A MONTHLY NEWSLETTER ON NAFTA AND RELATED ISSUES

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Gerald Banks
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1 July 2009 * Volume 14, Issue 7 NAFTA Works A MONTHLY NEWSLETTER ON NAFTA AND RELATED ISSUES INSIDE THIS ISSUE Mexico Has Become the Best-Cost Country for Manufacturing 1 Mexico Has Become the Best-Cost... 1 Trade Highlights 2 The Mexican Competitiveness... 3 NAFTA Related Events 3 Diario Oficial 4 Success Stories 4 Selected Readings 4 Infrastructure Projects in Mexico 4 Mexico Economic Update 5 Profile of New Jersey 6 Profile of Nayarit Mexico is now considered to be the best country to do business with the U.S., over countries such as China and India, according to the business advisory firm AlixPartners recent study on manufacturing and outsourcing costs index. The study was designed to provide international U.S. businesses and companies more accurate and understandable information of the major recipients of foreign direct investment in manufacturing that qualify as a best-cost-country (BCC). This study used relevant variables in determining the increase of Mexico s manufacturing cost advantage such as freight costs, overhead, labor cost, raw materials costs, inventory costs, import duties, and exchange rate. It also looked into sectors such as aluminum die casting, fabricated steel parts, electronic modules, small directcurrent motors, deep-draw stamped steel, high to low fabrication and assembly labor, and high to low capital equipment and tooling. Mexico has become the leader up from third place in 2005 with a 25 percent cost advantage in manufacturing; followed by India, China, and Brazil. Mexico has witnessed significant improvements due to the favorable exchange rate, the low transportation costs, and the free trade with the United States brought by NAFTA. The flexibility of the Mexican exchange rate has allowed for better adjustment to the global economic conditions improving its attractiveness to U.S. companies. In 2008, Mexico experienced a 20 percent drop in the value of the Mexican peso with respect to the US dollar, while China saw a 20 percent appreciation of the Yuan to dollar exchange rate. Mexico was not affected as significantly by the rise of transportation costs as other competitors during the sharp increase of oil prices in the last few years. Geographical proximity to the U.S. market makes a more efficient supply chain possible between both countries and lessens the burden of transportation costs. Continues on page 2 Page 1

2 Other important elements rely on Mexico s duty-free access to the US market which provides certainty to the more than 330 billion dollars in goods traded bilaterally under NAFTA. As a result, Mexico has the largest manufacturing cost advantage in five out of the six industries analyzed in For the fined blanked parts and deep draw stamping categories, Mexico remained the best-cost country since 2005, and had become the country with the greatest cost advantage in election sensor position, plastic molded parts, and all machined parts categories; whereas China lost its dominance to Mexico last year. Mexico s cost advantage surpassed competitors for the moderate labor and shipping cost experienced in the last few years. U.S. companies look for the opportunity to keep business closer to home due of the cost of freight and transportation costs; they also seek the competitive exchange rates and currency stability that have made Mexico the best fit for U.S. manufacturing investments. Close competitors would have to increase labor productivity and economic efficiency to significantly cut costs in order to be competitive while faced the rising cost of freight and transportation. Positioning Mexico as a world class trading hub. Promoting the incorporation of the best practices for companies in logistic management. Encouraging the formation of human capital skills in logistic services. Adequately promoting logistic operations and infrastructure to achieve trade facilitation. Promote certification as logistic operators, and Improving coordination between federal and private sectors in local initiatives. This agenda has the potential to increase the efficiency of Mexico s current network of free trade agreements with 43 countries on three continents. It allows businesses to obtain more efficiently, inputs necessary for production and compete successfully in the global market. The plan hopes to gain the participation of the private sector and officials from the three branches of government related to domestic logistics, by promoting comprehensive strategies, encompassing improvements in the best integration of all modes of transportation. The Mexican Competitiveness Agenda in Logistics Mexico has a strategic geographical location with coastlines on the Pacific and Atlantic Oceans and shares a border of more than 1,800 miles with the United States, the largest economy in the world, leading it to become a world-class logistics hub. Mexico is also an important player in global trade, ranking among the top ten largest trading countries in the world. With more than $600 billion products traded last year, its economic growth relies significantly on international trade. Mexico s proximity to the U.S has enabled it to reach a highly integrated economic relationship where more than $367 billion goods are exported and imported bilaterally each year, and over $119 billion has been invested in Mexico by U.S. companies in the last decade, making the region more competitive globally. For that reason, the Mexican government is committed to enhance the country s competitive advantages in order to promote growing flows of trade and attract more investments through a comprehensive program to develop highly efficient logistic services. In April 2008, Mexico s Ministry of the Economy released a plan called Competitiveness Agenda in Logistics (Agenda de Competitividad en Logística) with the aim of increasing the productivity and competitive edge of Mexico s economy. The main goal of the plan is to create conditions for the development of logistic services with better competitive costs, and to achieve the incorporation of the best practices for managing logistic companies based in Mexico, specifically focusing on the following: Reduce logistic costs to firms as a percentage of its sales; improve efficiency of logistic service providers in Mexico, specifically regarding the percentage of on-time and arriving deliveries to reach at least 93% by 2012; increase the number of companies that outsource logistic services; and facilitate the development of business for both the domestic and the international markets. The plan outlines 7 action strategies, which include: The creation of more and better operating logistic services in Mexico. On the other hand, it aspires to make Mexico the core for technology, information, and logistical services. The plan looks extremely promising, especially in its aim to include all of the activities relating to the logistic sector. At the end of 2008, the agenda has supported 69 projects, granting approximately $9 million. Mexican companies have lower logistic costs for doing business with the U.S. in comparison with other countries such as Brazil and China, this program has been praised for its potentially strong impact on reducing logistic costs to levels comparable to its main trading partners. As a result, Mexico will remain more attractive for trade and investments globally, as well as promoting economic growth by creating additional and better paying jobs. Mexico Growth Modes of Transportation p Rate Total Trade 185, , % Exports 96, , % Imports 89, , % By Air 10,029 33, % Exports 3,859 10, % Imports 6,170 22, % By water 32, , % Exports 20,888 68, % Imports 11,334 64, % By road 112, , % Exports 56, , % Imports 55, , % By rail 19,740 44, % Exports 14,196 27, % Imports 5,544 17, % By other 11,469 31, % Exports 780 3, % Imports 10,689 28, % Source: North American Transportation Statistics Database with INEGI data. P/ Preliminary Page 2

