While Mexico has become a popular manufacturing destination in recent years due to a myriad of advantages, including low labor costs, a weakening peso is driving that labor cost even lower. The resulting effect is a sometimes overlooked boon for US companies seeking to increase productivity. It is believed that the peso devaluation effect will continue for several years as Mexico’s infrastructure continues on its current path of improvement and when oil returns to $50-$60 per barrel. In the meantime manufacturing in Mexico continues to cast appeal to upper management of start-up companies as well as large companies.
The Peso Devaluation Effect
Because human capital is a fundamental component of business, it is vitally important for manufacturers on the global market to look for opportunities to cut costs wherever possible. Many US companies have found Mexico’s low labor cost and numerous other incentives make the Latin American country ideal for outsourcing labor. The country offers unique opportunities in the form of their maquiladora system. And this allows foreign companies to seamlessly partner with Mexican factories.
Mexico’s peso is sliding in value against the US dollar as the resulting peso devaluation effect on maquiladoras is increasing their profitability for US firms. This, in turn, is making those maquiladoras increasingly popular to US manufacturers, because the dollar remains strong, and thus goes even farther in Mexico. This is true for manufacturing in Juarez and manufacturing in Tijuana as well as all locations throughout Mexico. Currently, the peso is trading against the US dollar at nearly 19 to one. This is historically low for the peso. But it translates directly into noticeable savings for labor costs. In other words, as the peso slides, the same US dollar buys more and more labor, getting the job done for less. This peso devaluation effect has been observed in the past, such as in the 1994 currency crisis, when US manufacturers invested in Mexico at unprecedented levels.
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The Slide of the Peso
Despite strong economic indicators in Mexico, such as strong growth in GDP and relatively low inflation, the peso is sliding at an historic rate. According to economists and financial experts, some of the reasons driving the devaluation of the peso include:
- Falling oil prices have caused Mexico’s central bank to issue more debt.
- Expectations that the US Federal Reserve will continue to raise interest rates
- Uncertainty with the financial situations in Europe and Greece
- Mexicans sensing the weakening of the peso are more likely to exchange them for dollars, compounding the devaluation.
This trend and resulting peso devaluation effect on maquiladoras manufacturing will continue for at least another year or two, by some estimates. Mexican production gets at least 70% of its inputs from US companies, so supply levels are secure. Meanwhile, peso-based labor will continue to quietly benefit US manufacturers doing business in Mexico, attracting even more investment.
To assist companies with a greater understanding on the economics of the peso devaluation effect a Mexico shelter service company is prepared to assist the reader with further information. One such company, https://www.tecma.com (The Tecma Group of Companies, located in El Paso, Texas and San Diego) has developed 30 years of experience with US – Mexico economics.