China doesn't want your manufacturing dollars anymore. It's
set out on a five-year plan to shift itseconomy away from an
export model to one based on consumption.
That's good -- because the business world may not want China
anymore, either. Wages in the world's second-largest economy have
been climbing an average of 12% ayear . The 25% increase in the
value of the country'scurrency in the past decade has made
exports even more expensive.
In fact, Harold Sirkin of The Boston Consulting Group says that
by 2015, net labor costs for manufacturing could be the same in
China as in the United States. And that's before you add in the
cost of shipping goods halfway around the world.
We here at StreetAuthority are always looking for trillion-dollar
themes, those changes with the weight of nine zeros thatwill
drive the markets. The $2.05 trillion in exports that China
produced in 2012 may just be finding a new home -- and they' may
have found it in a country you 'might not expect.
This country has about a third the population of the United
States and not even a tenth that of China's. It also has had
decades-long problems with drug cartels and government
But it also has a quarter of the transportation costs as goods
exported from China and a boom in natural resources that makes
the energy to run plants extremely cheap.
One Nation's Loss Is Another'sGain
A 2011 survey by MFG.com, the world's largest online
manufacturing marketplace, found that 21% of North American
manufacturers surveyed planned on bringing production into or
closer to the United States and that 38% planned to do so in the
While some of these plants may be coming back to the United
States, the evidence clearly shows which country is poised to own
economic growth in the next decade. Mexico has been grabbing a
larger share of U.S. imports, from 11% in 2005 to more than 16%
The country already exports more manufactured products than the
rest of Latin America combined. Mexico's economy grew by 3.9%
last year, and foreign directinvestment is hitting record highs
as manufacturers return.
About 25% of California-based global transportation andlogistics
provider D.W. Morgan's high-tech clients are relocating
production to Mexico.
If you still need proof of Mexico's dramaticturnaround , net
immigration to the United States has dropped to zero, according
to the Pew Hispanic Center. Mexicoshares a border with the
world's largest economy -- yet its own economy is so good that a
median disposableincome six times higher cannot induce Mexicans
Regulatory And Political Reform
In addition to the rising cost of manufacturing in parts of Asia,
a series of regulatory and political reforms by Mexican President
Enrique Peña Nieto's administration is driving new
competitiveness in the country.
Mexico has signed 44 free-trade agreements, more than any other
country, including agreements between both the U.S. and the
A reversal of Mexico's decade-long slump in energy extraction
appears to be in the works, potentially sending the country into
a production boom. Production at PEMEX, the state-owned oil
company, dropped from 3.8 million barrels per day in 2004 to just
2.9 million in 2011. Since then, international service companies
McDermott International (
have been granted permission for field development.
Peña Nieto's Institutional Revolutionary Party is a socialist
party that has historically sided with the unions against
free-market principles. The new economic reality has brought many
in the PRI, including Peña Nieto, to embrace free-market reform,
and the party is leading the way tomarket liberalization. The
country's three main political parties recently signed an
agreement to negotiate aggressively with the big unions and
reform the energy and telecom sectors.
Direct And Indirect Plays
The market is still relatively closed to U.S. investors, with
only 22 companies traded on theNYSE orNasdaq as American
depository receipts (ADRs). But there are several direct and
indirect plays toprofit from the changing landscape in
StreetAuthority's Amy Calistri, author of the
, likes The
as a well-rounded fund that pays a soliddividend . The fund
offers a diversified play on the country with exposure to
financials, health care, media, transportation and mining. The
fund also holds shares in a number of Mexican subsidiaries of
U.S. consumer companies like Kimberly-Clark de Mexico,
Coca-Cola FEMSA (
and Wal-Mart de Mexico.
The Mexico Fund has a quarterly distribution at an annual rate of
10% of the fund'snet asset value , currently 77 cents a share for
ayield of 9% on the price. As the economy booms, the fund's
assets will increase, and this distribution will just keep
Cement and concrete producer
may be a good indirect play on the boom. The country's
infrastructure will need to be upgraded if it hopes to transport
goods. The company also does business in the United States and
Canada and saw its shares jump by 67% during the past year.
Looking at U.S.-China trade statistics might provide other ideas
for investment in the shifting manufacturing boom. The top two
product categories, electrical machinery and power generation
equipment, accounted for roughly half (48.6%) of the $399.3
billion of Chinese goods imported to the United States in 2011.
Heavy equipment producer
already has 28 manufacturing plants in Mexico and plans to
Risks to Consider:
While the country is developing rapidly, Mexico is still not
as politically or economically stable as the United States or
China. Investors should be ready for short periods of volatility
associated with larger globalheadline risks .
Action to Take -->
I've been following the market in Mexico since moving to Latin
America in 2006, and I firmly believe it is one of the next big
growth stories. The slowing economies anddebt burdens in the
developed worldmean that investors need to start looking at these
emerging countries for portfolio growth.
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