Friday, April 14, 2006

That loud sucking sound

Do you remember Ross Perot? Only a decade ago or so he seemed poised to win the presidency of the United States by playing on our fears that Mexico was going to take all of our jobs. He was famous for commenting on the loud "sucking" sound that would be our jobs leaving the US and going to Mexico as part of the NAFTA agreement.

Today, Mexico exports over 90% of the goods and services it creates to the US. Mexico is exceptionally dependent on the US as an export market. That outsourcing concern was a legitimate concern - we did lose some jobs to Mexico, but our economy has continued to prosper and grow. What's interesting is what's about to happen to Mexico.

Mexico banked on the fact that the US (and other countries) would need low cost manufacturing labor. In that, they were correct. However, Mexico for the most part did not invest any money into education or technology advancement for its people, to improve its ability to compete beyond merely being the lowest cost alternative. Then, China became a player. Suddenly, Mexico is not the lowest cost manufacturer, and frankly China has better quality control and manufacturing capabilities. Chinese firms are moving into design capabilities as well.

Total Mexican export to China? Zero. China's biggest export market? The United States. Mexico's portion of the US market? Rapidly falling. If it weren't for cars and oil, Mexico's exports to the US would fall by half in the next few years. The Mexicans have gotten the wakeup call. There was a great news article about the recognition of China as a strategic competitor taking over their largest market, and what the Mexicans plan to do about it on Marketplace Radio recently. You can listen to it here.

Basically, the Mexican authorities that Marketplace spoke with have the right ideas and the wrong approach. The right ideas are that they must compete on design (innovation) and speed to market. Since they are next door, the Mexicans have an advantage over other low cost manufacturing locations. All things being equal, I like my products on a very timely basis, so the Mexicans can compete on products with short shelf lives or fast turn times. Also, the Mexicans realize they've got to differentiate beyond low cost, by becoming a design and innovation center. Unfortunately, the approach they are taking is to try to craft a "national" plan for innovation. Rather than create credits and enducements and improved technology education, the plan will probably fund certain types of companies which are friendly to the government and fail to encourage entrepreneurialism and true innovation and design.

One thing is certain. Companies, and countries, are recognizing that speed and innovation are the clear differentiators for business today.
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posted by Jeffrey Phillips at 9:09 AM


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