A number of factors draw manufacturers to Mexico, including the country's participation in the North American Free Trade Agreement, significantly lower labor costs compared to other countries and close proximity to high-demand markets.
In addition to these common benefits, there are many changes taking place that are making manufacturing in Mexico even more appealing. One area that deserves extra attention from companies is the country's electricity sector, which is undergoing rapid reform as Mexico's energy markets continue to open up.
What is the impact of electricity?
Reliable access to electricity underpins the manufacturing environment in any country, as high costs or limited access to this resource make manufacturing impossible. As the International Monetary Fund points out in its working paper, "Made in Mexico: Energy Reform and Manufacturing Growth," electricity is a vital resource for manufacturing production. The IMF cites data that underscore this point: In 2012, Mexico's industrial sector consumed 58.6 percent of the country's electricity. Further, energy demand could be 79 percent higher in 2024 than it was in 2010. With this data in mind, it is easy to appreciate the importance of electricity reform in the country.
"Electricity sector reform is part of the larger energy reform package that was passed in 2013."
The importance of energy reform
In December of 2013, Mexico reformed its constitution and approved energy reforms that liberalized the country's energy sectors - including oil, gas and electricity - to private investment. By opening its energy markets, Mexico hopes to draw more investors who can develop its oil reserves and gas deposits.
The opening of Mexico's energy markets means more manufacturers will view the country as an attractive destination for business. Global Capital noted this shift is because the liberalization of energy - which includes electricity - is expected to lead to a dramatic reduction in costs for the industry. Additionally, the opening of Mexico's energy markets means there will be greater access to natural gas at a lower cost. Citing research conducted by HSBC, Global Capital reported that the Federal Electricity Commission plans to reach 65 percent of electricity power generation through natural gas, which will also contribute to the lowering of electricity costs.
The liberalization of electricity
As Mexico's energy sector welcome outside investment, the electricity sector will experience massive benefits. According to estimates shared in the IMF working paper, reductions in electricity prices driven by energy reform - including greater reliance on natural gas instead of fuel oil - could be associated with a 13 percent reduction in electricity prices, a boost in manufacturing output by up to 3.9 percent, and an increase in the country's overall GDP by 0.6 percent.
Electricity sector reform is part of the larger energy reform package that was passed in 2013. As Stratfor Global Intelligence noted, secondary legislation passed in August 2014 focused specifically on Mexico's electricity sector. Electricity reforms allow for the following changes:
- Greater investment in generation of electricity.
- More private participation in the maintenance and construction of distribution and transmission networks.
- The establishment of a wholesale electricity market; this allows power generators to sell electricity its distributors and end users.
Liberalization is working
Opening of Mexico's energy sector and the liberalization of electricity are having positive effects on the manufacturing industry. In fact, Enrique Ochoa Reza, Mexico's Federal Electricity Commission chief executive, said in a speech last March that electricity rates for industrial customers have fallen between 18 and 26 percent over March of 2013. Electricity prices will continue to decline, and as a result, more companies will begin to see the offshoring advantages of Mexico over other locations.