3 NAFTA Related Events International Computer and Electronic Fair August 5 9, 2009 Trade show presenting the latest products and models in electronic appliances. Location: World Trade Center, Mexico City Phone: Ext informes@lvalogistica.com.mx Website: El Mundo de las Manualidades August 6 8, 2009 Exhibition of handicrafts and inputs for the handicraft industry Location: Expo Guadalajara, Guadalajara, Jal. Phone: Ext mercedes@tradex.com.mx Website: Comfot August 25 28, 2009 New technologies and products related to photography, video and digital imaging Location: World Trade Center, Mexico City Phone: info@comfot.com Website: FESPA Mexico World Expo 09 August 27 29, 2009 The latest technologies and solutions for the signage, textile, screen and digital printing industries Phone: humbertogarcia@fesmx.com.mx Website: DIARIO OFICIAL NOTICES ISA Mexico Expo Control August 5 7, 2009 Show displaying the latest technology and automation of manufacturing processes. Phone: contacto@isamex.org Website: Expo Proveedores del Restaurante August 11 12, 2009 Exhibition of suppliers providing services and products for the creation, renewal, growth and operation of restaurants Location: Cintermex, Monterrey, Mexico Phone: / 21 ventas@paraelrestaurante.com Website: Concreto Lationamerica August 18 20, 2009 This show exhibits the latest technology in building construction including all of its supporting industries. Phone: poblete@ejkrause.com Website: Expo Mueble Internacional Verano 2009 August 19 22, 2009 Exposition of all new creations and designs in furniture fashion Location: Expo Guadalajara, Guadalajara, Jalisco Phone: proyectocomprador@afamjal.com.mx Website: Invest Mexico Forum 2009 August 19 20, 2009 Strategic information forum for investing in Mexico Location: Expo Bancomer, Santa Fe, Mexico City Phone: Ext visitants@investmexicoforum.com / expositor@investmexicoforum.com Website: Mexican Gift Show August 25 28, 2009 Trade show on gifts, decorative accessories, jewelry, and other related products Phone: registro@espaciosalpro.com Website: Regulation of the General Law for the Control on Tobacco Products. May 31 st, Decree reforming certain provisions of the Mexican Commerce Code, and the General Law for Trading Companies. June 2 nd, Amendments to the Appendix II related to the trade in the automotive sector between Brazil and Mexico, under the Economic Cooperation Agreement (ACE) No 55 signed by Mexico and the members of Mercosur. June 4 th, Ex-officio initial determination review of the countervailing duty order duration on imported frozen beef from the European Union regardless of shipping country. This merchandise is classified under the tariff items: , and of the Mexican Tariff Schedule. June 4 th, Proclamation Decree of the Agreement for the Promotion and Reciprocal Protection of Investments between Mexico and China, signed in Beijing on July 11th, June 5 th, Modification to the Mexican Official Standard (technical regulation) NOM-186-SSA1/SCFI-2002, related to sanitary specifications and labeling requirements for Cocoa and Cocoa products, published in the Mexican Official Gazette on November 8 th, June 5 th, Guidelines that mining concessionaries shall observe, regarding gas recovery from coal beds. June 11 th, Mexican Official Standard Draft (technical regulation) PROY-NOM- 027-SCT2/2009 regarding additional and special requirements for package, packaging, intermediate bulk containers, portable tanks and transportation of substances, material and hazardous residues of the Division 5,2 related to organic peroxides. June 15 th, Final resolution of the countervailing duty order review imposed to mushrooms (agraricus fungi) from China produced by Calkins & Burke Limited regardless the shipping country. This merchandise is classified under the tariff items , and of the Mexican Tariff Schedule. June 16 th, Notice modifying the Guidelines of the Program to Boost the Industry s Competitiveness. June 16 th, Decree approving the Agreement for the Promotion and Reciprocal Protection of Investments between Mexico and Belarus, signed in Minsk on September 4 th, June 17 th, Regulation of the Law for Promotion and Development of Bioenergetics. June 18 th, Notice of modification of the general rules for the handling of paperwork through electronic ways of communication dealing with the Secretariat of Economy s procedures. June 22 nd, 2009 Notice publishing the Decision Number 6 of the Mexico Chile Free Trade Commission. June 23 rd, Notice publishing the Decision Number 52 of the G-3 Free Trade Commission, regarding temporary use of non-originating materials to manufacture certain textile and apparel goods and exporting them under the FTA s preferential treatment. June 25 th, Page 3

