Mexican labor, law, infrastructure, NAFTA: Steps to develop or save Mexico manufacturing?

Most politicians in Mexico do not understand how to compete globally. Meanwhile, Mexico is moving away from low value-add manufacturing of products to more complicated products requiring more sophisticated processes.

While Mexico is competing with China’s manufacturing sector in some ways, it makes no sense for Mexico to try and compete against China’s labor costs because of the difference in the way each nation is governed.

VentureOutsource.com speaks with Sergio Garcia de Alba, president at the Institute for Innovation, Competitiveness and Entrepreneurial Development at Tecnológico de Monterrey, (Guadalajara, Mexico), Former Secretary of Economy (2005-06) and Under Secretary of Economy for SMEs (2003-05).

In this exclusive interview, Sr. Garcia de Alba shares his unique perspective on the myriad of challenges Mexico faces and offers insight into the Mexican mindset as he talks about Mexico’s position on the global stage while competing with China; changes he’d like to see in the North American Free Trade Agreement (NAFTA), corruption, and Mexican infrastructure, foreign direct investment and development opportunities, and more.

Transcripts from that discussion follow…


VentureOutsource.com: Once deemed the world’s factory, China is losing some of its allure. China’s export taxes have risen and Chinese manufacturing employees are demanding higher wages. Meanwhile, labor is still more expensive in Mexico than in Asia plus Mexico has high grid energy costs that can quickly erode margins for foreign manufacturers. For North American manufacturers, Mexico is closer but China has more workers plus China has invested in its workforce – the type of skills that build manufacturing capability and sustainability. Taking all of the above into account, what are three (3) challenges you feel Mexico’s manufacturing sector must overcome if it is to regain the position it once held in the 1990′s as the manufacturing destination-of-choice for North American companies?

Garcia de Alba:
I first want to point out that Mexico has been undergoing a change of focus, from being heavily dependent on low value add manufacturing, to more products (and increasingly more services) that require more sophisticated processes and more flexible and well prepared human resources.

Mexico shouldn’t try to compete anymore, or try to develop, in traditional high-volume manufacturing projects that require low wages and benefits to be competitive.

The economic slowdown from 2001 to 2003, together with the strong competition from China for investments, were painful for Mexico, but were also an opportunity for Mexico to evolve and attract projects offering better jobs; higher value add, lower volumes, high flexibility, and fast delivery times.


Sergio Garcia de Alba - VentureOutsource.com Sergio Garcia de Alba
President
Institute for Innovation, Competitiveness & Entrepreneurial
Development at Tecnológico de Monterrey (Guadalajara),
Former Secretary of Economy, Mexico







It is my opinion, Mexico should not step backward and compete for projects primarily seeking low labor, not to mention the working and environmental conditions found in China.

With this perspective in mind, I feel the following three challenges facing Mexico’s manufacturing sector are:

1.) Increase Mexico’s budget allocation for education and training, to develop better qualified human resources (from operators and technicians, to professionals). This will help make Mexico more attractive for the types of projects that can pay higher wages and benefits, even if we are not leaders in volume production.

2.) Improve Mexico’s infrastructure.
This is critical. We need to invest a lot more to increase and modernize our sea and air ports; high-ways, rails, logistics centers…create more border crossings and making each more efficient (and safe). We also require more competition between telecommunications providers and broadband connectivity.

One thing most of our politicians do not understand (since they don’t understand what it means to compete globally for markets) is, we need to open electric energy generation; distribution, and commercialization to national and foreign investments – at least in the industrial; commercial, tourism, commerce and services sectors.

The government can concentrate its efforts on providing plenty of sustainable energy for homes.

Energy is increasingly a strategic input for many productive sectors, and a low energy cost is necessary to remain competitive. It is a shame, this lack of vision and structural reforms in this area.

It would be a considerable step in the right direction for the government to allow the complete use of alternative energy and offer Mexico and Mexicans both mid- and long-term benefits.

With respect to infrastructure, it is important to mention that on the Federal level, since Vicente Fox’s government (continuing with President Calderon), ‘Public Private Partnership’ schemes began being used to enable larger investments.

Now, there are pieces of legislation being developed that would permit these schemes on the state and municipal levels (with support from the Inter-American Development Bank. There are also US$110 billion dollars from pension funds in Mexico that could have a significant portion invested in infrastructure projects (this is healthier than to have everything invested in the stock market).

3.) Regulatory framework. This is another, very complex and challenging area where progress is needed (fiscal simplification, and streamlining of various types of lengthy and complex permits that have to be obtained at the Federal, state, and municipal levels).

At the same time, it will be important to fight corruption with innovative strategies and more strict application of Law.

Regulatory improvement should be headed by President Calderón, and requires a strong re-engineering of strategy and Mexico’s governmental regulatory infrastructure, and needs the committed participation of governors and mayors. Regulatory improvement also requires changing of the Administrative Proceedings Law at various government levels, to impose punishments to functionaries that do not comply with the regulatory improvements, or to help combat corruption.

It will also be necessary to improve and strengthen the respect to intellectual property (IP), and the handling of incentives for IP development, in order to attract and develop the type of investments that are best for Mexico and the NAFTA region.


VentureOutsource.com: Many Americans and U.S. business leaders feel the 14-year old North American Free Trade Agreement (NAFTA) needs to be renegotiated, particularly regarding U.S. trade with Mexico. What are two (2) aspects of NAFTA you would you like to see addressed?

Garcia de Alba: In effect, NAFTA has been very positive for Canada, the USA, and Mexico, but it has become insufficient.

With regards to NAFTA’s commercial aspect, there is not much that can be done, except to revise certain sectors and rules of operation with respect to the minimum percentages of origin required to have the tariff benefits of NAFTA.

More work has to be done to improve the chapter on services, which are increasingly important in international trade.

Opportunity areas for NAFTA primarily focus on evolving the free trade agreement into a strategic regional alliance, which should include issues like ‘joint vision’ and ‘collaboration’ on issues such as energy; logistics infrastructure, human development, strengthening of productive chains to successfully compete with Asia and Europe, and could even work on addressing a possible strategy for handling the mobility of human resources in a modern; efficient, controlled, safe, and mutually beneficial way.

The integration of trade among the Europeans and Asians is becoming much more profound and efficient than what we have in North America today, and this has made us in this region loose competitiveness in markets; investments, jobs, and it is also causing damage to all three nations.

We need leaders who understand that competition in the current global economy is not only between countries, but also between regional blocks that are dynamic and are gradually getting stronger.


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