When Modine Manufacturing said on Thursday it would close its Mexico plant and shift some production to Asia, it reportedly struck at the heart of Mexicans’ fears for their economic future – that jobs, including those in the car and car component industries, will be moved out of the country.
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According to Reuters, Mexico overhauled its economy in the last two decades to focus on shipping low-cost goods to the United States but the country has lost market share in recent years to Asia where labour costs are even cheaper, especially in China.
Perhaps more worrisome for Mexico longer term, however, is that Asia is more competitive in the production of high-end, added-value manufactured goods such as the computer parts made by US-based Modine, the report said.
Modine’s electronics cooling group, Thermacore International, Inc., reportedly said it would shut its Guaymas, Mexico, plant and move business to other North American and Asian plants – the company said it expected to complete the move within four months to cut operating costs and get its manufacturing operations closer to electronics customers’ assembly locations.
“The main driver wasn’t labour costs. In fact, labour at our factory in Taiwan is not cheaper than our factory in Mexico,” Tom Neyens, Modine’s general manager for its electronics cooling group, told Reuters in an interview.
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By GlobalData“It’s just that we need to be closer to our customers, and they’re over there in Asia,” Neyens reportedly said. “Our clients are computer companies, and that’s where they’re migrating.”
Reuters said that other multinational companies that have cut jobs this year in Mexico include Canada’s Bombardier Inc., US automotive parts supplier Delphi Corp. and aluminium producer Alcoa.
This year’s rebound in US manufacturing has spread to Mexico and sparked a broad economic recovery after three years of stagnation, the report said, but analysts say that Mexico’s comparatively high cost of doing business and poorly educated workers will discourage investment long term.
“It’s a worrying trend,” Edgar Camargo, an economist for Bank of America in Mexico City, told Reuters. “Things are okay this year but some companies are abandoning us when they think about what will happen 10 years in the future.”
Economists reportedly say even though Mexican industry will grow this year, foreign companies are concentrating on expanding capacity at existing plants rather than opening new ones. Stubbornly high unemployment bears out the theory that multinationals are wary of committing too many resources to Mexico.
Reuters said much of the debate in Mexico has centred on its labour costs but, in a central bank poll of foreign companies last month, only 43% of respondents said workers’ salaries were more expensive in Mexico than in countries with which it competed for foreign direct investment.
By contrast, the report noted, 93% said bank credits were more expensive than competing countries, while 87% cited higher telephone costs and 85% cited higher electricity costs.
“Mexico has to become more competitive in operating costs rather than by reducing salaries,” Alfredo Thorne, head economist for Latin America at JP Morgan, told Reuters. “And Mexico has to start producing better-educated workers as well.”
The news agency noted that president Vicente Fox failed to push a tax increase through Congress last year that could have been used to fund better public schools – businessmen say the slim chance for meaningful reforms before Fox leaves office in 2006 has been a significant deterrent to investment this year.
In the meantime, Reuters said, the government has been left to take largely rhetorical shots at the competition.
“Not everything that shines is gold in relation to China,” Fox reportedly told a US-Mexican business group in Chicago on Wednesday. “Mexico offers the same or better opportunities for investment.”