Success Stories Jabil Circuit to Build SunPower Solar Panels in Mexico SunPower Corp, a solar power leader in North America, has made a contract with Jabil Circuit to build solar panels in the

According to SunPower s Chief Operating Officer Marty Neese, This agreement provides SunPower with the flexibility to site manufacturing near the largest and fastest growing solar markets in North

4 Success Stories Jabil Circuit to Build SunPower Solar Panels in Mexico SunPower Corp, a solar power leader in North America, has made a contract with Jabil Circuit to build solar panels in the Mexican state of Chihuahua starting the second half of The company located in San Jose, California has decided to partner with Jabil to produce their solar panels. According to SunPower s Chief Operating Officer Marty Neese, This agreement provides SunPower with the flexibility to site manufacturing near the largest and fastest growing solar markets in North America, improving the efficiency of our supply chain. Also stating that, Jabil's extensive experience in manufacturing and high-quality standards makes them an ideal partner for producing SunPower's solar panels, the most powerful solar technology on the planet." EE Technologies Demand Drives a 30% Increase in Mexico Manufacturing Capacity EE Technologies, Inc, a premier electronics manufacturing service provider headquartered in Reno, NV, will increase capacity and capabilities at its manufacturing plant in Empalme, Sonora, by more than 30%. "The increased demand for our services has required this expansion of our Mexico operations" said Dave McDonald, Director of Operations for EE Technologies. This new project includes the addition of a fully automated surface mount technology (SMT) line as well as supporting processes and equipment. The equipment additions will further expand EE Technologies' capacity, which will be used to serve customers in many growth industries including the automotive, scientific equipment and education sectors. Foton Begins the Construction of a Plant in Mexico Foton, a Chinese leader in vehicles production, will now start building a plant in Coatzacoalcos, Mexico to produce 50 thousand light trucks every year. The company has budgeted 200 million dollars for the first stage of this plant, where production volume will allow meeting the demand for their Class 3 to Class 5 vehicles in regions such as United States, Central and South America. Fonton has already an agricultural tractor assembly plant operating in the same city and a network of 11 distributors in medium size cities to primarily assist the small and medium size carriers. The firm hopes to have a total of 20 sales points by the end of the year Freescale Opens New Tech Center in Mexico Freescale Semiconductor is expanding its business and technology center with a new 65,000-square-foot facility in Tlaquepaque, Jalisco. The center is three times larger than the company s previous facility in Guadalajara and offers nearly 22,000-square feet of additional space for future expansion. The center houses engineers who work on technology for the consumer, networking and automotive markets, as well as customer service and sales support staff. "Establishing this state-of-theart business and technology center solidifies Freescale's commitment to Latin America and will help us to continue attracting and retaining worldclass digital and analog chip talent in the region," said Rich Beyer, chairman of the board and CEO of Freescale. "Freescale Mexico's applications engineering and semiconductor design teams enhance our support for our customers around the world and help strengthen our global leadership in embedded processing." Selected Readings Foreign direct investment in Latin America and the Caribbean 2008 Author: Economic Commission for Latin America and the Caribbean (ECLAC). June, 2009 In 2008, inward foreign direct investment (FDI) in Latin America and the Caribbean rose to a new record high. Considering the economic and financial turmoil of the times, these