mexico—co-opete with china 1 january 30, 2009 mexico — co-opete with china leon bian (sdm’04)...

Mexico—Co-opete with China

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January 30, 2009

Mexico — Co-opete with ChinaMexico — Co-opete with China

Leon Bian (SDM’04) — Esteban Guerrero (LFM’03)Leaders for Mfg and System Design & Mgmt Web Seminar

• A Supply-Chain Perspective A Supply-Chain Perspective


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Co-opetition = Cooperation + Competition


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Preamble – Mexico seems unable to compete with China• China has taken over as

the 2nd largest exporter to the US and has even flooded Mexico’s internal market with all kinds of products. As more companies find it harder to stay afloat in the face of Chinese competition, it seems inevitable that Mexico cannot compete anymore. Source: US Census Bureau

China surpasses Mexico as the 2nd largest exporter to the US.

China surpasses Mexico as the 2nd largest exporter to the US.

China’s exports to the US sharply increased in 2001.

China’s exports to the US sharply increased in 2001.


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Three factors contribute to the gloomy picture, from a supply-chain strategy perspective

1. China’s cheap labor and vertical integration

2. NAFTA and maquiladoras’ waning advantages

3. Mexico’s unrealized advantage: proximity


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Population: 1.3B

Area: 9,600,000 km2

GDP: USD 4.222T

GDP Growth: 9 %

FDI Inflow (2007): US$75 B

Foreign Exchange Reserve: US$2T

Export: US$1.465T Import: US$1.156T

Data source: 2005 Ministry of Commerce

1. China’s cheap labor and vertical integration – China moves up the Value Chain

• Low labor cost (fully loaded): $1 per hour (China) vs $3 per hour (Mexico)

• Joined WTO in 2001

• Exchange rate advantage

• Investment in fundamentals


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2. The advantages provided by NAFTA and the maquiladora strategy faded away

• Scarce labor in the less populated north contributes to the rise in labor costs

• Moving factories south is not necessarily attractive from a logistics point of view

• NAFTA’s Article 303 reduces the tax benefits for maquiladoras

Population: 110M

Area: 1,972,550 km2

GDP: USD 1.143B

GDP Growth: 2 %

FDI Inflow (2005): US$17.9 B

Foreign Exchange Reserve: US$91.9B

Export: US$294B Import: US$305.9B


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3. Mexico’s biggest advantage — proximity to the US — has not been fully exploited

• On occasion, it is faster to build and ship goods from China to the US market than it is from Mexico

• Transparent truck/trailer crossing — warranted by NAFTA — must be fully realized


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… but Mexico can adopt a different strategy to tackle the issues:

1. China’s cheap labor and vertical integration

2. NAFTA and maquiladoras’ waning advantages

3. Mexico’s unrealized advantage: proximity

• Benefit from China’s low labor costs through “co-opetition”

• Prepare the country for this new scheme: people & logistics

• Utilize the one advantage that no other developing country has


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1. Benefit from China’s low labor costs through “co-opetition”— an alternative to direct competition

• A careful supply-chain modeling exercise can reveal that not everything is cheaper in China, and Mexico need not compete with China in all instances. In certain cases, a more profitable alternative to a China-US value chain is a China-Mexico-US value chain.

a) China-US vs. Mexico-USa) China-US vs. Mexico-US b) China-Mexico-USb) China-Mexico-US


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A China-Mexico-US supply-chain model

• CH-MX-US is more profitable, the lower the labor content. So CH-MX-US is more suitable for capital-intensive products or if more of the transformation is done in Mexico.

• Mexico would have to provide more material than China (either in weight or value).• Adding more material content in Mexico improves profitability more than reducing Mexican labor content.• If Mexican Import Tariffs increase, however, decreasing overall Chinese content (both labor and

material) by a similar rate tends to cancel the effect.

Profit $ (@ DM = $50)

0

20

40

60

80

100

120

0.0 1.0 2.0 3.0 4.0 5.0

WTcx (CH to MX)

40%rt-40% P.cxu

40%rt-40% P.cu

30%rt-40% P.cxu

30%rt-40% P.cu

20%rt-40% P.cxu

20%rt-40% P.cu

10%rt-40% P.cxu

10%rt-40% P.cu

0%rt-40% P.cxu

0%rt-40% P.cu

Component Material Weight from China to Mexico (kg)

Mexican Tariff (%)

CH-US weight = 5kg constantly

Chinese Content (L+Mat’l), (%value)


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40

60

80

100

120

140

0% 10% 20% 30% 40%

CH%

Pro

fit $

(@ 2

.5kg

ex-

CH

)

$100-40% P.cxu

$83-40% P.cxu

$67-40% P.cxu

$50-40% P.cxu

$33-40% P.cxu

$17-40% P.cxu

$0-40% P.cxu

…supply-chain model (2)

Total Chinese Content (L+Mat’l),

(% total value)

Mexican tariff (%)

Total MATERIAL Value


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2. Prepare the country for this new scheme: people (increase skilled-labor supply)

• Further train the local population in the north

• Attract skilled labor from the south

• Move more factories south


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2. Prepare the country for this new scheme: logistics. And, 3, fully exploit Mexico’s proximity to the US.

