Mexico’s manufacturing sector has been on a steady uptrend in recent years, as evidenced by its 30% increase in trade with the US since 2010. Much of Mexico’s market share gains have come at the expense of China, where significant wage inflation over the past decade has caused Chinese competitiveness to decline relative to Mexico (Exhibit 1).

Mexico’s proximity to the US—providing lower transportation costs and shorter lead times—a healthy supply of engineers, and lower projected energy costs, have made Mexico an increasingly attractive location for auto manufacturers. In addition to NAFTA, Mexico has signed 12 other free-trade agreements. These allow for the export of duty-free goods to the US, Canada, EU, Latin America and Japan, helping to strategically position Mexico in the global auto manufacturing supply chain.

Exhibit 1: Manufacturing wages: Mexico versus China (US$/hour)

Source: U.S. Census Bureau, SHCP, Promexico, Boston Consulting Group, Asesoría y Estrategia Económica

Against this backdrop, numerous global auto OEMs (original equipment manufacturers) have announced a shift of their capacity to Mexico (Exhibit 2). With Nissan ramping up capacity over the next few years, as well as the entrance of Germany’s big three automakers, Mexican auto production capacity is forecast to accelerate from a five-year compound annual growth rate of 10% to 25%. Additional expansion plans are also being considered by other OEMs, including Toyota, so this trend could further expand.

This has boosted several sectors in Mexico, including industrial real estate and airports, with rising traffic driven by new routes opening between Mexico and Europe, Korea and Japan. The unique opportunities presented by this shift in the global auto manufacturing landscape should continue to create differentiated investment opportunities for specific companies.

Exhibit 2: Auto original equipment manufacturer capacity

Source: AMIA and Banxico