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WEB EXCLUSIVE
Mexico Still Competitive But Facing Challenges Mexican Manufacturing Must Continue Moving Up Value-Added Ladder for Continued Success

In May, ProLogis, a leading global provider of distribution facilities and services, released a new study entitled, "Is China's Economic Success a Threat to Mexico?" This study was conducted by Leonard Sahling of the ProLogis Research Group, whose main objective was to examine whether China's recent success in exporting to the U.S. has come at the expense of Mexico's market share.

The study indicates that although some observers believe that China's exports to the U.S. are growing at the expense of Mexico's, there is not a causal connection, and that reports of the demise of Mexican manufacturing have been greatly exaggerated. Rather, the study concludes, the slowdown in Mexico's exports to the U.S. is due to the U.S. economic boom that peaked in 1999-2000 and the prolonged U.S. recession and slow recovery. The strong U.S. economy of the late 1990s fueled the growth of Mexican maquiladora factories, but they have been hard hit since by the U.S. economy's sluggishness. Yet, despite their recent economic woes, Mexico's manufacturers have made a lot of progress in moving up the value-added ladder. The report further finds that China's exports to the U.S. escaped the downdraft of the U.S. recession because of dramatic changes in U.S. trade treaties with China.

"These trade changes were one-time events that have leveled the playing field, which had previously been tilted against Chinese imports to the U.S.," Sahling explains

Key Findings of the Report Include:

• Mexico's proximity to the U.S. is its foremost comparative advantage as an outsourcing destination for manufacturing. Global manufacturers will prefer Mexico to other countries when product specifications are complex and frequently changed, requiring close supervision; when the inventory cycle is short, so that a transport time of 5 to 6 weeks is unacceptably long; or when products are bulky, so that high shipping costs offset low production costs.
• China's admission to the World Trade Organization (WTO) in December 2001 meant that other WTO members, including the U.S., lowered their duties on goods imported from China, thus enhancing the competitiveness of those goods within the U.S. This was a one-time event that, while providing a short-term boost to China, will not alter Mexico's long-term advantages vis-a-vis China.
• Approximately two-thirds to three-fourths of Mexico's exports to the U.S. have remained competitive and are either holding their own or expanding their market shares.
• ProLogis' customer base in Mexico provides many examples of the overriding importance of Mexico's proximity to the U.S. Some of these customers need to meet demanding just-in-time requirements, while others have short production runs or rigorous quality control testing. For all of these reasons, ProLogis customers have chosen to manufacture in Mexico rather than China.

The ProLogis study concludes that certain goods are more likely to be manufactured in China, while others are better suited to Mexico. Exports that are commodities, mass-produced, or less expensive to ship are good candidates for manufacture in China, while more expensive or bulky goods, including those offering customization, can be delivered to the customer from Mexico at a lower cost.

However, the study finds that Mexico does face critical challenges at home that it must solve if it is to remain competitive on the world stage. These challenges range from addressing its aging infrastructure and unreliable power system to its neglected schools and troubled court system.

Looking ahead, Sahling believes that even though they find Mexico's competitive position in the world to be secure today, every country in the world, including Mexico and the U.S., will face increasingly stiff competition from China. "Ultimately," says Sahling, "no nation can be complacent in the face of a motivated country of 1.3 billion people who are gaining momentum in the global marketplace."

For a copy of the research report, visit http://ir.prologis.com, go to the "Proprietary Research" page and click "Is China's Economic Success a Threat to Mexico?"