Mexico: Oil opportunities

Tuesday, July 15

Mexico's growth may already be suffering because of the economic slowdown in the United States, but its pull as an industrial centre could be set to increase substantially.  High oil prices have meant rising freight fees, making Mexico an increasingly attractive production base for nearby US companies.  However, for this to happen the government needs to integrate the economy more with that of its northern neighbour, and Mexican costs (such as wages) need not to increase substantially.

Tipping point

At almost 150 dollars per barrel, oil prices have nearly tripled since early last year.  Regardless of short-term oil price volatility, the tipping point where increasing transportation costs become a major factor in deciding where to produce (or move) production has been passed:

Mexico should become attractive for some US companies that seek to produce as much as possible in the geographical area where a product will be sold.

The maquiladora sector -- facilities mainly along the US-Mexico border that import materials, assemble goods with much cheaper Mexican labour, and ship the final product back to the United States, may attract as much interest as during the 1990s.

Growth potential

With geographical proximity and lower transportation costs much more important than at the beginning of the decade, Mexico's higher wages have become less of a disadvantage Moreover, Mexico offers a relatively larger pool of better-qualified workers:

• Automotive. Probably the best recent example of this has been the car industry, which has been attracting significant investment. Production has boomed over the past two years, and has reached 23.6% of manufacturing exports.
• Electrical and electronics. Electrical and electronic equipment is the other significant manufacturing branch, representing 30.3%. Competing directly with Asian factories, this has seen extraordinary growth since early 2007 -- exports jumped 35.5% year-on-year in April.

Remaining problems

onetheless, Mexico may still prove too costly for some US producers due to poor infrastructure, both within the country and connecting it to its northern neighbour. This issue put Volkswagen off Mexico for its new North America plant (it already operates in Puebla, near Mexico City), in favour of a site somewhere in the US south (probably in Alabama or Tennessee):

• A five-day strike at the Puebla plant in 2006 seemed to count against Mexico, along with higher US worker productivity, and the fact that its new US employees are not expected to join the United Auto Workers union.
• Alabama, Tennessee and Michigan offered Volkswagen financial incentives to operate in their territory, while the Mexican government apparently did not.

Ambitious Plan

President Felipe Calderon’s government is aware of the need to improve infrastructure with an eye to growth:

• The government in early February formally launched the National Infrastructure Fund, expecting to fund projects totalling 25 billion dollars in the next four years, particularly building or renovating roads, bridges, ports and airports.
• While the Fund will focus on connecting the south with the wealthier and more dynamic north, projects are planned to increase trade infrastructure with the United States.

If such projects succeed, and costs remain low, Mexico could cement the for the long term the manufacturing advantages it has gained from more expensive oil.