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Is Mexico the new China for manufacturers?

Posted by Goldin Peiser & Peiser on Sep 24, 2014 12:07:03 PM

September 2014

By: Allan Peiser

According to an article on thecountries.com, 2,637,239 U.S. jobs were outsourced in 2013. When one thinks of outsourcing manufacturing, China typically comes to mind. China has historically provided manufacturers with low labor costs, low factory costs, high number of skilled engineers, efficient work force, and experienced suppliers and distributors. Now, however, an increased number of manufacturers are looking to Mexico as the next outsourcing hub.

In April 2014, the Boston Consulting Group (BCG) published a press release detailing its findings on the shifts in manufacturing costs around the world. The study revealed that countries such as China may no longer be the most financially advantageous places to outsource. Where China was attractive, in part because of its low labor costs, that is no longer the case; hourly wages are on the increase. According to BCG, Mexico seems to be the new “rising star” due to a number of factors: its low manufacturing costs, “…stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage.”

Let’s explore the advantages of outsourcing to Mexico.

Manufacturing labor costs

China, once considered to have one of the lowest labor costs and highest labor availability, is now losing its advantage to countries such as Mexico. It is predicted that by the year 2015, the average manufacturing labor costs in Mexico will be 19% lower than those in China. When the output per worker is factored into the equation, the costs could be as low as 30%.  As of today, an automotive factory worker in China earns, on average, the equivalent to a factory worker.

Proximity to the U.S.

Shipping costs and time to market are two important factors that are making Mexico more attractive. Mexico’s proximity to the U.S. affords savings that could not be realized when manufacturing in China.

Shipping costs

It was estimated that in 2012, with the rise of oil prices, the costs of shipping a 40 ft. container from China to the U.S. was just over $7,000. The cost of shipping that same container from Mexico was estimated at just under $3,000. It stands to reason that freight transportation by truck, rail and air from Mexico to the U.S. will add up to huge savings for the manufacturer.

Time to market

While the geographical advantage that Mexico has over China cannot be underestimated, the North American Free Trade Agreement (NAFTA) has made it that much cheaper (goods enter the U.S. duty-free), easier, and faster for goods to move from Mexico to the U.S. According to the third party logistics company Cerasis, moving goods from Mexico as compared to from China could save as much as three weeks in transit. As a result, a company needs less lead time, possibly 2 weeks rather than 5, to place an order with the factory.

Mexican factories easy to access

Time and distance are very important considerations when choosing where to set up shop. Factories in Mexico can be reached in a fraction of the time it takes to get to factories in China. This short distance allows for the business owners to visit their Mexico facilities more often than they would in those located in China.

The fact that the U.S. and Mexico share similar time zones is an added bonus. Because of the 12 – 15 hour time difference, communication with Chinese factories can be challenging and may have a marked effect on production. When operating in the same general time zone, as in the case of Mexico and the U.S., the real-time business that takes place allows for easier management coordination.

Growing pool of qualified engineers

China has been and still is an outsourcing destination for those manufacturers looking to employ qualified and knowledgeable engineers; the number graduating university with engineering degrees has more than doubled since 2000. Mexico, too, understands that education is central to economic progress. As a matter of fact, Mexico is surpassing the U.S. in graduating qualified engineers by 3 to 1, according to an article on HSBC Global Connections by Elizabeth Millard. This growing pool of talent is certain to attract more interest in Mexico from U.S. manufacturers.

Commitment to enforcing IP laws

According to Jack Perkowski, in an article in Forbes, “…the issue of protecting intellectual property rights (IPR) is the single biggest hurdle for most companies to overcome when thinking about entering the China market.” It is well known that China leads the world in counterfeit and pirated goods, with little or no regard for patent rights. Mexico, on the other hand, has strong IP protections and enforcement procedures similar to those in the U.S. Over the years, Mexican courts have demonstrated their commitment to enforcing IP laws.

While Mexico will not over-take China as an outsourcing destination in the near future, there are signs that it is becoming an attractive alternative for manufacturers. Since 2010, American trade with Mexico has increased almost 30%. According to the International Monetary Fund, over the last few years, goods manufactured in China and imported to the U.S. has decreased, while those manufactured in Mexico has increased by 14%. While I am not advocating Mexico over China, it is important to have a greater perspective on why Mexico is becoming a force in the manufacturing arena.

For more information, contact Allan Peiser at APeiser@GPPcpa.com or (214) 635-2503, or one of our other experienced professionals. You can also learn more about Allan by visiting his bio or Google+ profile.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

 

Topics: Manufacturing