An assumption exists that international competition is becoming ever more vertical, and companies are increasingly becoming both competitors and key suppliers for each other. As a result, global value chains (GVCs) have become the main channel for transfers of capital, know-how, technology, standards and value-added services.
The country this assumption points to having possible GVC shortages in is Mexico.
An investment bank report by BBVA Bancomer highlights Mexico’s major challenge is maintaining and winning participation in global value chains. And the issue is this transfer of capital, know-how, technology, standard and value-added services might not be available in Mexico, but they are available in global markets.
Therefore, countries cannot be or continue being competitive without efficient links with global markets. Do Mexico’s relationships with various global EMS providers located in the country offer enough of a transfer of capital, know-how, technology… to represent global value chain contribution from Mexico?
The era when a country’s exports were totally produced by domestic companies is now firmly in the past. Meanwhile, sustainable re-shoring requires considerable value add.
Nevertheless, participation in GVCs is also a risk, as countries might import crises from other economies through trade. The 2011 triple disaster in Japan – earthquake, tsunami and damaged nuclear power plant – is a clear example of this, as it disrupted production of computers, consumer electronic products and vehicles globally given the quasi-monopolistic dependence on Japanese suppliers of specialized technological parts and components.
The Mexican economy experienced a short slowdown in 2013, starting in 3Q12 and seeming to have ended one year later, at some point in 3Q13. The export sector has gained strength over recent months, and this will eventually impact the domestic market. This will be reflected on more homogeneous growth in manufacturing sectors in 2014.
The strongest growth will occur in sectors such as transportation equipment (automotive and aeronautics), consumer electronics, and communications equipment. The report says faster economic growth in the US, the rebound of remittances, and the recovery in formal employment will drive private consumption and demand for services.
However, this scenario is not risk-free.
Among the main causes for concern, the bank mentions are:
1) A less vigorous than expected US economy that would affect Mexico’s non-oil exports and, as a result, manufacturing, trade, and transportation services.
2) The limited implementation of approved structural reforms.
Download the full report (PDF)