Is Mexican nearshoring boom the start of something big or a flash in the pan??
This little-known data set indicates a potential weakness in Mexico’s future potential.
END of the Story First: ??Mexico is going to have to raise its national Human Capital Index if this nearshoring boom is to last. ?
HCI is a set of statistics that monitor Human Capital – a measure of health and education – gathered and overseen by the World Bank.? It predicts how suitable a workforce is for certain types of work.?
As job requirements in factories change due to technology, low math and science scores could undermine Mexico’s potential economic development.
It’s to AMLO’s great credit that he didn’t kill off the nearshoring boom early - and has even put some incentives in place.? His main policy has been to keep out of the way and allow MNCs and Chinese to dump money across the border as fast as they can.?
The China Component
While Mexico is (probably) prohibited by USMCA treaty from joining China BRI program, Mexico is shaping up to be one of the most important targets of Chinese FDI for the coming decade.?
The US Congress finds that extremely worrying, which must make AMLO a bit happier.? But the fact is that neither the Mexican (federal) government nor private Mexico Inc. did much to make nearshoring happen.? It was a lucky set of accidents, geography, and other people’s bad luck.?
So now the job of business decision-makers is to figure out if this boom is the start of something permanent or a flash-in-the-pan that will burn off quickly.
What is the Human Capital Index, and why nearshorers should care.
Looking at FDI and the way businesses were setting up, it really looked like this boom is the start of something big.?
Industrial clusters – while still far too siloed – are diversifying and developing in sophistication.? The Chinese seem to be building a deep presence around Monterrey, which may unleash a powerful network effect and even spark the growth of contract manufacturing in Mexico.?
But there’s a downside floating just beneath the surface.? Mexico’s hi-tech industrial future is threatened by weak Human Capital numbers.? That means education, training, literacy, and birth-health.?
What it is and why it matters:
The Human Capital Index? ?Human Capital (worldbank.org)? ?is a compendium of government statistics about the human potential in a country.? It measures everything from survival rates of the mother, stats about education and school, and literacy.
To nice people, this means “the ability of people to reach their full potential in terms of health and education”.? To us it means, “How trainable is the workforce?”??
In Mexico, the answer is, “trainable for now, but not great”.
The HCI Numbers (out of 1.0)
??????????????? USA:? 0.76
??????????????? Mex:? 0.62
??????????????? PRC:? 0.65
NGOs use this data to assess the effectiveness of governance and the general health of society.? You will use this to make site selection and training decisions.? There must be some alignment between the technological requirements of the production process and the abilities of the workforce.
HCI predicts training budgets and HR costs.? The higher an economy’s HCI, the easier it is to train workers and to develop new managers. It also predicts how easily a company can localize functions like design, marketing, HR, and finance.? Even more important, it tells us how your supervisors and middle-managers will be spending their time.? The higher the HCI, the more likely your teams will run independently – for good or ill.??
The Top 10 HCI countries:
Side-by-side comparison: US, Mexico, and PRC HCI scores.
For nearshorers, it’s a mixed bag.?
The bad news is that Mexico is low on education and literacy metrics.?
This skillset is important now but will become vital as automation and AI brings more technology into the office and onto the factory floor.? While new technologies will doubtless lead to AGGREGATE improvements in efficiency, they will require experienced workers who can learn to use new tools and processes quickly.? Automation seems simple enough when everything is working right, and everyone is trained and performing well. ?New tech, however, will change the production process and the job requirements of workers.? ?Work that was once considered “semi-skilled manual labor” now seems more like operating a computer.?
The most dramatic numbers in the report are the PISA numbers.? This is a very controversial global study of math, science, and reading levels among 15-year-old students.? China made headlines a few years ago with its dramatic rise in scores – especially in Shanghai.?? Mexico’s science and math scores are 30% below China’s.? That’s a pretty stunning difference, and if we take the numbers at face value it can have an impact on our decision to nearshore.?
There are, however, ?3 big caveats that nearshoring negotiators have to remember:
1.???The people you are dealing with and hiring during your set-up phase will have HCI scores more in line with Texas and California.? Many of the experts, service providers, and key-hires you’ll work with have degrees from US schools and may have lived north of the border for long periods.? Furthermore, they have relevant MNC experience and a deep understanding of US corporate culture.
It's great that we get to work with the best-of-the-best when planning our nearshore moves, but they are not indicative of the general level of education or training in Mexico.
