this is China and this is its GDP growth over the past few decades China has experienced a meteoric
rise thanks to offshoring and globalization but as you can see their growth has flatlined and
with new trends like near Shoring where companies partner with countries that are geographically
close sometimes even sharing a border and new laws and geopolitical strife China suit
as a manufacturing engine of the world is being challenged and one country stands uniquely poised
to see massive growth in the next few decades Mexico and today we're going to figure out why
so many companies are eyeing Mexico and even have a little fun and explain it using a fun
fictional company
I'm Ricky and this is Two Bit da Vinci
this video is sponsored by better help
the year is 2016 and the hero of our story let's call him John just launched a new Eevee company called avocado Eevee.
the company gets off on a strong footing John's designs are groundbreaking and offer efficiency range and safety at a fraction of the competitor's cost like most other companies he offshored manufacturing and assemble to most of the parts to China but why the answer is
you might have guessed involves cheap labor no secrets there but I wanted to see exactly how
cheap labor was in China when John started his company and I wanted to really figure out why he
decided to Offshore so I went ahead and searched for the average wage in the manufacturing sector
in China in 2016 and it turned out to be close to 60,000 Yen which is roughly around $9,000 a year
compare that to the average in the US of around 40,000 per year and you immediately start to see
the appeal that offshoring had to offer but as I dug deeper I found out that that's just the
tip of the iceberg you see China also offers a large pool of very capable Engineers for its
factories and a very robust industrial sector where companies can Source pretty much anything
they need let's see how that works out for Jon's company through strong capital investment JN was
able to set up a factory in the Shanghai free trade zone this offers various benefits such
as tax exemptions streamlined customs procedures and preferential policies for foreign investment
beyond that it offers proximity to most of its suppliers the factory supply chain is
95% localized in China meaning that most of the inputs come from domestic Chinese companies for
example the factory sources most of its battery cells from China's contemporary aerx technology
company catl which is the world's largest supplier of lithium on batteries for electric vehicles the
factory also relies on a large network of local suppliers and other parts and components such as
Motors inverters Chargers seats windshields and tires these suppliers are mostly located
within a 4-Hour driving distance enabling avocado EV to have a close and collaborative
relationship with the suppliers and to optimize its Inventory management and Logistics operations
the unique combination of low production costs and convenience is in part what spurred China's
huge economic growth over the past few decades and what fueled the globalization in the world
economy however it would also be the key source of its demise Global trends in politics it's
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huge thanks to betterhelp and you for supporting the show so it's the beginning of 2018 and John
is flying high everything is going better than planned they're making and selling a decent amount
of VVS for such a young company and they're loving it but on June 15 2018 after accusing China of
unfair Trade Practices the US government imposes a 25% tariff on $36 billion worth of Chinese Imports
and later expanded it to 50 billion officially starting a trade war with China that would have
far-reaching implications by 2019 more than $550 billion doll worth of Chinese imported
goods spanning over 10,000 item categories were impacted by the trade war between China and the
US for John and his company things were looking bad the tariffs directly impacted many of the
parts that they relied on for making EVS including DC Electric Motors and primary lithium ion battery
cells but worse than that the US also imposed a 25% tariff on imported automobiles including
internal combustion hybrid plugin hybrid and yes EVs and this was catastrophic for John's company
because it immediately made made his cars 25% more expensive in the US market then disaster
Struck from Wuhan China at the end of 2019 the co9 pandemic hits and Global Supply chains are
completely disrupted John's company is forced to seize operations entirely due to a lockdown
measure in A Brave move Jon decides not to lay off any workers paying them A reduced wage out of his
own pocket to help them through The Darkest Hours of lockdown almost going bankrupt the
company barely survives by the end of 21 when the worst of the pandemic is over the company is back
in production but things aren't the same there's a massive new crunch in global Shipping due to
travel restrictions too much demand and not enough production to cover it one year later our hero JN