results are surprisingly positive. Many of the investments carried out in 2008 reflected the inertia effects of precrisis market trends, and capital flows in 2009 are in fact expected to fall. This paper examines investment in offshore business services in the region, a sector that holds promising prospects in the medium and long runs, and which may even be able to thrive in times of crisis. The report analyses investments in large coastal hotel and real estate complexes in tropical countries, a segment whose growth had been fuelled by the United States real estate boom and which has consequently been hit hard by the current crisis. These types of investment projects are an interesting example of a new model for tourism development that could be adopted by many countries in the region. P36094.xml&xsl=/ddpe/tpl-i/p9f.xsl&base=/tpl-i/top-bottom.xsl Infrastructure Projects in Mexico Oaxaca I Wind Farm Sponsor: Electricity Federal Commission (CFE) Location: Oaxaca Total Project Value: $124 million Mexican state power company CFE has awarded the contract for construction and operation of the Oaxaca I wind farm in the state of Oaxaca to a local consortium. The consortium is made up of firms Energía y Recursos Ambientales and Energías Ambientales de Guadalajara, which will operate the plant under the independent power producer (IPP) model. The plant will have an installed capacity of between MW. The plant, in conjunction with the Oaxaca II, III and IV plants of equal capacity, will require an investment of $496 million. Oaxaca I will connect to the grid through a 115kV transmission line, while Oaxaca II, III and IV will connect through a 230kV line. The plant will start operations in Business opportunities: Construction, turbines, electrical equipment. Guadalajara Pipeline Sponsor: Electricity Federal Commission (CFE) Location: Guadalajara, Jalisco Total Project Value: $320 million TransCanada Corp. was the successful bidder on a 25-year contract to build, own and operate a pipeline in Mexico. The pipeline will follow a 193 -mile route from a liquefied natural gas terminal under construction near Manzanillo on Mexico's Pacific Coast to Guadalajara, the second largest city in Mexico. The 30-inch-diametre pipeline will be capable of transporting 500 million cubic feet a day (MMcf/d) of natural gas. The majority of the capital expenditures are expected to be made in 2010 with a targeted in-service date of March, Business opportunities: Construction, pipelines, valves, precision instruments. Page 4

New Jersey In 2008, New Jersey's exports to Mexico reached $1.46 billion, up $955 million from their level in 1993 and an increase of 1.8% in comparison with the previous year.

In 15 years of NAFTA, New Jersey's exports to Mexico have increased by 189%. Since NAFTA was implemented, New Jersey's sales to Mexico have grown at an annual average rate of 7.3%.

5 New Jersey In 2008, New Jersey's exports to Mexico reached $1.46 billion, up $955 million from their level in 1993 and an increase of 1.8% in comparison with the previous year. Exports to Mexico (Millions of US Dollars) Among all U.S. states, New Jersey was ranked 18th as an exporter of goods to Mexico in In 15 years of NAFTA, New Jersey's exports to Mexico have increased by 189%. Since NAFTA was implemented, New Jersey's sales to Mexico have grown at an annual average rate of 7.3%. Mexico is an important trade partner to New Jersey. It was ranked as the 5th largest export market for goods from New Jersey in 2008, up from 6th in 1993, illustrating the impact of NAFTA for New Jersey growing businesses. Mexico accounted for 4.1% of New Jersey's exports worldwide in Source: US Census with adjustments made by the World Institute for Strategic Economic Research (Wiser), and SE-NAFTA by SIC AND by NAICS. Page 5

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The International Energy Sector of Colombia, Mexico, Chile and Brazil Opportunities for Virginia Defense Companies

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