Tuesday, November 20 2018
By Bob Cook, Senior Vice President, Latin America, Site Selection Group
The most successful countries in Latin America have created investment laws that encourage foreign direct investment and have assembled professional teams that can facilitate the establishment of operations inside their borders. As you consider Latin America for potential operations, it is important to conduct in-depth analysis on the labor force, infrastructure and the legal/regulatory environment in each country. You must also assess the risk environment in real time—looking comprehensively at the political environment, and any current or emerging issues that may directly impact the security of your people, facilities and supply chain. Be assured, however, there are a number of places in Latin America that will grade out favorably in all these measures.
The Site Selection Group has facilitated both manufacturing operations and white collar operations (such as BPO and call centers) across the region, particularly in Mexico, Costa Rica and Brazil. To find the right location for our clients, we utilize a mixture of purchased data, open source information and primary research conducted by our team of consultants. Purchased data and open source information is typically used to filter down to a narrow list of potentially desirable cities for a given operation. During the filtering process, we use proprietary, internally-developed analytical tools weighted to the criteria that are most important to each of our clients’ individual needs for a given project. Once we have concluded the initial filter analysis, we conduct real-time, extensive primary research on the shortlisted markets which includes all the factors mentioned in the first paragraph.
Foreign Direct Investment Trends in Latin America Show Increasing Interest, Particularly in Mexico and Central America
Experiencing Increasing Investment from Small to Mid-Size Companies
This data plus a review of actual projects locating in the region suggests that there is clearly increasing interest in the region, but a major portion of the new interest is being driven by small to mid-size companies—especially in Mexico and Central America.
Why Latin America?
Latin America is also geographically well-positioned to provide efficient access to U.S. markets. One recent study we conducted concluded that products manufactured in Mexico can be shipped to most markets in the U.S. by truck, typically within three to seven business days. In the same analysis, we determined that manufacturing operations in Costa Rica, for example, will tend to ship products by sea and reach most markets in the U.S. within 17-19 days. Depending upon the product, a number of companies in Central and South America can easily opt for shipping products by air if the time frames from shipping via water do not work.
With a total population of roughly 642 million, Latin America provides access to a very large and very young workforce of 309.8 million persons. The median age in the region is 29.5 years (compared to 38 years in the United States), and the countries of Central America in particular are experiencing healthy workforce growth. In fact, seven of the eight countries (except Costa Rica) in Central America are growing faster than the global annual workforce growth rate of 1.23 percent. Interestingly, Mexico and Brazil each added over one million workers last year, while the U.S. added only approximately 860,000. Given the ever tightening labor markets in the United States, Latin America provides a viable alternative for companies seeking to serve the U.S. market. Not only is there rapid workforce growth, labor participation rates in Latin America typically exceed the current global average of 62 percent.
There are too many projects to mention, but several projects are particularly noteworthy. Yazaki Corporation (Japan) announced in February of this year that it will add 1,500 jobs to its automotive wire harness manufacturing operations in the state of Chiapas. In June, U.S.-based Plexus Corporation broke ground on its second electronics manufacturing facility in four years in Guadalajara. The new 472,000-square-foot facility will employ a projected 3,000 people beginning next year, taking the company’s total employment in the region to nearly 5,000.
We are keeping our eye on two developments in Mexico that have the potential to impact site location decisions in the country. First, the newly-negotiated trade agreement referred to as USMCA (formerly NAFTA) has specific provisions which address the automotive industry. This deserves an article unto itself, but in summary, the agreement attempts to increase North American content in automobiles and automotive parts in order to qualify for duty-free treatment. The agreement also attempts to drive higher wages in the sector. Other than for the automotive industry, we do not currently see dramatic changes from the prior NAFTA agreement. The principal trade issue impacting Mexico at the current time is the Trump Administration’s 25 percent tariff on steel and ten percent tariff on aluminum, which the new USMCA does not remove.
Secondly, the more significant issue may be the incoming Mexican President’s proposed policies related to border locations. Andrés Manuel López Obrador (AMLO) takes office on December 1st, and he has vowed to double the daily minimum wage in cities located adjacent to their northern border with the United States. This will likely exert upward pressure on all wages in border locations, even though the vast majority of manufacturers already pay double the minimum wage when considering bonuses. AMLO has also promised to cut the current 16 percent value-added tax (VAT) to eight percent for companies locating in Mexican border towns.
While the country has attracted more than 300 multinational companies there, they have placed specific emphasis on attracting medical device manufacturers, now claiming 72 companies in this sector with over 22,000 employed. Medical devices are actually the number one industrial export good of Costa Rica. In 2017, the country registered U.S. $2.9 billion exports in medical devices, more than half of which went to the United States. Costa Rica is on the second-largest exporter of medical devices in Latin America, behind Mexico. The country has a relatively young and significantly bilingual workforce. The industrial base has matured well enough that almost one hundred percent of the employees in multinational companies are Costa Rican.
In May of this year, Coloplast (Denmark), announced they will locate a medical device manufacturing facility in the city of Cartago. They will establish a temporary plant in La Lima Free Zone, where the first 100 employees will be hired to produce various “ostomy” devices. The facility will be fully operational by the summer of 2020.
In July of this year, Align Technologies opened its newest facility in Costa Rica, a $50 million office complex located in the city of Belén, with plans to open another multimillion dollar facility located in La Lima (Cartago) by the end of 2018. The company has more than 2,800 employees in Costa Rica, adding more than 1,000 over the past two years. With these new investments, Align hopes to add 400 new jobs by the end of 2018.
We are watching closely, however, the financial situation at the federal level. The country has a budget deficit that is 7.1 percent of GDP, the highest in Central America. This has led the current administration to propose a tax and spending reform package that has been met with resistance by workers in the government and various other sectors. Some workers went on strike in early September thru late October, and now the courts have struck down the proposal. How the situation is resolved will play a role as to how Costa Rica is viewed by site selectors in the future.