decides to start over but this time he's hellbent on doing things differently the company keeps at
Shanghai Factory in operation to supply the Asian market but they decide that it just won't do for
the US market John has to find an alternative production site but he needed to find it in
the right Place once he found it he called up a meeting with his investors and dropped the bomb
we're setting up shop in montere Mexico let's forget about China for a minute and think about
what the ideal manufacturing Hub looks like for a company like John's in light of the events of
covid-19 and the Tariff Wars the first thing I would look for is another manufacturing Hub
closer to home that isn't subject to the same level of risk to the global supply chain then I
would look for stable trade agreements between the US and the target country to reduce the risk of
future trade Wars like with China then there are production costs John would need to compare the
cost of Labor land utilities and transportation and taxes of various countries and regions John
would also need to consider the Regulatory and policy environment such as emission standards
and tax incentives as they also play a part in production cost finally he would need to assess
the availability and quality of skilled Workforce the infrastructure and the supply chain Network
we saw how China ticked all those boxes back in 2016 but after the trade war in covid-19 it it
lost most of its shine China's growth is also in part to blame here's one of those areas in
engineering where you can't have too much of a good thing because there's always a trade-off
foreign investment through offshoring has made China's GDP per capita grow dramatically over the
past two decades increasing the quality of life in China but this in turn also increases wages
which isn't good for foreign companies looking for low labor cost it is good for the Chinese of
course just look at this graph showing average Chinese wages in the manufacturing sector ven
creased over 30% that since 2016 when JN started his company this alone raised production costs
in China significantly Jon explained this to his investors how these factors are eroding China's
appeal in the global economy and how they're slowly making producing things more expensive
so John needs then is a new manufacturing Hub and Mexico fits the bill perfectly first there's no
need to point out that it's as close as you can get to the US sharing a border of almost 2,000 Mi
this is the ideal scenario for a new trend in the global economy near Shoring or offshoring
manufacturing to a nearby country instead of to a far away place like Asia near Shoring has many
benefits it gives small companies like John's more flexibility allowing them to produce on their own
timetables and not depend on storing parts or raw materials it lets companies find incorrect
mistakes in production quickly and it also makes it easier to check on production quality and raw
materials used ensuring they are not pirated it enables faster turnaround times thanks to
Shorter shipping routes a shipping container from Mexico to New York takes 5 days while from
Shanghai can take over 40 but how about wages how much do you pay a Mexican worker in manufacturing
when I did the research it turned out that the average Mexican worker in the manufacturing
sector earns an average of $263 per hour this adds up to around $5,500 per year 6,000 after
Christmas bonus and paid vacation so today labor costs are way lower in Mexico than they are in
China but I asked myself how good is the labor many people have an image of Mexican workers
as largely f related but that's not the case at all we're talking about the eighth country with
the highest number of engineering graduates in the world churning out almost 14,000 Engineers
every year so affordable and skilled labor check since July 1st 2020 Mexico has had a free trade
agreement with the US and Canada under the United States Mexico Canada agreement usmca
before that we had the North American Free Trade Agreement or NAFTA and we've had multiple other
trade agreements through the years the usmca is a modern comprehensive trade agreement that supports
free and fair trade among these three countries it reduces or eliminates tariffs or quotas on
qualifying goods and services and provide strong protection for intellectual property that's a big
one also labor the environment and digital trade this means with Mexico there's almost no risk of
running into a Terra for that will hike John zv prices in the US market in fact I discovered that
the US Mexico border is one of the busiest in the world over $1.2 million in trade cross the border
every single minute of every single day totaling over $630 billion per year so good and stable
trade relations with the US also a check and if you're thinking that Mexico is just now becoming
a manufacturing Hub you'd be wrong they've been at it for years many of the electronics that
we hold dear like Apple and Samsung components smartphones TVs are in some part made in Mexico
and Mexico's Auto industry is off the charts it is the world's seventh largest passenger Vehicle
