Manufacturing Showdown: Mexico vs Brazil
September 29, 2015
The global demand for goods is rising as emerging economies grow. This in turn isfueling increasing competition in the manufacturing industry and the countries that host them. Nowhere is this more evident than in the automotive manufacturing industry. Both in the top 10 manufacturers worldwide, Brazil and Mexico remain strong contenders
Brazil’s economic downturn over the past few years has adversely affected their share of the manufacturing market. This has allowed recent trends to favor Mexico and fueled it to overtake Brazil in production numbers. Second only to Japan, Mexico is now a top supplier of cars to the United States. Brazil’s top export customer is China. The automotive manufacturing industry in Mexico increased by 10.2% in 2014 while Brazil’s dropped by 15.3%. First quarter 2015 figures are just as dramatic, with Mexico up 3.2% and Brazil down a whopping 21.3%. The number of vehicles being manufactured is close, with Mexico producing over 3.3 million and Brazil producing just over 3.1 million.
Modern technology production is thriving in both countries as well. Large-scale solar panel manufacturing is on the rise in Brazil, including plants for Swiss and Chinese companies. Mexico is the world’s largest supplier of flat-screen televisions and is also a leading-edge electronics manufacturing sector. In a controversial move earlier this year, the government gave away over 10 million television sets to low-income Mexican citizens. This was in support of conversion to digital broadcast and Mexico’s efforts to update their technology infrastructure. Work is also underway to improve internet access throughout the country.
NAFTA and BRIC trade partnerships have shaped the export economies of both Mexico and Brazil. These agreements reduce trade barriers, such as quotas and tariffs, in order to stimulate trade between the partners. A country comparison of the automotive industry shows that Mexico exports 80% of the automobiles it manufactures, and Brazil exports 15%. Since the inception of NAFTA two decades ago, the U.S. makes up 80% of all exports from Mexico. Brazil’s main partner is China, who takes 17% of all exports. The economies of major trade partners affect the export economy. It is plain to see by the numbers that Mexico is more profoundly affected by the condition of the U.S. economy than Brazil is by China. The 2008 U.S. recession resulted in a 6.6% decrease in Mexico’s GDP in 2009. It is still to be seen what the 2015 Chinese economic woes will do to Brazil’s economy, but the impact will likely be less with the smaller export percentage.
Once goods are produced, they must be brought to the market. Mexico’s strategic location next to the U.S. gives it efficient access to the world’s largest economy. Access is continuing to improve with construction of new transportation corridors under the NAFTA agreement. Conversely, shipping costs have been on the rise in recent years due to rising oil prices. Brazil’s distant location from major markets must be factored into the total cost of manufacture and movement of goods to the market.
When considering costs in a global market, the exchange rate can be a major factor. As of August 2015, the exchange rate compared to the U.S. dollar was 3.4625 for Brazil and 16.3655 for Mexico. Both countries would provide an advantage to a U.S. based company looking to outsource its manufacturing, but the dollar would stretch over four times further in Mexico than in Brazil. Inflation rates are a factor in determining costs as well, and Brazil has suffered a continuing rise in inflation rates to 9.56% as of the first half of 2015. Mexico’s inflation rate as of the first half of 2015 was 2.74%.
Security of facilities and the workforce keep the manufacturing process running smoothly. Recent news coverage of drug cartel violence and political corruption has put a damper on some industries considering Mexico. These fears are understandable. UNESCO’s 2013 study on homicide rates indicates that Brazil has a homicide rate of 25 per 100,000 inhabitants while Mexico’s rate is a moderately lower 21 per 100,000. Although Brazil has a higher rate than Mexico, both are much higher than the 4.9 per 100,000 in the U.S. Brazil sometimes presents a better public image than Mexico, but recent scandals regarding the upper political echelon and calls for presidential impeachment are beginning to filter out in the news.
The World Bank develops the Doing Business Economy Rankings to analyze economies based on their regulatory environment and their conduciveness to starting and operating a business. In their 2015 report, benchmarked to June 2014, Mexico ranked 39th and Brazil ranked 120th overall for ease of doing business. Mexico has incentives available to entice foreign manufacturers, including capital equipment grants, assistance with infrastructure, and real estate grants. This, in conjunction with reduced or eliminated tariffs to many countries, has provided a
friendly handshake to stimulate business. According to the U.S. Department of Commerce publication Doing Business in Brazil, the implementation of the Brasil Maior industrial plan has caused a rise in trade protections such as increased tariffs and local content requirements. This combined with a complicated tax structure and high interest rate does not put a warm light on Brazilian relations with foreign manufacturers.
There are two factors that are key in making sure the labor is available to get the job done at a reasonable cost: skill and price. According to The Conference Board’s publication International Comparisons of Hourly Compensation Costs in Manufacturing, 2013, the average manufacturing wage in Mexico was equivalent to $6.82 USD. Brazil’s manufacturing wage was equivalent to $10.69 USD. However, that is only the effective wage if the workers are available and skilled enough to provide the work. Increased demand for skilled labor and decreased investment in quality schools in Brazil have resulted in a shortage of adequately trained workers. The economic slump and political scandal has further fueled reluctance in investing in education. The shortage in workers is also increasing wages. Mexico now boasts an educated workforce, and location near city centers offers access to University graduates for professional positions. Investment in schools is increasing in more remote areas also.
The Bottom Line
Brazil is one of the world’s leading contenders in emerging economies. Although accustomed to being the pretty girl at the financial party, Brazil’s manufacturing industry has become complacent and demanding of her suitors. Mexico is the relative newcomer with more open market strategies, talent pools, and economic stability. She is making the effort in infrastructure and technological expansion, but still needs to powder her face to improve her overall public image. Pegged to rank among the top 10, Mexico is slated to be a leading global economy by 2050, according to Sandy Flockhart, HSBC´S managing director. At the factory fiesta, when considering Latin American partners, such as Brazilian and Mexican, options, which one would you really want to marry? The ring clearly fits on the hand of Mexico.