Thomas White Global Investing
Mexico Stamp
January 27, 2012
A Postcard from The Americas
Mexico: The glow of economic resilience lightens the shadows of violence

Mexico Cable Bridge

The Baluarte Bicentennial Bridge, between the states of Durango and Sinaloa, is one of the many cable-suspended bridges spanning the new highways being built in Mexico. Towering at more than 1,300 feet, Baluarte is the highest cable-stayed bridge in the world.

The statistics are grim. Nearly 50,000 people have been killed in Mexico over the last five years in drug-related violence. Drug trafficking remains highly lucrative and the money lures young men into gangs that are well financed and armed. Despite repeated government attempts to push them back, criminal gangs rule the northern areas of the country with impunity. Kidnapping for ransom is commonplace and there are few businessmen who will not pay extortion money to criminals in the worst affected regions. People hardly venture out of their homes after dark and are scared of spending money, for fear of attracting the attention of criminals. Researchers have estimated that drug related violence is stifling Mexico’s economic growth by one percentage point or more. It’s not an ideal point to be in a tough global environment.

But, surprisingly, the Mexican economy has so far remained somewhat impervious to all that violence. GDP growth last year was relatively healthy and the expected slowdown during the current year is likely to be a minor dip rather than a steep fall. Domestic consumer demand has held up, supported by nearly $23 billion in remittances during 2011 from Mexicans working abroad. Industrial investments are flowing in from abroad, and last year were estimated by the UN at close to $18 billion. Despite higher consumer prices in recent months, inflation remains under control and has allowed the central bank to maintain interest rates relatively low.

It is interesting that much of the economy’s resilience is rooted in the sustained buoyancy in export shipments, especially of manufactured goods, when consumer demand in the U.S., the destination for most of Mexico’s exports, has not been particularly robust. This suggests Mexico’s improved export competitiveness and, in fact, Mexico has been steadily increasing its share in the total import basket of its northern neighbor. The most significant driver of this trend are rising labor and other costs in China and in neighboring Asian countries that are the principal suppliers into the U.S. market. Even though the average wages in Mexico are still higher than most developing countries in Asia, the competitive edge in that Far East region has gradually declined when aggregate costs are considered. The close proximity to the U.S., which allows greater logistical flexibility in response to short-term demand fluctuations, adds to Mexico’s luster in the eyes of large manufacturers.

Nowhere is this trend more visible than in the automobile sector, which accounts for nearly a fourth of Mexico’s manufacturing output and employs more than half a million people. Annual production of cars and light vehicles last year totaled 2.56 million units, the highest ever. More than 80% of the production was exported, as shipments to overseas markets crossed 2 million units for the first time. Almost all major global car makers now have manufacturing units in Mexico, Fiat being the most recent entrant with an assembly line for its chic small cars.

Notably, while the U.S. remains the most significant market for Mexican automobiles, exports to other Latin American countries are growing at a faster pace. Mexican auto exports to markets in South America jumped more than 50% last year after the signing of regional trade pacts meant lower trade barriers and tariffs. This has considerably increased market access, especially in countries such as Brazil and Argentina. As demand growth in these new markets is likely to be stronger than in the U.S., research outfits such as IHS Global Insight are hopeful that Mexico will be able to expand its shipments even further in the future. Manufacturers are also betting that Mexico will become a regional automobile manufacturing hub, and are busy building new facilities and expanding existing ones. For example, Japanese car maker Mazda is investing $500 million in a new factory, while larger rival Honda is spending $800 million to build its second assembly line. Not to be outdone, Nissan has announced a $2 billion investment in a third assembly unit to lift its aggregate capacity in the country to over 1 million units annually.

Alongside its efforts to stem the violence, the Mexican government is also doing its part to lift economic growth by pushing significant infrastructure projects. Earlier this month, the Mexican president inaugurated the world’s highest cable suspended bridge across the Baluarte River in the Sierra Madre Occidental mountain range. When opened for traffic later this year, it will significantly improve transportation to one of the most inaccessible parts of the country. The bridge is only one of many more that will dot the new $1.5 billion highway, connecting the city of Durango to the Pacific port city of Mazatlan. The new highway, which is expected to dramatically cut travel time between the two cities, is again part of a larger and more ambitious project to connect the Atlantic and Pacific coasts of Mexico. It is hoped that this project, when completed, will facilitate easier access for Mexican products to Asian markets.

Mexican author Enrique Krauze recently wrote that, ‘Mexico is a country that measures its time in centuries and even in millennia’. The industrial structures and infrastructure marvels sprouting up all over the country may not survive that long, but they will in many ways contribute to the story of Mexico as it evolves in the future.

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