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Many consumer goods companies are transferring their manufacturing to emerging markets due to the lower wage and transportation costs involved. Packaged food and automotive are two of the industries where this trend is especially strong, with players such as Barry Callebaut and Ferrero setting up major manufacturing hubs in the region in 2013. BMW’s plant is scheduled to open in 2014. While Asia has previously seen much of this activity, Latin America countries such as Mexico and Brazil are proving a major draw and are rapidly becoming manufacturing hubs due to low wage costs, high productivity, geographical proximity to the world’s biggest consumer market (the USA), a large number of free trade agreements, and growing education standards.
Source: Euromonitor International from International Labour Organisation (ILO)
While average hourly manufacturing wages in Mexico and other key Latin American countries are still higher than China, they are rising far more slowly. China’s more than doubled between 2007 and 2012, from US$1.5 to US$3.2. Mexico’s grew only from US$4.6 to US$4.7, and actually declined to US$4.1 in 2009. Setting up a manufacturing hub is a long term investment, and Latin America looks like a safer bet for ensuring that wage costs do not spiral in the mid-term.
Productivity, defined as total GDP per person employed is higher in some key Latin American countries compared with that of some other emerging countries such as those in Asia. For example, in 2012, Mexico’s productivity was US$23,202 compared with US$3,152 in Vietnam or US$4,443 in India.
The US economy may have felt the full force of the global recession beginning in 2009 but it remains the world’s biggest consumer market in 2012: its total consumer expenditure was higher than all Asian countries put together. The USA is also the biggest automotive consumer market and second biggest consumer of foods and beverages. Latin America’s geographical situation is ideal for companies to take advantage of lower wages in Latin America while still being able to quickly transport goods, especially perishables in time to meet fluctuating US consumer demand. Heavy investment in infrastructure across Latin America will also continue to improve transport links between the two regions.
Mexico is a member of the North American Free Trade Agreement (NAFTA) together with the USA and Canada, providing it with unrestricted access to the whole North American market. It also has a free trade agreement in place with the EU and numerous other countries. Mercosur is the other major trading pact in the region. Brazil has been a member since 1991 together with partners Argentina, Uruguay and Paraguay. Mercosur trades with the European Union (EU), amongst others.
While many Latin American countries continue to have significant shortcomings in the quality of their education systems, there has been a tangible improvement in the quality of education standards, adult literacy levels and rising higher education student numbers in subjects like engineering and manufacturing and therefore also in the availability of staff for skilled manufacturing work such as that involved in automotive production. For example, Mexico’s literacy rate as a percentage of the adult population aged 15+ rose to 93.7% in 2012, up from 87.6% in 1990, while the number of its graduates in Engineering, Manufacturing and Construction jumped from 67,587 in 2007 to 113,882 in 2012.