The NAFTA Commission Meeting held on April 3rd in Washington DC issued a joint statement that outlines continued cooperation of Canada, the U.S. and Mexico to increase economic competitiveness and trade among the 3 nations. Since NAFTA was signed in 1994 trade has more than tripled from $288 billion to $1 trillion.

Among the significant agreements reached at this meeting are to continue to combat challenges to Intellectual Property Infringement (IPR) to fight piracy and counterfeiting. The U.S. and Canada are among the six countries that have joined the Anti-Counterfeiting Trade Agreement (ACTA). Mexico is in the process of working on comprehensive reform to its legal system to enable it to achieve the high standards pursued under ACTA.

A focus of this meeting was the challenges faced by small and medium enterprises (SMEs), including lack of access to information and reducing unnecessary barriers and costs for these enterprises.The U.S. and Mexico are linking these SMEs for trade opportunities through the Small Business Development Centers (SBDCGlobal.com). Canada will consider joining this network.

The Working Group on Rules of Origin (WGRO) reached agreement on a fourth set of changes to the NAFTA Rules of Origin. These changes will be implemented as soon as possible and will further facilitate trade between the three countries. To further increase trade, the commission agreed to pursue sectoral cooperation in areas such as trade in chemicals. Working committees will address ways to reduce differences in regulations and procedures, which can reduce transaction costs.

Mexico and Canada also indicated their strong interest in joining the Trans-Pacific Trade Partnership (TPP), a move that was welcomed by the U.S. The TPP to date includes Australia, Brunei, Darussalam, Chile, Malyasia, New Zealand, Peru, Singapore, Vietnam and the U.S. As of 2010, Mexico had signed 11 free trade agreements, covering trade with 41 countries.

Mexico's minimum wage commission set the increase for 2012 at 4.2% for all three of the country's geographic zones, slightly above the rate of inflation expected for this year and next. This is slightly higher than the 2011 minimum wage with an increase of 4.1%. This is higher than the expected rate of inflation in which the bank of Mexico projects it to be between 3-4%.

The increase brings the minimum wage in Mexico to 62.33 pesos ($4.60) a day for zone A, which includes Mexico City. The minimum wage is slightly lower in other geographic zones.

Area A: The states of: Baja California, Baja California Sur, Mexico City; some municipalities of the states of: Mexico, Sonora, Tamaulipas Veracruz and Chihuahua.

Area B: The states of: Jalisco, Nuevo León and some municipalities of the States of: Sonora, Tamaulipas y Veracruz (not covered by A, above).

Area C: The states of: Aguascalientes, Guerrero, Quintana Roo, Nayarit, Oaxaca, Puebla, Querétaro, San Luis Potosí, Sinaloa, Tabasco, Tlaxcala, Yucatán, Zacatecas, Morelos, Michoacán, Hidalgo, Guanajuato, Durango, Chiapas, Coahuila, Campeche, and some munipalities of Veracruz, Nuevo León, Sonora, Tamaulipas, Jalisco, and Chihuahua (not covered by A and B, above).

Comparing Mexico and China

Although minimum wages in Mexico might be higher than in China, companies are concerned with the rising wages and transportation costs associated with China. Mexico has focused its resources on developing special training and linkage programs that tie in directly with a specific industry in order to strengthen its supply chain market. However, companies have recognized that for some labor-intensive processes, Chinese workers do not meet the skill sets required for specific jobs. When looking at production costs in its entirety, Mexico is a viable option for companies wanting to cut transportation costs. This is primarily due to its close proximity to the U.S.

Automotive manufacturing including auto parts remains a bright spot for the Mexican economy with exports close to $65 billion in 2010, exceeding revenues from crude oil, remittances and tourism. Automotive exports to the U.S. fell by 14.5% in August compared to 2010, with exports to Europe partly offsetting the U.S. decline in demand. The overall Mexican economy is expected to grow between 4% and 5% in 2011. Mexican economists predict foreign direct investment in Mexico will reach $20 billion this year.

In 2008 Mexico became the largest supplier of auto parts to the U.S. Mexico exports 80% of its vehicles to the U.S.: 11 out of every 100 autos sold in the U.S. are made in Mexico. Other destinations are Latin America: 11%, and the European Union: 9%. In 2010 Mexico ranked as the 6th automotive exporter in the world.

By 2014 automotive production is expected to reach 2.4 million units. Eight of the 10 leading OEM’s have assembly plants in Mexico. More than 300 Tier 1 suppliers have plants in Mexico, including: Chrysler, Ford, GM, Honda, Nissan, WV and Toyota. Heavy truck manufacturers inclued Dina, Navistar, Kenworth, Daimler, Volvo, Isuzu and Scania.

Over 1,100 companies manufacture auto parts in Mexico including: Robert Bosch, Denso, Delphi, Magna, Visteon, Eaton, Valeo, Bridgestone/Firestone, Johnson Controls, Michelin, Goodyear, Lear, ThyssenKrupp, Faurecia, and Siemens. The automotive and auto parts plants are located in 16 Mexican states: Aguascalientes, Baja California, Chihuahua, Coahuila, Distrito Federal, Estado de México, Guanajuato, Jalisco, Morelos, Nuevo León, Puebla, Querétaro, San Luis Potosí, Sonora, Tamaulipas and Tlaxcala.

Mexico offers manufacturing costs that are 25% lower than the US and is increasingly capturing the attention of car manufacturers, such as Mazda, which recently announced plans to invest 500 million dollars to produce 140,000 vehicles a year for export to Central and South America. Honda, GM, Chrysler, and Ford have announced expansion plans in the works for Mexico. By 2020, sales from the automotive industry in Mexico are expected to reach 120 billion dollars. North American Production Sharing (NAPS), a leading shelter company in Mexico providing outsourced administrative and compliance services, expects further expansion in the automotive sector through 2016.

Mexico, China and the U.S. form a unique triangle consisting of strategic advantages for investment and manufacturing. Understanding key advantages that China, Mexico and the U.S. offers can uncover significant savings opportunities.

Direct labor costs are just one of the factors considered when hoping to save on production costs. Over the past decade many U.S. based electronics manufacturers shifted production to Asia to benefit from low cost labor. Although wages in China are still lower than in Mexico, saving on China air-freight costs by shipping in bulk to Mexico makes the difference in labor cost insignificant. The cost improvement associated with lower labor costs can be quickly eliminated when transportation and inventory costs are taken into account.

In short, as wages and air-freight costs from China continue to rise, companies are taking a closer look at how to improve their bottom line, therefore supply chain strategies are playing a bigger role in ensuring a company’s profitability.

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