After two years of a U.S.-China trade war, multinational companies that manufacture in China are getting restless. Escalating U.S. tariffs, on top of rising labor costs, stiffening environmental rules, and the heavy, often capricious hand of the Chinese state are forcing manufacturers to rethink their global presence. Dell Technologies Inc., Apple Inc., Nintendo Co., Crocs Inc., IRobot Corp. and GoPro Inc. have announced changes in where they are going to make things. Many more companies will follow.
Yet just as the world’s C-suites and boardrooms are mulling where to put their next plants and production facilities, Mexico is taking itself largely out of the game.
Over the last 40 years, Mexico has transformed its economy from one dominated by oil and other commodities into a major manufacturing powerhouse. Today, the ratio of its exports to gross domestic product tops 39 percent — more than twice China’s, not to mention that of the more closed United States. Auto parts, machinery, computers and phones lead this wave — most going to the U.S. but some also headed to Brazil, Canada, Germany and elsewhere.
Tariff-free access to the world’s largest consumer economy helped, as did the tens of billions in foreign direct investment that came with the greater legal certainty and intellectual-property protections agreed to in the North American Free Trade Agreement. Mexico has amplified these advantages by graduating tens of thousands of technicians and engineers every year. It has made it easier to open up shop, removing bureaucratic hurdles for private companies. Wages have remained relatively low, too, erasing one of the edges enjoyed by China, where wages have been rising.
Yet now, as companies begin to relocate, very few are coming to Mexico. True, existing supply chains are sticky. Asia has electronics largely locked up: Its nations are able to put together phones, radios, laptops and the like with astonishing speed and agility. Thousands of parts are sourced across the South and East China seas: screens from Japan, circuits from South Korea, chips from Taiwan. Apple’s attempt to make MacBook Pros in Texas failed for want of a screw, a cautionary tale for all companies looking to move very far away from their current production sites. The uncertainty over when and whether Congress will approve the United States-Mexico-Canada Agreement, or new Nafta, adds to the outside risks.
But the biggest reasons Mexico isn’t attracting its share of global relocations are homegrown: Its once-business-friendly environment is looking much less so.
The government is slashing investment in the kinds of infrastructure that manufacturers need (and that China has been so exceptional in providing). The proposed budget for new roads is down 45 percent; rails and ports don’t fare well, either. President Andres Manuel Lopez Obrador, known as AMLO, canceled plans for a world-class airport that could have moved cargo alongside millions of people. For global supply chain managers, the big-ticket tourist train and Tabasco refinery that AMLO touts are just financial distractions.
The government’s energy policies don’t ensure Mexico will have enough reliable and affordable electricity to support a manufacturing surge, either. Instead of encouraging private investment to deal with the rolling blackouts across states along the eastern coast, the government chose to fight with international companies over pipeline projects, canceling both renewable and conventional energy auctions. With Mexico’s aging power grids already overtaxed, a real risk facing new plants and operations may be just keeping the lights on.
Violence is rising, particularly in the industrial heartland, forcing any company to think more than twice about setting up shop. And despite AMLO’s rhetoric, the new budget shows dealing with insecurity isn’t a true priority. Spending remains flat. At less than 1% of GDP, it is far below what other Latin American nations or many of its emerging-market peers spend to protect their people.
Add in social unrest. Strikes are on the rise, making Mexico’s reasonable wages and skilled workforce less attractive. Protests, such as those that blocked Michoacan’s highways and railroads for months, threaten deliveries from the main Pacific port of Lazaro Cardenas to central and northern Mexico’s industrial clusters. For any company looking to bring in Asian parts to feed a new Mexico-based link in its supply chain, these disruptions are dire.
Even ownership of land, plants and other facilities is looking less certain than before, given the recently passed asset forfeiture law. While taking on serious issues of corruption, extortion and organized crime, the broad framing could also snare companies involved in even ordinary disputes. The new rules give the government the right to confiscate property first and ask questions later. With no initial independent domestic judicial review, owning and operating a business in Mexico has become more risky.
But perhaps most importantly, the government isn’t selling Mexico. Big corporations have become used to being wooed by nations. Under AMLO, Mexico is doing next to nothing to let these job creators know it is open for business.
Promexico, an agency that once had offices in over 30 countries to gin up business for homegrown exporters and attract international ventures, was recently shuttered. The government has also pulled out Economy Ministry employees from embassies, leaving no officials in Beijing or Shanghai to argue for why Mexico is a better alternative than Vietnam, Malaysia, Indonesia or Ethiopia.
Mexico did see a good bump in its sales to the north in the first half of 2019, as existing operations took advantage of the tariff headwinds facing their Chinese competitors. But over the same six months, domestic investment all but collapsed, and foreign investor confidence plummeted, suggesting any gains will be fleeting (especially as production moves out of China and into other countries not subject to punitive U.S. duties).
Factories and facilities, particularly in advanced manufacturing sectors, have long lead times. Years can pass before an investment’s first car, plane engine or MRI machine comes off the line. The decisions being made now to redirect hundreds of billions of dollars in contracts and foreign direct investment can either fuel growth or leave countries scrambling for the next decade or more. Mexico’s retreat right at the moment of a global manufacturing shakeup means it is losing an opportunity to gain in the years to come. AMLO says he cares more about economic development than growth. Yet under his administration, Mexico is now blowing its biggest chance for both.