2.?? There have been highly efficient MNC factories running in Mexico for 50 years.? There is a large base of highly experienced middle and senior managers who know how to get the job done. ?There is a large population of experienced, highly trained workers and managers already here.?
3.?????? Good site selection solves or prevents a lot of problems in Mexico and access to quality workers and managers is one of them.? If you stick to major cities within the right “industrial corridor”? (Autos in the Northeast and on the border, aero and tech in the Center (Bajío), software and design in Guadalajara – MORE OR LESS).??? The point is, if you plan your Mexican entry around your industry and product, you’ll be able to focus on HR priorities early.? ???
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What you should do.
The 3 steps that nearshoring managers should undertake:
1)? DIY Management Development.? I remember having a VERY SHORT conversation with a Vietnamese HR professional in Saigon who informed me that they expected their job candidates to show up fully trained and ready to work (so they wouldn’t need my training or consulting services).?
Most international managers come to Mexico ready to train workers in the company’s production methods.? It might be time, however, to return to the long-forgotten concept of “management development”.? This is where you identify “high potential” young managers and start cross-training them in a range of skills and coaching them about company processes & best practices.? The hope is that this will prep them for leadership roles.? Are these programs expensive, resource intensive, difficult to manage, and of questionable benefit?? Mmmmmaybe.? But judging by the number of new deep-pocketed MNCs setting up or expanding in Mexico, a deep bench of management talent may give you a considerable competitive advantage. ?I predict that we are about 6 -9 months away from hearing about the “great Mexican management drought”.? We saw the same thing in China at the beginning.? Mexico won’t have enough managers.? ??
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2) Site selection? The major cities in Mexico are getting expensive and crowded (at least for industrial park space).? This is causing some investors to shop for the site of their new factory based on cost or time to delivery.? Be careful, there.? Mexico’s different cities each have their own production specialties, and your life will be much easier and stress-free if you locate your facility in the right “technical corridor”.?? Another aspect of site selection is the mistaken impulse to cut costs by going off into less developed popular areas.? Land prices and certain other fees may be lower, it’s true.? But your access to quality workers (MNC experience is absolutely key)
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3 Fight the Status Quo - subtly.? Businesses that take a gradual approach to innovation and new processes will have an easier time of it than those trying out revolutionary technologies or new processes.? Mexico is conservative in most respects anyway, and the low HCI scores indicate that rapid change may leave some of your team behind.?
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Final Word:
From where I’m sitting, the Mexican nearshoring boom has legs.? This has the potential to transform the Mexican economy – and even society – if it follows this logical trajectory.? Mexico is already achieving critical mass in its auto industry, and will soon follow suit in aerospace, electronics, and medical devices.?
Nearshoring companies have the resources and experience to undertake significant training and development programs.? These expenses have gone out of favor due to cost-cutting. ?In Mexico, however, where skilled labor and experienced management are in short supply, this investment may be justified.
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Certainly, here's a comparison of the Human Capital Index (HCI) for the United States, Mexico, and China, focusing particularly on aspects related to education and training:
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| Aspect?????????????????????????????????? | United States???? | Mexico?????????? | China????????????? |
|------------------------------------------|-------------------|------------------|--------------------|
| Overall HCI Score (2020)???????????? | 0.76????????????? | 0.62???????????? | 0.65?????????????? |
| Expected Years of School???????????? | 16.3 years??????? | 13.9 years?????? | 13.5 years???????? |
| Harmonized Test Scores?????????????? | 494 (Math & Science) | 416 (Math & Science) | 531 (Math & Science) |
| Learning-Adjusted Years of School??? | 13.1 years??????? | 7.7 years??????? | 9.3 years????????? |
| Percentage of Children in Preschool? | 67%?????????????? | 63%????????????? | 79%??????????????? |
| Tertiary Education Enrollment Rate?? | 88%?????????????? | 28%????????????? | 51%??????????????? |
| Government Expenditure on Education (% of GDP) | 5%?????????????? | 5.3%???????????? | 4.1%?????????????? |
| PISA Scores (2018)?????????????????? | Reading: 505, Math: 478, Science: 502 | Reading: 420, Math: 409, Science: 419 | Reading: 555, Math: 591, Science: 590 |
| Adult Literacy Rate????????????????? | 99%?????????????? | 95%????????????? | 96.8%????????????? |
| Vocational and Technical Training Programs | Extensive, with a focus on technology and innovation | Growing, needs expansion and modernization | Extensive, with a strong emphasis on manufacturing and industrial skills |
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Source: World Bank Human Capital Index, OECD, UNESCO, PISA 2018.
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