Forget China: Meet the next export leader

The Asian giant no longer wants your manufacturing dollars as it aims to shift its economic model to one based on consumption. Guess which country could benefit.

By StreetAuthority Apr 25, 2013 11:58AM

Engineer with handheld computer © Image Source Getty ImagesBy Joseph Hogue


China doesn't want your manufacturing dollars anymore. It's set out on a five-year plan to shift its economy 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% a year. The 25% increase in the value of the country's currency 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 that will 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 corruption.


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's gain

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 near future.


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% in 2012.


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 direct investment is hitting record highs as manufacturers return.


About 25% of California-based global transportation and logistics provider D.W. Morgan's high-tech clients are relocating production to Mexico.


If you still need proof of Mexico's dramatic turnaround, net immigration to the United States has dropped to zero, according to the Pew Hispanic Center. Mexico shares a border with the world's largest economy -- yet its own economy is so good that a median disposable income six times higher cannot induce Mexicans to emigrate.


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 European Union.


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 like McDermott International (MDR) and Schlumberger (SLB) 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 to market 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 the NYSE or Nasdaq as American depository receipts (ADRs). But there are several direct and indirect plays to profit from the changing landscape in manufacturing.


StreetAuthority's Amy Calistri likes The Mexico Fund (MXF) as a well-rounded fund that pays a solid dividend. 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 (KOF) and Wal-Mart de Mexico.


The Mexico Fund has a quarterly distribution at an annual rate of 10% of the fund's net asset value, currently 77 cents a share for a yield of 9% on the price. As the economy booms, the fund's assets will increase, and this distribution will just keep increasing.


Cement and concrete producer CEMEX (CX) 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 Caterpillar (CAT) already has 28 manufacturing plants in Mexico and plans to increase operations.


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 global headline 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 and debt burdens in the developed world mean that investors need to start looking at these emerging countries for portfolio growth.


Joseph Hogue does not personally hold positions in any securities mentioned in this article.

StreetAuthority LLC owns shares of MXF in one or more of its "real money" portfolios.


More from StreetAuthority

33Comments
Apr 25, 2013 12:31PM
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Travel much to Mexico?  I didn't think so.  Third world on its best day. 

Apr 25, 2013 1:05PM
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It is good news to me that more "jobs" are coming back to the United States. But I've also learned to not just listen to what people say but to actually see what they will do.
Apr 25, 2013 12:31PM
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If wages continue to stay the same or fall here in America, those companies won't have anyone to sell their products to. As we are closer to a Credit Bubble Collapse as opposed to any real recovery, that will derail globally most economies.
Apr 25, 2013 1:26PM
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Well this doesn't jive with what I heard a month ago.  I heard that the average chinese wage is about $1.70/ hour and the average mexican wage is about $2.20/hour.  Oh and a 12% wage increase sounds like a lot for a typical american wage, but for a chinese wage?  Come on, give me a break.  Report the actual wages which means much more than percentages in this case of such low per hour rates.
Apr 25, 2013 3:08PM
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Better Mexico than China. No reason not to round up the illegals and send them home.
Apr 25, 2013 2:59PM
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So, if Mexico is doing so good then why are the Drug Lords killing people at random. The only safe places to travel are resort location that have walls and soundly protected. I guess that is the same way it is in Chicago though.
Apr 25, 2013 2:36PM
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If Mexico's economy were as strong as Canada's we wouldn't have to worry about illegal immigration in this country, at least not to the same degree.

 

I'm all for it.

Apr 25, 2013 2:38PM
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China's net labor costs equal to the US in 2015?  Impossible!
Apr 25, 2013 2:09PM
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I'm not going to say much... no matter what happens until we rein in the psychopaths, it won't be what they say and it won't be good for America.
Apr 25, 2013 2:09PM
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This is news but old news.  These internationals jump from country to country to find that government that will best allow exploitation of their working class.  First Japan, then Korea, then China, India, Pakistan.  One thing for sure it will very quickly cure the illegal issue as if it isn't curing itself already.  We may one day use the fences to keep folks in the US. But until wages fall here to complete the arbitrage don't count on any mind changing economic benefit  for working Americans. The New World Order is very much alive and progressing.  Amazing how Americans voted in and keep voting in the same mentality that sold them out in the first place.   JMHO
Apr 25, 2013 3:50PM
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So your saying all the illegals will self deport on their own then?  If there are more jobs in Mexico they might as well, in fact perhaps it will be Mexico dealing with all the American illegals.  I wonder if they will allow hospital service or amnesty ????
Apr 25, 2013 4:12PM
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Viva Mejico. Just don't go there on vacation unless you want to be held for ransom. I think the amigo's make more than the Chinese, but being so close, shipping charges should be a whole lot cheaper. Maybe we should just make Mexico our 51st state, clean up the cartels, get them into our tax system, and show them how real corruption works.
Apr 25, 2013 3:32PM
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What, you mean all the democrats' ranting and raving about legalizing illegals is for naught and we should be spending our time trying to get work visas in Mexico?
Apr 25, 2013 3:50PM
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This country is being driven into the dirt economically.  Pretty soon, unemployed Americans will be illegally crossing over the Mexican border searching for work.
Apr 25, 2013 10:02PM
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Back in 1994 when they were promoting NAFTA they claimed we would all have jobs making products to be consumed by Mexicos growing middle class. The lesson here is free trade dosnt come close to living up to its promises. it does very well at driving down labor costs and increasing profits for company owners. The only way for a country to be strong is to do everything and make everything inside its own borders. Free Trade creates dangerous dependency's for food energy or important equipment. Common sense will tell you Free Trade is a win lose deal. Not all come out winners.
Apr 25, 2013 11:36PM
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That is ABSOLUTE bullshidt.....No one said we would have Jobs(all kinds) for manufacturing, because of growth in Mexico's Middle Class....(at least no-one important)

You are mis-informed, we would HELP them to become a three-class society, which would include the MIDDLE CLASS..

It was to alleviate trade barriers amongst mostly the North American Countries..Hence NAFTA.

 

And two things come to mind:

You never traveled in Mexico during the 50-70s..or before??

And you don't remember Ross Perot, running as a 3rd. Party candidate, garnering a large % of vote.

Stating that all we would hear was a huge "sucking sound" of a large number of jobs leaving the States moving to Mexico...He was ABSOLUTELY CORRECT.

And then they started moving "MANY PLACES" because it was so easy to do it.

I am aware of people in our Government...Still in Office, that have family operations(or companies) that manufacture in Mexico...And elsewhere...Plus offshore monies, which is a crock.. 

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Duh! can you say NAFTA  If I can get someone else  to do your job for 1/4 what you earn 
why not .
Lax standards of safety is another plus .
Transportation costs are less than China well to the US 
America is just the consumer any more & that is coming to an end . Look around .
Made in USA is an oddity . Construction sites are full of Latinos .
We need to changes for the better 
Walmart will send money to Latin America for $7 / $1000

Apr 25, 2013 11:05PM
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Someone said China was a "third world country" 20 years ago....

 

4000-5000 years ago they were the CENTER of our Universe...Or our World as we knew it.

They have been forever, but many will never realize that FOREVER....

And you probably thought the Jews were the "chosen ones."....???

My oh, my...

Apr 25, 2013 11:14PM
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"Can't we all, just get along." R. King.....RIP.
Apr 25, 2013 2:24PM
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What ?    Now the Republicrats won't have another clueless wave of immigrants to buy votes from.
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