Co-Production International Discusses Benefits for Nearshore Manufacturers as Mexican Peso Devaluation Surpasses 19 on the Dollar

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Major banks are now posting the peso at over 19 on the dollar, leading Co-Production International to explain the benefits of Mexican peso devaluation for nearshore manufacturers. Companies manufacturing in Mexico are finding that the cost of labor and fixed expenses continues to reduce their overhead costs as the peso declines against the dollar.

Peso devaluation improves benefits for manufacturers in Mexico

Peso devaluation improves benefits for manufacturers in Mexico

One of the things you look at in our case at Goodridge (A US/UK company with maquilas in Mexico). Our costs are in pesos and our sales are in dollars. When any of these currencies are devalued, but especially the peso, our expenses become cheaper

This month, major banks in Mexico are now posting the peso at over 19 on the dollar. As the peso devaluation continues, nearshore manufacturers are finding additional savings by operating in the region. The benefits of nearshore manufacturing in Mexico are already well-established. High quality and less-than-China labor costs, logistics made easy by geographic proximity, along with little to no-tariff trade, have all solidified Tijuana and its decade’s long history as a global manufacturing powerhouse. Aside from these known indicators of manufacturing leadership, Mexico has one additional advantage that has now taken center stage: the peso devaluation.

To better understand how manufacturers can hedge the currency exchange market while operating in Mexico, Co-Production International spoke with Antonio Carranza, Finance Director and CFO for Goodridge Ltd. Carranza has over 20 years’ experience in financial planning, treasury management and hedging strategies. Having worked in Latin America, the United States and Europe, his expertise in global currency markets will give dynamic insight into how manufacturers can hedge the peso devaluation in Mexico.

Twenty years ago the Mexican peso, though significantly devalued against the dollar, was fixed and offered no opportunities to hedge against it for a greater return. With much of Mexico’s economy dependent on its nationalized petroleum industry, the peso becomes heavily dependent on oil prices. Carranza explained that with the global price of oil dropping over the last two years, Mexico has seen the peso go from twelve pesos on the dollar to upwards of eighteen.

Over the last two years the Mexican peso has depreciated significantly enough that real dollar savings have been realized for US manufacturers in the region, Carranza explained. “One of the things you look at in our case at Goodridge. We are a US/UK company with maquilas in Mexico. Our costs are in pesos and our sales are in dollars. When any of these currencies are devalued, but especially the peso, our expenses become cheaper.”

“You have to understand, as a corporation manufacturing in Mexico, we are in the business of making money from what we manufacture, not from the exchange rate,” Carranza tempered his statement, but adding what cannot be overstated enough, “fixed expenses are where the real savings are realized. Electricity, water and telecommunications costs are all in pesos, which when devalued add significant reductions in the cost to operate in Mexico.”

In addition to savings from fixed labor costs, Co-Production has run the numbers for labor cost savings when the peso is devalued. Using a sample company with 100 employees, nearly $65,000 of additional annual labor cost savings occur when the peso is devalued from sixteen to eighteen, a scenario proven possible over the last year.

With his long history in finances, Carranza has begun to develop strategic planning tools for corporations who wish to analyze and plan for hedging the currency exchange market. For manufacturers in Mexico, this would allow them to know and measure the risks they are willing to incur. By determining what a corporation is willing to risk or gain, they can make smart decisions based on their overall business strategy. The end result means stronger financial statements for nearshore operations.

“I am working with a bank in Mexico to put together strategies for SMEs which will help them understand the risks they have in their business, how they are impacted by the exchange rate, and to develop a strategy to hedge the currency while avoiding uncertainty in their financials.” Carranza believes it is this type of value-added service that will allow manufacturers in Mexico take an innovative and dynamic approach to operating in the country. Corporations cannot manufacturer in Mexico without considering the currency. The peso’s long term trends are a crucial to analyzing the viability of successful foreign operations.

The time is right to take advantage of both currency exchange rates and the low-cost, highly skilled workforce in Mexico has to offer. If your company is considering moving or expanding manufacturing operations in Mexico, Co-Production International provides a comprehensive cost analysis at no charge. As a long-established shelter services provider for manufacturers, CPI provides innovative solutions to maximize manufacturer’s margins by operating in Mexico. Contact CPI today!

About Co-Production International: Specialist in establishing manufacturing operations in Mexico. As an administrative services provider CPI offers maquiladora shelter programs, day-to-day administrative services, site selection, and the complete set-up of your operation in Mexico. For more information, or if you are interested in a cost analysis for expanding your operations to Mexico, visit http://www.co-production.net or call (619) 429 4344.

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Alma Denisse Martinez, Marketing Director
Co-Production International

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