With China continuing to improve its ability to attract FDI and recently overtaking the US as the world's top inward FDI destination, it would seem that the country's investment prospects are as strong as ever. But, not all sectors are sharing in this success. FDI growth in China is increasingly down to investment in the services industry, with flows into manufacturing industries showing signs of decline.
China's automotive sector has seen a marked decrease in FDI projects in recent years and this has been reflective of the sector in China, with its market share starting to fall. According to greenfield investment monitor fDi Markets, China’s share of global FDI in the automotive sector has decreased from 15.16% in 2010 to just more than 12% in 2013. In contrast, Mexico has seen its market share more than double in the same period. In 2013, the country accounted for 12.56% of the sector globally – more than China.
What is driving these dynamic changes? China’s decreasing cost competitiveness could be a factor in explaining this changing trend.
Cost is a key driver in large-scale manufacturing operations that require a high number of employees and/or expensive equipment and facilities. According to research and analysis firm Economist Intelligence Unit, China’s average annual nominal wage growth has gone up by 10% since 2008, outgrowing wage growth in neighbouring Asian competitors and in Mexico, all of whom have experienced annual wage growth rates of less than 10%.
According to fDi Benchmark, a corporate location assessment tool, China’s labour costs in the automotive sector have increased at a rapid rate and are above those in neighbouring countries, such as India, Indonesia, Thailand and Malaysia, the last of which it has only recently overtaken. In addition, China's labour costs are rapidly converging with those in Mexico – with the most recently available figures showing labour growth more than four times that in Mexico.
A losing battle
Key source markets in the automotive sector, such as the US and Japan, are important to monitor. For the US, the appeal of investing in Mexico is high. There is an existing free-trade agreement in place (the North American Free Trade Agreement) between the two countries, and the elimination of tariffs and barriers subsequently enhances Mexico’s appeal over its rivals in Asia. Also, the cheaper logistics costs derived from running an operation in a neighbouring country instead of one that would require trans-ocean shipping is also in Mexico’s favour.
With the margin between labour costs in Mexico and those in China decreasing, labour costs are not as decisive as they have been historically. Consequently, there has been an increase in the number of companies, both from the US and Japan, that are launching FDI projects in the Mexican automotive sector. At the same time, China's automotive sector has witnessed a decline in the number of FDI projects from these two source counties.
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