May 25 (Bloomberg) -- Mexico’s exports to the U.S. are taking market share from China as demand rises for Mexican-made refrigerators from Whirlpool Corp. and Dodge Ram pickups from Chrysler Group LLC.

Mexico’s share of the $427.7 billion in goods and services the U.S. imported in the first three months of the year rose to a record 12.3 percent from 11 percent a year ago, helped by a weaker peso and U.S. companies moving manufacturing south of the border. China’s share fell to 17 percent from 18.4 percent.

To combat China’s low-cost manufacturing industry, Mexican factories have shifted to goods that are expensive to ship overseas and those that require more complex manufacturing, such as automobiles and appliances, said Luis de la Calle, a former Mexican negotiator for the North American Free Trade Agreement. Mexico adopted the strategy after China’s entry into the World Trade Organization in 2001 caused the closure of hundreds of textile, toy and electronics plants.

“There’s a change in perception in favor of Mexico,” said De la Calle, who is now a partner at Mexico City-based business adviser De la Calle Madrazo Mancera SA. “There’s a realignment that started before the crisis and the crisis sped it up.”

The increase in Mexico’s share of the U.S. market will continue because of its proximity and supply of workers willing to be paid less than their counterparts in Canada, De la Calle said. Mexico may have as much as 15 percent of the U.S. market within three years and displace Canada as the country’s second- biggest source of foreign goods, he said.

Welcome Competition

“We don’t pay much attention to short-term changes in market share data,” Chen Rongkai, head of the press department at China’s Ministry of Commerce, said by phone. “We welcome competition in an open and fair environment.”

Polaris Industries Inc., the Medina, Minnesota-based maker of snowmobiles and all-terrain vehicles, said May 20 they are opening a production facility near Monterrey to replace one they plan to sell or close in Osceola, Wisconsin. The move, along with adding production to two other U.S. facilities, will save $30 million annually by 2012, the company said.

“With speed-to-market and logistics costs, China just wouldn’t have been competitive,” Chief Executive Officer Scott Wine said in a May 24 telephone interview from Medina. “Mexico has got a workforce that’s used to working for U.S. multinational companies, with fairly high-technology products.”

Temporary Gains

Mexico’s exports reached $291.3 billion in 2008 before falling 21 percent last year as its northern neighbor struggled with the worst recession since the Great Depression. In the first four months of this year, Mexico’s exports to the U.S. climbed 35 percent to $91.3 billion.

Mexico reported yesterday a preliminary trade surplus of $195 million in April, beating a forecast for a $15 million deficit, according to the median estimate of 13 analysts surveyed by Bloomberg.

Some economists, including Alonso Cervera of Credit Suisse Group AG, say the gains won’t last because they’re based on higher oil prices and a one-time rebound in auto exports. Mexico is the second-largest supplier of crude oil to the U.S.

“The rate of growth going forward should ease substantially,” Cervera said in a phone interview from Mexico City. “Exports out of Mexico will continue to look very strong on a year-over-year basis, but in sequential terms we’ve seen the best numbers already.”

Mexico’s oil exports rose 77 percent to $11 billion in the first four months of the year. Export volume rose 4 percent to and the average price for Mexican crude exports climbed 70 percent to $70.53 per barrel over the same period. Oil accounts for about 14 percent of Mexico’s exports.

Weaker Peso

Auto exports jumped 79 percent in the first four months of 2010 to 564,388 vehicles, after plunging 41 percent in 2009.

Exporters have also benefited from a weaker peso, which makes Mexican goods cheaper in dollar terms. The currency declined to as much as 15.57 pesos per dollar in March last year from as strong as 9.86 pesos in August 2008, a 37 percent drop. The peso has recovered since last year, to 13.0753 as of 3:06 p.m. New York time. Inflation has remained tame, with consumer prices rising 4.27 percent in April from a year earlier.

An influx of foreign investment in factories and equipment before the U.S. recession that began in 2008 showed the confidence companies have in Mexico, said Beatriz Leycegui, a deputy economy minister, in an interview. Investments will return as U.S. demand for manufactured goods rebounds, she said.

Foreign Investment

Foreign direct investment reached a record $27.3 billion in 2007 and $23.2 billion in 2008 before plummeting to $11.4 billion last year. Economy Minister Gerardo Ruiz Mateos last month said Mexico will receive $20 billion in foreign investment in 2010.

Among those boosting production is Chrysler, which plans to invest $550 million at its assembly plant in Toluca to begin producing the Fiat 500 model in December, retooling a plant that produced the PT Cruiser. Mexico won the production over Michigan, which was also being considered, De la Calle said.

Whirlpool in August 2009 announced it would shift production of refrigerators from an Evansville, Indiana, factory to Mexico, eliminating 1,100 full-time U.S. jobs. With heavy or bulky items, shipping costs often outweigh the labor savings when manufacturing from China, Marc Bitzer, president of North American operations for Whirlpool, said on a May 11 conference call with analysts.

Rising Costs

Mexico has gained favor as manufacturers see more risks in China because of rising costs to do business and the possible appreciation of the Chinese currency, said De la Calle, who has a framed copy in his office of the Nafta agreement signed by President Bill Clinton.

U.S. and European officials are pressuring China to let its currency appreciate to boost their export competitiveness. Chinese President Hu Jintao, who is hosting U.S. officials in Beijing this week, said yesterday China will move gradually and independently in altering exchange-rate policy after keeping the yuan pegged to the U.S. dollar for 22 months. Treasury SecretaryTimothy F. Geithner, who has delayed a report to the U.S. Congress that could brand China a currency manipulator, said he welcomed China’s commitment to yuan changes.

The average annual salary for Chinese manufacturing workers was 24,192 yuan ($3,543) in 2008, a 16 percent increase from 2007, according to the National Bureau of Statistics. Mexico’s average manufacturing salaries rose 5.2 percent to 239.8 pesos a day last year from 227.78 pesos in 2008, according to Mexico’s Labor Ministry. Factoring in a work week of five days, the Mexican wage in 2009 would be 62,348 pesos ($4,823).

“Company boards are asking, ‘In what country can we diversify away from our Chinese risk?’” De la Calle said. “Mexico is your best option.”

By: Thomas Black - Bloomberg Businessweek