Canada: the third amigo

Mexico’s surging manufacturing sector and growing economy mean its influence in NAFTA will soon supersede our own. But that doesn’t have to be a bad thing
By Ian McGugan

Welcome, economics fans, to the 2014 version of Name that Country.

Today’s clue: This nation, which shares a border with the United States, has large oil and gas reserves, is headed by a pro-business leader intent on shaking up the country’s cozy telecommunications industry, and is enjoying a boom in its auto industry.

Canada, you say? Sorry, the right answer is Mexico.

The country most Canadians tend to ignore except when it’s time to book a February vacation is emerging as a surprisingly muscular force in the global economy. It’s doing so as Canada finds its own competitiveness under threat.

A recent report from Boston Consulting surveyed the world’s top 25 export economies and concluded it is now cheaper to manufacture goods in Mexico than in China—a dramatic shift from a decade ago, when the Asian nation was the undoubted bargain basement of the global economy.

The report showered praise on Mexico and labeled it a rising global star. In sharp contrast, the consulting firm’s numbers showed that Canadian factories have slipped badly in terms of cost competitiveness since 2004, and are now far more expensive than those of the U.S. or Mexico.

The shift is most clearly seen in the auto industry, where Mexico has moved ahead of Canada in the race for jobs and investments, according to a report issued last year by the Canadian Automotive Partnership Council. While the United States is still the preferred location among global automakers for North American investment, Mexico sits solidly in second place while Canada has fallen to third.

Mexico’s attractions extend well beyond cheap labour. It also enjoys free trade agreements with more than 45 countries and boasts ports on both the Atlantic and Pacific oceans that can operate in all months, without any disruption from ice or snow. The proximity of those ports to the huge U.S. market position give Mexico a big advantage over China or southeast Asia especially for shipping heavy goods such as cars and car parts.

All of that is leading to the realignment of the North American auto industry. A study earlier this year by the Office of Automotive and Vehicle Research at the University of Windsor found that automakers have spent $6.3 billion in Mexico over the past four years to build new plants or expand production at existing plants. By comparison, a mere $180 million was spent to expand production in Canada during the same period.

What may be most remarkable is that Mexico has attracted the flood of new investment while suffering from obvious problems. Drug wars among rival cartels have resulted in horrific scenes of murder and violence. On a less spectacular level, the country struggles with corruption and poverty as well as oppressive oligopolies in many areas of business.

But Mexico is finally addressing some of its issues. President Enrique Pena Nieto, who took office in 2012, has introduced measures to boost competition in the telecommunications sector. He’s also passed reforms to the country’s miserable education system, an overhaul that has pitted him against the country’s famously militant teachers union.

Even more notably, Mr. Pena Nieto has succeeded in opening up parts of Mexico’s oil and gas sector to foreign investment after decades in which the industry was off limits to non-Mexicans. In addition, he’s breaking the stranglehold of the country’s electricity generation and distribution monopoly in a move that has the potential to eventually cut Mexican electricity costs by nearly half. Couple that with moves to increase natural gas imports from Texas, and Mexican industry is likely to see its energy bill tumble over the coming years.

For Canadians, the rise of Mexico is likely to mean a shift of power within the North American Free Trade area. After years of regarding itself as the No. 2 player in the continental partnership, Canada is now likely to see its priorities increasingly superseded by Mexico’s.

This continental shift will bruise our egos, but it could eventually carry encouraging news for our companies’ bottom lines. With a population three times the size of Canada’s, Mexico has the potential to become a huge export market for Canadian goods and services, as well as a steady consumer of Canadian know-how.

Surprisingly, though, Canadian businesses have largely ignored the opportunity. Mexico accounts for only a 3.5% sliver of this country’s global trade—but the potential profits are becoming increasingly hard to ignore, especially given the size and relative youthfulness of Mexico’s population. By 2030, Mexico will rank as the world’s eighth largest economy while Canada will be only 16th, according to a report prepared for the Canadian Council of Chief Executives.

Only a handful of Canadian companies have positioned themselves for that shift. Bank of Nova Scotia entered the country in 1967 and now operates the seventh largest bank in Mexico. Bombardier has been manufacturing subway cars at Mexican factories since 1981 and in 2005 opened a $200-million plant to make aerospace components in Queretaro, north of Mexico City. Linamar of Guelph, Ont., began making auto parts in Mexico in 1998, while Palliser of Winnipeg employs more than 1,000 workers at its Mexican furniture plants.

Their examples demonstrate that Mexican expansion can make sense for Canadian companies despite the country’s many problems. Assuming that Mexico can brings its violence under control—a reasonable bet given the resources being poured into the fight—the decade ahead will only add to the country’s attraction as Mexico’s youthful population enters its prime consumption and working years, while Canada’s working force ages.

Rather than bemoaning the competition from this low-wage competitor, Canadian companies should look for ways to cash in on the opportunities that will accompany Mexico’s rise. Only if they do so can Canada dominate the 2030 version of Name that Country.

Ian McGugan is an award-winning business journalist in Toronto and the founding editor of MoneySense magazine. E-mail: imcgugan4@gmail.com.

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