Presentation made by Crossborder Group's President, Kenn Morris, at August 2012 meeting of the Hong Kong Association of Southern California (www.hkasc.org) reviewing some highlights of "perfect storms" over last decade for manufacturers in Mexico and China -- the confluence of factors in the early 2000s that affected Mexico's perceived competitiveness versus China; and more recent cost analyses and factors that are leading some to suggest that manufacturing in Mexico is now more cost-competitive than China. For more information about this topic, or for assistance in analyzing the costs for manufacturing in Mexico and accessing the NAFTA market, contact Crossborder Group at answers@crossborderbusiness.com or call us at 619-710-8120.

1. Mexico versus China Manufacturing:
Two Perfect Storms
Hong Kong Association of Southern California Meeting
August, 2012

2. OVERVIEW
• Introduction: ¿Quién Soy?
• Early 2000s & Maquiladoras’
Perfect Storm
• Manufacturing 2010’s: Perfect
Storm - Round 2
• Mexico’s Rebound: Winning
Round 2?
• Summing it Up

3. INTRODUCTION: QUIEN SOY?
• Kenn Morris
• Founder & President/CEO of Crossborder Group Inc.
• Gerente General de Crossborder NS, S de RL de CV
• Nearly 20 years of business consulting, market
research and policy research in Mexico, the US-
Mexico border region, and Central America
• Former Director of “Crossborder Innovation &
Competitiveness Initiative” at UCSD San Diego
Dialogue
• In 2008, appointed by Secretary of Commerce as
founding member of US-Mexico Border District
Export Council

4. INTRODUCTION: WHAT CROSSBORDER GROUP DOES
• Founded in 1996 in San Diego
• Crossborder Group Inc. (1996, US)
• Crossborder NS, S de RL de CV (2007, Mexico)
• Key consulting & research staff in two offices:
• San Diego, USA • Tijuana, Mexico
• Leader in US-Mexico market research and strategic consulting
• Includes expertise & specialization in:
• Industry & B2B research • Surveys and focus groups
• Siting studies • Market studies & strategies
• Manufacturing cost models • Market-entry plans & assistance
• Highly regarded by US & Mexico organizations and companies for
accurate data and insights on border & binational issues

5. A FEW OF CROSSBORDER’S CLIENTS
…and many others – ranging from major corporations,
to government agencies, to NGOs, to small start-ups…

6. Early 2000s &
Maquiladoras’
Perfect Storm*
*Image of “Perfect Storm” movie courtesy of Warner Brothers Pictures

7. ROUND 1: MEXICO VERSUS CHINA
• Early 2000’s, Mexico’s maquiladora manufacturing industry was hit
by “perfect storm” – a confluence of several factors:
• Taxation uncertainty: initial Federal decision to treat
maquiladoras as permanent establishments in 2000 (later
changed)
• Implementation of Article 303 of NAFTA: Preferential duty
treatment of NAFTA-content inputs (i.e.: new duties on non-
NAFTA items…later modified under ProSec rules)
• Wage inflation amongst maquiladora workforce
• Early-2000’s recession in the U.S.
• …In the meantime, China was working toward stronger global
integration and increasing competitiveness of its industries
• 1990’s: privatization push for state-owned companies
• Late-2001: China’s accession to the World Trade Organization
(and reduction of tariffs)

8. EARLY 2000’S: PERFECT STORM
• What happened?
• Fast maquiladora growth of 1994 NAFTA agreement dropped off, as
did manufacturing FDI
• Sectoral declines in electronics & textiles

9. EARLY 2000’S: RESULTS OF ROUND 1
In early 2000s, many Mexico industry professionals saw it this way:
…and assumed China had won.
“China VS Mexico” image by José Quintero (Mexico), used via Creative Commons license

10. Manufacturing 2010’s:
Perfect Storm - Round 2

11. ANOTHER PERFECT STORM?
• In 2010’s, seeing new “perfect storm” and confluence of factors –
this time in China
• Like Mexico in late-1990’s, seeing labor wage inflation: labor rates
nearly doubled between 2000-2005, then again between 2005-2010
• Estimates: over US$5.50/hr by 2016

12. PERFECT STORM: ROUND 2
• Wage inflation part of the equation…
• Also: Significant appreciation of Renminbi (Yuan) vs US$

