U.S. dumps China for Mexico

Mexico overtakes China as the number one location for manufacturing goods destined for the American market.

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By Veronica Galan and Enrique Duarte

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Ford continues to invest in Mexico despite the crisis.
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MEXICO CITY (CNNExpansion.com) -- Mexico did not have an extreme economic makeover, but the global recession was enough to defeat China as the number one place for American assembly-for-export factories, or maquiladoras.

"For many companies that want to export to the United States, like the maquiladoras, Mexico's exchange rate will be seen as a stable and permanent advantage and we are going to see much stronger investment flows associated to this industry," said Cesar Hernandez, general director of foreign trade at the Mexican Trade Ministry.

Mexico has become much more attractive, even Chinese companies are moving to the country to take advantage of the North American Free Trade Agreement (NAFTA) commercial and fiscal benefits and export to the United States, said different experts in foreign trade.

"Compared to China and other manufacturing hubs, Mexico offers better access to North American markets with a shorter, faster and cheaper transportation route to move products and supplies by truck, rather than over thousands of miles by ship, rail, and truck combined," said Daniel Silva of the Mission Economic Development Authority.

Maquiladoras are an extension of U.S. production of automobiles, electronics, apparel and many other goods designed for the export market. Maquiladoras are often owned and operated by foreign companies, who, even though they bring their equipment from the United States, pay for assembly, operating and labor costs in pesos, which allows their dollars to go much further.

Mexico is the least expensive

An index developed by the global business advisory firm AlixPartners states that by the end of 2008, Mexico was the least expensive country for the U.S. to manufacture.

"The index showed that China, once the lowest cost supplier ... has now dropped to number three in LCC (low-cost countries) rankings, behind India and the new number one, Mexico," according to the AlixPartners 2009 Manufacturing-Outsourcing Cost Index.

Manufacturing in Mexico costs around 68%; in India around 73%; in China, near 86% and in Brazil close to 91%, compared to costs in the United States.

China has lost its sex appeal for companies that manufacture due to the 20% appreciation of its currency against the dollar, the increase in the cost of freight and the cost of labor, AlixPartners explained in its report. During the same time, the peso has dropped 20% against the dollar.

Geographic proximity

Mexico's maquiladoras include plants operated by Johnson & Johnson, (JNJ, Fortune 500) Whirlpool (WHR, Fortune 500) and car-parts maker, Delphi Corp. Close to 58.4% of the near 3,100 maquilas are located at the northern border in Mexico, according to the National Maquiladora Council of Mexico.

"There are some kinds of maquila that have to be located in Mexico, no matter what, due to the integration of production chains, like in the automotive and aerospace industries ... and the risk factor for just-in-time inventories. Mexico is closer to the U.S.," Claudia Avila, general director of the Mexican Industrial Park Association.

Even though Mexican government officials and business leaders have seen maquiladoras leave the country to go to China and then come back, none of them dare to give data on how many companies have done it.

"How many companies have come back to Mexico is not that simple to detect," said Cesar Castro, head of the National Maquiladora Council in Mexico. To top of page

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