• Improve customs processes to reduce or eliminate border-crossing time

• Develop a secure, high-speed railway system that can bring products from anywhere in Mexico across the border in one day — and more cheaply


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How this strategy changes in light of the current worldwide economic slowdown:

• Lower fuel cost lower transportation cost• Worsening economic condition lower labor costs in both

countries• Lower demand cost is more important (JIT, etc)• Large investment projects (e.g. new plants) delayed

Some of these changes are temporary, but the need for Chinese exporters to assemble closer to their markets will remain

The benefit of leveraging a particular supply chain depends on the nature of the product, and it should be considered on a case-by-case basis


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Summary: Mexico – Co-opete with China

• Take advantage of China’s low labor cost while leveraging the tariff advantage provided by NAFTA

• Increase skilled-labor supply to be able to assemble capital-intensive products

• Fundamentally change the roles of China and other emerging economies in a Mexico-led value chain into the US

• Engage the rest of the country through improved logistics


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Thank you

Esteban [email protected]

Leon BianMotorola Inc

[email protected]

Paper: http://www.mexico-now.com/index.php/contents/editions/No33.html


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backup


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Detailed observations (1)

Observations:All else being equal---while P.cu stays constant… 1. ...as WT ex-CH (+) grows, P.cxu (-) drops [i.e. the more WT gets loaded in MX, the less overall freight, because MX-US FRT < CH-MX FRT]; e.g. 2x WT.c ---> 20~25% drop in P.cxu 2. ...as im.c-x (+) grows, P.cxu (-) drops [i.e. as it gets more expensive to import CH components into MX, MX cost increases, thus reducing overall profitability]; e.g. 2x im.cx ---> -10% P.cxu 3. ...as CH% (+) grows, P.cxu (-) drops, and makes the effect of im bigger [i.e. as more of the product is produced in MX, the effect of a higher MX DL Rate can be felt]; e.g. 2x CH% ---> -10% P.cxu 4. If im, CH% and WT remain the same, as DM (+) grows, P.CXU (-) drops a bit, but P.CU (-) drops a lot [i.e. the more DM value gets loaded in MX, the less the effect of MX DL (which is higher than CH DL), thus reducing P.CXU a bit; but greater DM vs. DL obviously increases costs tremendously in a CH-US chain, thus reducing P.CU by a lot]

Conclusions: 1. CH-MX-US chain works better for low labor-intensive products (i.e. a higher DL% is better suited for the CH-US chain) 2. Adding more material to the product in MX in WT (and to a lesser extent in value) has a greater effect on profitability than trying to reduce MX Import Tariffs 3. If Tariffs increase, though, decreasing CH content by a similar % cancels out the effect

Profit $ (@ DM = $50)

0

20

40

60

80

100

120

0.0 1.0 2.0 3.0 4.0 5.0

WTcx (CH to MX)

40%rt-40% P.cxu

40%rt-40% P.cu

30%rt-40% P.cxu

30%rt-40% P.cu

20%rt-40% P.cxu

20%rt-40% P.cu

10%rt-40% P.cxu

10%rt-40% P.cu

0%rt-40% P.cxu

0%rt-40% P.cu

Component Material Weight from China to Mexico (kg)

Mexican Tariff (%)

CH-US weight = 5kg constantly

Chinese Content (L+Mat’l), (%value)


19

40

60

80

100

120

140

0% 10% 20% 30% 40%

CH%

Pro

fit $

(@ 2

.5kg

ex-

CH

)

$100-40% P.cxu

$83-40% P.cxu

$67-40% P.cxu

$50-40% P.cxu

$33-40% P.cxu

$17-40% P.cxu

$0-40% P.cxu

Detailed observations (2)

Total Chinese Content (L+Mat’l),

(% total value)

Mexican tariff (%)

Observations:All else being equal… 1. ...as CH DM (+) grows, P.cxu and P.cu (-) drop (respectively by 2~10% [dropping with CH%(+) ] and 11~15% [ (-) with DM (+) ]; i.e. more DM means fewer profits overall, but if more DM gets loaded in MX, more DM gets a lower tariff, so P.cu will be more sensitive to the greater amount of DM overall 2. For DM.c < 50% value, as CH% (+) grows, P.cxu (+) grows, while for DM.c > ~50%, Pcxu (-) drops... 3. ...but only for higher values of DM.c is P.cxu > P.cu... 4. As WT ex-CH (+) grows, P.cxu (-) drops; e.g. 2x WT.c ---> P.cxu drops by 20% 5. And as WT ex-CH (+) grows, because P.cxu (-) drops, the DM range and the CH% range for which P.cxu > P.cu, shortens [i.e. DM has to be closer to 100% (or >>DL) and CH% has to be closer to 0% (or <<MX%) for P.cxu to remain > P.cu] 6. As im.c-x (+) grows, P.cxu (-) drops [i.e. if MX Tariffs on CH products get higher, MX costs increase, which reduces overall P.cxu]; e.g. 2x im.c-x ---> P.cxu drops by 3~24% (the higher the CH%, the higher the P.cxu drop, but this drop is less sensitive to DM drop; e.g. DM(+) ---> P.cxu(-) <=> CH% >>0)

Conclusions: 1. For CH-MX-US to be profitable, more material (in WT or $) has to be loaded on the MX leg 2. DM in general has to be high and CH% low, which means CH-MX-US is better for lower labor-intensive products and if more of the transformation is done in MX 3. Adding more WT to MX has a greater effect than reducing DL.x

Total MATERIAL Value

mexico—co-opete with china 1 january 30, 2009 mexico — co-opete with china leon bian (sdm’04)...

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