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Investing in Mexico

Time to Buy Mexico (NYSE: EWW)?

Written by Brian Hicks
Posted July 10, 2014

Could Mexico’s economy and stock market be taken to the next level by surging international and American direct investments?

In the wake of China’s economic challenges, let’s take a deeper look at the fascinating and complicated triangle of trade and investment between Mexico, America, and China.

China’s Loss is Mexico’s Gain

According to consultant AlixPartners, Mexico has surpassed China to become the cheapest country for manufacturing — especially for products for the U.S. market. Of the big emerging markets, next is India, followed by China and then Brazil.

In addition, the report showed that across many industries, China’s cost advantage in producing goods and delivering them to Long Beach, California over production from an American manufacturer has shrunk from 22% in 1998 to 5% in 2010. In 2013, it hit zero.

Higher transportation costs fueled by higher oil prices have erased any labor cost advantage.

In addition to the cost factor, flexibility, speed of response, and quality all point to Mexico over China. This is why American trade with Mexico is up 30% since 2010, while trade with China has gone down.

This is good news for American manufacturers and, in an odd but welcome twist, American workers. The reason is that about 40% of the goods assembled in Mexico are made in America. For goods assembled in China, only 4% is U.S. content.

Ironically, these trends have led Chinese companies to move production to Mexico to capitalize on the trade advantages that come from geographic proximity.

As early as 2005, there were about 25 Chinese manufacturers operating in Mexican states such as Chihuahua, Tamaulipas, and Baja, primarily producing products such as electronics and appliances for the Mexican and U.S. markets.

Between 2003 and 2008, China invested only $1.1 billion in Mexico, primarily in the automotive, manufacturing, electronics, and mining sectors. This is but a drop in the proverbial bucket.

The China/Mexico Export Tag Team

But as China’s cost edge thins and logistical costs escalate, China and Mexico may be seeing themselves as partners rather than competitors in exporting to U.S. markets.

Nowhere is this more evident than in the auto industry.

China-based automakers Zhongxing Automobile, Geely Automobile Holdings, and ChangAn Automobile Group (in partnership with Mexico’s Autopark) have all announced plans to place auto-making factories in Mexico.

First Auto Works (in partnership with Mexico’s Grupo Salinas) is already manufacturing cars in central Mexico. The Mexican government requires that foreign investors inject $100 million in capital and annually produce 50,000 cars.

Geely’s plan seems to be the most ambitious, with a $250 million investment over three years and an output of up to 300,000 units annually. All these Chinese companies are really eyeing Mexico as a platform to penetrate U.S. and other Latin American markets.

U.S. companies are also realizing that Mexico is a better option than China for manufacturing goods for North and South American consumer markets. Analysts are calling this “nearshoring,” “inshoring,” or “reverse globalization.”

The U.S. is already the biggest foreign direct investor in Mexico, accounting for 45% of all foreign investment, according to State Department sources.

How will all this shake out, and what will American congressmen (and American labor groups) think of U.S. multinationals shifting manufacturing from China to Mexico?

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Mexico’s Global Manufacturing and Trading Platform

While President Obama highlighted last week the $100 billion in American exports to China, U.S. firms still export three times as much to Mexico as they do to China. Mexico sends 85% of its exports back across U.S. borders.

In addition, Mexico’s trade with the United States and Canada has tripled since NAFTA was enacted in 1994. In comparison, Mexico’s exports to its giant neighbor to the south, Brazil, account for only 1% of its exports.

On the back of NAFTA, Mexico also launched 12 more free-trade agreements that involve more than 40 countries — more than any other country and enough to cover more than 90% of Mexico's foreign trade.

Its goods can be exported — duty-free — to the United States, Canada, the European Union, most of Central and Latin America, and Japan

So is Mexico (NYSE: EWW) the newest China play on the block? Or is it the best “platform” play for investors looking for the magic combination of low costs and access to a well-diversified blend of global markets?

Either way, adding Mexico to your global portfolio seems like a smart move to me.

Until next time,

Carl Delfeld for Wealth Daily

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