Is Mexico the Next Asia?

Is Mexico the Next Asia?

Recent articles and studies have begun to cast doubt on the conventional wisdom that goods made in Asia are lowest cost. In fact, recent calculations have shown definitively that cost of Asian manufactured products is growing rapidly. Looking at prices overall, Asia is now approximately 15-20% more expensive than it was only 4 years ago. So, if Asia isn��t the lowest cost venue for manufacturing, where does one look?

BY DANIEL J. HILL

Rising Mexico

In comparison to China, Mexico has emerged as the ��Best Cost Country�� for products destined for the U.S. and global markets. The reasons are relatively straight-forward. In addition to being a low labor cost country, five other key elements have emerged to provide Mexico��s advantages:

• Low transportation cost: Being immediately adjacent to the world��s largest market, especially when oil prices and hence transportation costs are so volatile, is a significant long-term advantage. Whatever happens to the price of oil in the coming decades, this relative advantage will remain intact.

• Favorable (and relatively stable) exchange rate: As Mexico��s leading trading partner, its economy is inextricably bound to that in the U.S. As a result, the Peso trades in a relatively narrow range relative to the U.S. dollar. Recent devaluation (about 15%) of the Peso relative to the U.S. dollar makes manufacturing in Mexico even more appealing. Contrast that to Asian currencies that have appreciated 10-11% since 2005.

• Low, stable labor costs: While labor costs in many parts of Asia are appreciating at 7-8% per annum, labor rates in Mexico have remained steady or even declined when denominated in U.S. dollars.

• Free trade status: As a part of NAFTA, Mexican products are exported, duty free into the U.S. market. Additionally, Mexico has Free Trade Agreements with 43 other nations. In addition to the U.S. and Canada, its products can be exported, duty free, to the EU, most of Latin and Central America and Japan.

• Low tax profile: Many US firms seeking to locate in Asia request tax holidays from the host government ranging from 5 to as long as 10 years. That isn��t necessary in Mexico. Tax rates for foreign-owned companies are based on a very small percentage of total value added in Mexico.

Essential Conditions for Success

For Photovoltaic companies who wish to prosper in the highly price-competitive U.S. market, a low cost manufacturing strategy is not only desired, but essential. Additionally, a country that has preferential tax structures for foreign-owned companies is also a significant advantage. Mexico provides the world with the best of both: low, stable labor rates and a probusiness government with tax structures that provide foreign-owned companies to have a very, very low tax profile. Figure 1 shows the comparative costs and profitability of a 425 MW, crystalline silicon manufacturing facility located in the U.S. and one located in Mexico. The only variables in the analysis are the labor rates and tax burden. In practice, there are also additional savings to be made in Mexican operations, but for the sake of simplicity, only those two variables are considered.

Government incentives, readily available in Mexico for direct foreign investment are not considered in Figure 1, but can be allocated to additionally drive down the cost structure in Mexico. Note also that the facility is assumed to have only 800 direct labor; higher numbers of direct labor will dramatically increase the differential in labor cost.

The lower labor rate and tax profile drive an annual cost savings of approximately US$ 90,000,000 per annum. That is almost 8% of net sales. PV companies considering site selection should take into account the total lifetime costs and be sure to net out increased profitability driven by lower operating costs against one-time incentives and time-delineated tax holidays. In Figure 1, profitability is approximately 64% higher for the facility operating in Mexico than the facility in the U.S. As the cost per MWp decline, those percentages become even more pronounced. At an Average Selling Price (ASP) of US$ 2.35/MWp, the Mexican facility is 75% more profitable.

The intent of the analysis is not to predict a cost structure for any specific photovoltaic company or process. Each enterprise must conduct the analysis for themselves. Consideration of the total value of increased profitability and lower labor costs in association with the advantages listed above make Mexico an ideal location from which to manufacture at exceptionally low costs to provide products for the U.S. market.

Daniel J. Hill is Chairman and CEO of Silicon Border (www.siliconborder.com).

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