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 (NYSE: MDR) and Schlumberger (NYSE: 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, author of the Daily Paycheck, likes The Mexico Fund (NYSE: 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 (NYSE: 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 (NYSE: 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 (NYSE: 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.