13. PERFECT STORM: ROUND 2 (2)
• Also, significant variability (generally upwards) on logistical costs
for shipping from China to US
• Logistics costs, time cost, and inventory carrying cost…

14. IMPACT: MANUFACTURING COST INDEX - ALIX PARTNERS
• In 2005, China had low-cost advantage (compared to US)…
• …since 2007, Mexico costs dropped below those of China

15. IMPACT - MANUFACTURING COSTS NOW FAVOR MEXICO
• China: times they are changin’
• Boston Consulting Group: by 2015,
China mfg costs approx. $4.50/hr
• Total costs for manufacturing a
product (and getting it to North
American market) increasing
• Costs benefits for Mexico: from
2000-2010, manufacturing wages in…
• US: increased +41% ($34/hr)
• Mexico: +39% ($6/hr)
• …even Brazil: +130% ($10/hr)
• KPMG: 2012 Competitive Alternatives
study found little difference in
Mexico v China costs

16. Mexico’s Rebound:
Winning Round 2?

17. OVERALL, NAFTA TRADE INCREASING…
• As North American economy crawls back, trade in the combined NAFTA
marketplace of 454 million consumers is increasing…
• …over US$1.2 trillion in trade between NAFTA partners in 2011
• …$460 billion in trade just between US & Mexico (12.5% of total US)

18. MEXICO’S ECONOMY POST GREAT RECESSION
2012 not going to be economic
“apocalypse” for Mexico…
• GDP growth outlook improving
• 2000s: often lower than US & OECD
countries…
• 2011: Mexico at 3.9%, US at 1.7%
• Some improvement in unemployment
• Rebound in job growth has been
quicker than in US
• Mexico: Slow glide from 5.8% peak
• US: Down from 10.0% peak
• Some synergy & restructuring going
on, esp. in Automotive Industry
(both sides of border growing)

19. RECOVERY IN MANUFACTURING (MAQUILADORA/IMMEX)
Economic revival & competitive
advantage leading to recovery in
National-level maquiladora/IMMEX
employment…
• National: 1.9M (similar to 2007)
• Growth automotive sector
(mainly Central & NE Mexico)
• Baja: At 222K (vs. 260K in 2007)
• Tijuana: 146K (vs. 170K in 2007)
• Heavy loss in electronics, but
still big (45K+ employment)

20. SITUATION TODAY: FOREIGN DIRECT INVESTMENT (FDI)
• Foreign Direct Investment has recovered from early-2000’s…
• Great recession still leaving investment weaker than desired…
• Expect return to stronger Mexico FDI in 2013-2014

21. REGIONAL ECONOMICS: BAJA’S ADVANTAGE FOR TECH MFG
• Given long-term trend, should expect growth of tech industries
• True for Baja California & Tijuana:
• TJ: #1 location in North Am. for medical device manufacturing
• TJ: One of top North Am. centers for electronics mfg employment
• Likely to see expansion of these industries as costs change in China
2010/2012 Medical Device Mfg
Employment in Key Regions*
City of Tijuana* 31,079
Minneapolis-St. Paul 22,099
New York State 18,233
Boston Metro 15,229
Chicago Metro 12,789
Los Angeles County 12,570
Michigan State 11,261
Orange County 11,528
San Diego County 10,360
Santa Clara County 9,859
*data for Q2-2012 *see endnotes for estimation methodology used

22. ECONOMIC REBOUND: REGIONAL SECURITY IMPROVEMENTS
Security and perceptions of security improving
• By 2011, security situation of Northwest Mexico significantly improved
• Also, growing perception (by those in Mexico, at least) that overall
security is improving (monthly perception survey)
• Should result in increases in Manufacturing FDI in NW Mexico by 2013+

23. …EN FIN
Summing it up…
• In early-2000’s, saw Perfect
Storm of factors that weakened
manufacturing in Mexico – and
spurred investment in China
• Believe that latest Perfect
Storm will likely shift and bring
manufacturing back to North
America…
• …helping Mexico to consolidate
as global economic power-
house (esp. in North America)

24. Gracias!
Contact Us at www.CrossborderBusiness.com
1-888-4XBORDER or 619-710-8120