Manufacturer producing 3.5 million Vehicles annually 88% of vehicles produced in Mexico
are exported with 76% destined for the United States Mexico's Automotive sector is also one of
the most Diversified in the world with 22 oems and more than 2,000 suppliers that's why Major Brands
like Toyota the world's largest manufacturer GM and Tesla all have or are planning multiple
factories in different parts of the country this is perfect for John because it means building a
factory in Mexico will be supported by multiple local car part manufacture ufacturers similarly
to what we have in Shanghai so stable supply chain check I'll be the first to admit that I didn't
know Mexico was such a manufacturing Powerhouse much less that it could actually challenge China
on the world stage but it can and it is in part thanks to the trade war between the US and China
Mexico grew to become the US's greatest trade partner in 2023 single-handedly accounting for
over 15% of all us import now you would think that this is all because of American companies setting
up shop in Mexico like they did in China last century but that's not the case in fact what's
happening today is that Chinese companies are moving to Mexico to manufacture their
products for the US market there just look at how Chinese direct investment in Mexico has grown the
last few decades for example China's lingong manufacturing group is investing 5 billion in
industrial park in Mexico's Northern State of noo Leon but of course nothing is ever perfect there
are several challenges to overcome in Mexico Mexico ranked 126th among the 180 countries in
transparency International's 2022 corruption index that means of 180 countries number one
would be the most honest and transparent 180 is the worst Mexico be 126 which is not great another
key problem is that most people worry about security there are several large drug cartels
operating in northern Mexico another challenge that Manufacturing in Mexico faces is the poor
quality and availability of infrastructure such as roads Railways ports airports electricity
water and Telecommunications according to the world economic Forum Mexico ranked 67th out of
141 countries in the global competitiveness index in 2022 and scored low in infrastructure 64th Road
connectivity 76th quality of road infrastructure 79th and electricity access 85th regardless of
these challenges as it stands Mexico is an almost perfect alternative to China for every company
that wants to make things for the US market the world's largest economy but I wondered is Mexico
really capitalizing on this opportunity if it was I would expect to see Mexico's share of
the US import increased dramatically since 2018 right I found one person who said Mexico hadn't
capitalized at all on the opportunity and that the volume of imports from Mexico had barely changed
but that's not what I found I mean look at this graph compared 2017 with the rest of the years
there was obviously a dip due to covid in 2019 but the trend is clearly upward but here's the
kicker this growth hasn't been Thanks to Mexico itself but to private companies investing in
Mexico the Mexican Government hasn't done much to boost Mex industrial growth focusing more on
fighting crime which is obviously important too however the government has taken some steps in
the opposite direction One of Lopez abor's First actions in government was to shut down Pro Mexico
a subdivision of the Secretariat of economy that used to promote international trade and investment
there have also been reports of amll taking aim to private companies following socialist
economic models like Venezuela's I don't know the exact context here so I won't judge these actions
but I will say that these political systems have been a proven way to [ __ ] the economy of these
countries perhaps you figured out by John and this company avocado eeve aren't real but they're based
on real companies like Tesla and others theirs is the story of many US companies which is now
switching from China to Mexico in a new trend that is challenging globalization because of Mexico's
proximity of the US I think most Americans have more of a context of Mexico than they do
of China China is just a distant place and what they don't remember is that when globalization
first started the Chinese infrastructure wasn't like it is now with added investment comes added
infrastructure and I think Mexico will undergo that same level of infrastructure development
in the next few decades when there is money on the table countries will find a way to make sure that
they can capitalize and I believe we're going to start to see the rise of Mexico so don't forget
to hit that like button and subscribe by the way and let me know what you think Global economies
and predictions are difficult but they're fun as well and this move to Mexico is going to be
fascinating especially with all the geopolitical Strife at play all right so if you like that video
you got to check out that video until next week I'm RI Tu Vinci thank you so much for
watching