total. Strategic sectors are tourism, mining, agribusiness, automotive and auto parts, electrical and electronic, life sciences, information technology and aerospace.

EDUCATION

Average 9.1 years of schooling, slightly over the national average. Analphabetism at 3.1% (less than half the national average).

EMPLOYMENT

Labor force in manufacturing is mostly concentrated in Ciudad Juarez, which has a total 1.5 million population and a labor force of 531,000. According to the Ministry of Economy of the State, absenteeism in Juarez is around 3.7%, turnover around 3.7% and unemployment around 3.5%

LABOR COST

The Secretary of Economy of the State estimates manufacturing labor cost at $3.25 USD per hour, considering 2,161 hours a year (45 hours a week).


Being a border state, it has a constant migration flow with the United Sates. Migrants include workers from Southern States and Central America, hoping to cross to the United States. Given the size of the state and a relatively small population, population density is the lowest in the country.



NUEVO LEONThe State of Nuevo Leon enjoys a higher standard of living than the comparable states. Education and productivity are top notch and competing for talent generates higher than typical wages. On the other hand, quality of life is better than at compared border manufacturing cities. Among advantages, we can list the region’s consolidated industrial clusters, easiness to attract national and foreign talent, and its pipeline of students coming from their prestigious universities and technical schools.

LOCATION

Nuevo Leon is a northern central State. It has a narrow border with the United States, with the rest of the state stretching south. The primary manufacturing area is the metropolitan area of Monterrey, considered the strongest and more traditional industrial city in Mexico. Weather is dry and precipitation is around 650 mm. Temperature can also be extreme, but it averages around 70 Fahrenheit.

POPULATION

Total population is around 4.6 million people, with 95% concentrated in urban areas (mostly the metropolitan area of Monterrey). Long established society with migration from surrounding states, typically attracted by esteemed universities, technical schools and work.

ECONOMY

The state’s GDP represents almost 7.1% of the country, making it the strongest economy among those compared in this study. Secondary and tertiary activities have been growing over 5% in the past couple of years. Inflation is close to the national average at 2.9%. Strategic sectors are: aerospace, automotive, biotechnology, appliances, specialized medical services, software, food, nanotechnology, sustainable housing and interactive media. The World Bank’s report on Doing Business, ranked Nuevo Leon 16th for easiness of doing business in Mexico. According to the National Institute of Statistics and the Secretary of Economy, exports represented $25 billion USD, representing 7.9% of the national total. Manufacturing represents most of it with transportation equipment as the most relevant sector, followed by appliances and energy generation equipment.

EDUCATION

Average years of schooling in the state is at 10, above the national average. Analphabetism is under 2%. Monterrey has some of the most prestigious universities and technical schools in the country, attracting students from all across the country and other Latin American nations. According to the Federal Secretary of Economy, the state ranks second on a national basis on science, technology and innovation and communication and information technologies.

EMPLOYMENT

Nuevo Leon’s labor force is estimated at 2.2 million people, with an unemployment rate at 4.7% last year.

LABOR COST

Labor costs are higher in Monterrey than in the other cities represented in this sample. On the other hand, education and productivity are also higher.


High concentration of population in the metropolitan area of Monterrey.



SAN LUIS POTOSÍBeing in a strategic location between the three largest markets in Mexico - Mexico City, Monterrey and Guadalajara - absence of security issues, good communications, reasonable weather and a sizable population have made San Luis Potosí an attractive destination for multinational corporations looking to establish a presence in a friendlier and more affordable location, as compared to the border cities. The state’s success is now putting pressure on the availability of labor and rising wages.

LOCATION

San Luis Potosí is located in Central Mexico in the “Bajio”. It has an area of 23,600 sq. mi. (slightly smaller than Tamaulipas). Average temperature is a comfortable 70 Fahrenheit with an annual pluvial precipitation of 950 mm that comprises a more tropical area known as “Huasteca Potosina”.

POPULATION

Total population is 2.5 million people, with 64% living in urban areas.

ECONOMY

The state’s GDP represents approximately 1.9% of the national total. In the past couple of years, it has registered an accelerated growth of 4.4%, with inflation at 3.3% (above the national average). Outside of manufacturing, the state’s economy is based on mining (silver), which was the historical foundation of the state. San Luis Potosí is considered one of the friendliest states to do business in Mexico, ranking 4th by the World Bank. Exports In 2014 reached $7.7 billion USD, with manufacturing representing over 90%, particularly automotive and auto parts.

EDUCATION

Average 8.6 years of schooling, with 6.6% analphabetism (below the national average). Nevertheless, in urban areas, San Luis Potosí has a reasonable pool of students enrolled in upper levels of education, both in technical schools and universities. Out of 92 universities and technical schools in the state of San Luis Potosí, 60 are located in the metropolitan area of San Luis Potosí.

EMPLOYMENT

Labor force is estimated at 1.2 million people and unemployment is rated at 3%. The manufacturing activity is concentrated in the metropolitan area of the San Luis Potosí.

LABOR COST

Labor cost information is not readily available, but high demand must be causing upward pressures, given the high concentration in one single metropolitan area and the ongoing construction of the new BMW plant.


The state traditionally registers high migration to the United States. It has a sizable Amerindian population (around 11%). Given that it is not a border state, it does not experience the same transient population as Chihuahua and Tamaulipas.



TAMAULIPASTamaulipas is also a mature manufacturing state that has enjoyed the advantage of close proximity to the United States. The state has a temperate climate and a diversified economy that includes a strong oil and petrochemical sector. Security has been a challenge.

LOCATION

The state shares borders with Texas (Laredo, Brownsville and McAllen). Less than a third the size of Chihuahua (31,000 sq. mi.). Climate is warm and sub-humid given its proximity to the Gulf of Mexico. Annual pluvial precipitation is at 780 mm. Main manufacturing cities are Nuevo Laredo, Reynosa and Matamoros.

POPULATION

Total population 3.2 million, with 88% concentrated in urban locations (Nuevo Laredo has 373,000 people; Reynosa has 590,000 people and Matamoros 449,000 people).

ECONOMY

The state’s GDP represent approximately 3% of the national total. Manufacturing is the strongest component, but oil and petrochemicals is also a key industry for the state. With $23 billion USD in exports, Tamaulipas is the 6th largest exporting State in the country. Manufacturing accounted for over 90% of exports, with computer hardware, communication, measurement and other equipment, electronic components and accessories representing 30.9%. Inflation was under 2.4%, below the 3.06% national average. Strategic sectors are: chemicals and petrochemicals, automotive, appliance, machinery and equipment.

EDUCATION

Average 9.4 years of schooling with 3.3% analphabetism (half the national average).

EMPLOYMENT

Labor force in the state is estimated at 1.5 million people, with a 5% unemployment rate. Manufacturing is distributed between Nuevo Laredo, Reynosa and Matamoros.

LABOR COST

Given similarities, manufacturing labor cost in Tamaulipas is estimated at around the same than Chihuahua ($3.20 USD per hour at 2,161 hours a year).


Similar to Chihuahua, there is intense crossing along the border. Migrants from Central America and Southern States hoping to cross to the United States add to the labor force in border cities. Tamaulipas has a medium population density and a reasonable distribution of the population across the state.

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h&a global outlook - mexico update sping 2016

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