No Más Pemex: Making the case for Manufacturing in Mexico

The blasts that occurred late last week at the headquarters of Mexican oil behemoth Pemex sparked fear, outrage, and speculation among Mexico-watchers as to who or what was responsible. As of recent reports, authorities have attributed the incident to a gas leak in the building, laying to rest rampant rumors that the attack was a deliberate attack on the state by one of the country’s two major narco-trafficking cartels. That was just one speculative theory. Other raised fears (or hopes, depending where you stand) that, frustrated by the policies of the current government, the increasingly radical opposition was launching a violent movement to depose the President. And of course, there are those, like me, who believe that the state brought this upon themselves through mismanagement and negligence at the state-owned oil and gas company.

I believe there is an important story to be told about Mexico’s status as a potential economic force to be reckoned with regards to the Pemex incident. The company, controlled by the government since a revolution-induced wave of nationalization in the 1930s, is the world’s second largest non-publically traded company, with a market value of $417 billion. It doesn’t come as much of a surprise that nine out of the top ten companies on that list are state-owned oil conglomerates, Japan’s postal service being the pleasant exception.

Pemex’s dominance in the region has persisted despite sinking revenues and stagnant growth. As of 2009, it was listed as Latin America’s largest enterprise and is contributes 10% of Mexico’s total export earnings. However the enterprise is widely considered to be an absolute failure with repeated cries for reform and disinvestment falling on deaf ears. Many attribute the gas leak that caused the recent explosion to Pemex’s inability to maintain safety standards and infrastructure not just at its plants and rigs but also its offices in Mexico City! On the other hand, many opponents of reform claim that Pemex is a symbol of Mexican pride and economic independence and must not fall into the hands of private investors. However the debate has reached a moot point as many, including yours truly, believe Mexico’s future lies not in natural resource extraction and export-based revenues, as is the case with most Latin American countries, but in manufacturing.

At the recent World Economic Forum in Davos, Joseph Stiglitz, a Nobel Prize-winning economist, made the startling claim that Mexico could outrank China in terms of manufacturing competitiveness in the coming years. This is news even to Mexicans, who have borne the brunt of increased competition since the NAFTA agreement put their manufacturing units at the same level playing field as their technologically-superior and far more efficient counterparts in the United States and Canada. Things have changed.

Just 24 hours after Stiglitz made his declaration, an article titled, “Mexico: The New China” appeared in the New York Times. The author of the article runs a drone company (which produced automated drones purely for exploratory and navigation purposes) whose primary production unit is in Tijuana, a city better known for its seedy bars and clubs than its manufacturing infrastructure. While highlighting the benefits of cheap labor and the abundance of skilled engineers (Mexico produces three times more engineering graduates than the U.S. annually), the author claimed that the primary benefit of doing business Mexico was the short supply chain. Being able to hop across the border to check up on his factories erased the hassle of worrying about labor standards, delivery delays and above all, quality control.

In stark contrast to the Chinese production model, which calls for massive sales orders in order to justify shipping expenses, small businesses like the drone enterprise are able to pilot new products by producing smaller quantities in Mexico and then upping orders once they are proven successful in the market. Furthermore labor costs in China aren’t all that cheap anymore either. Inflation-adjusted labor costs in China have more than tripled in the past decade. Wages in China’s southern cities are approaching $6 an hour, roughly what they are in Mexico. Big players like General Motors, Boeing and even the infamous Foxconn have begun setting up production centers in Mexico, along the same scale as those in China.

Manufactured goods are now Mexico’s chief export, having surpassed oil. The best part about this is that unlike the case of Pemex which pays about 60% of its revenues in taxes to a labyrinthine bureaucracy, the benefits of this manufacturing boom are felt by Mexicans directly – in the form of jobs, investment, improved infrastructure and the increased potential of being transformed into an economic superpower. Even the drug-related violence with which Mexico has been so long associated has begun to abate. Former hubs of drug warfare like Juarez now being transformed into manufacturing hubs, with factories like those of Foxconn helping reduce unemployment and tackling discontent among male youths in the communities.

The recent Pemex blasts were a human tragedy, with over 32 people dead and hundreds more sustaining life-threatening injuries and burns. But instead of arousing conspiracy theories, perhaps it should give a much-needed nudge to the government to stop feeding an insatiable oil behemoth and perhaps focus on improving its manufacturing capacity. Who knows? As a recent cover story on the Mexican manufacturing boom in the Economist put it, Perhaps in a few short years “Made in China” will give way to “Hecho en México.”