China is quickly losing its stronghold as the manufacturing superpower of the world. The reason this is occurring is a topic of much controversy, but when you start to compare data—then factor in the ongoing trade war between the U.S. and China—you realize that China is not the cheapest nor the easiest offshore territory to utilize facilities in.  

Today, the landscape is changing, providing opportunities for countries like Mexico to claim dominance in an industry they’ve only ever created ripples in. In which case, American and foreign companies are beginning to pivot their focus to the lands south of the American border.

And guess what? It’s not just the Western World that’s eyeing Mexico, China has already begun to mobilize their production as well. Some have already touched foot. This then begs the questions: What are the labor costs in Mexico? And how does that fair against the cost of manufacturing in China? 

The Mexican Economy 

Before diving into the costs associated with manufacturing in Mexico, it’s important to note the upswings in Mexico’s economy. Specifically, how the resigning of NAFTA (in 2018) might solidify Mexico’s foothold in the international manufacturing industry and what projections come from the deal’s renewal. Of course, being that USMCA (United States-Mexico-Canada Agreement) is to go in effect come January 2020, many investments and opportunities have been halted in preparation for what could be an exponential shift in international imports and exports.  

With that being said, a recent study stated that:

Consequently, the international supply chains American manufacturers have relied on for low-cost parts and components for nearly two decades may at least in part be restructured. Such changes mean shifting production of many parts and components from China to Vietnam, Taiwan, South Korea, and Mexico, among others, likely over a period of several years.

While historically the challenging components of shifting manufacturing to Mexico have been a lack of workforce, higher costs, and inefficient freight lines, the country’s current efforts look to reshape the paradigm of their processes. In short: Mexico is trying to become a manufacturing superpower and they’re doing it well. 

But how well do they hold up against China?

Labor Costs in Mexico 

When it comes to the nominal hourly wages in Mexico (specific to manufacturing), the average over the course of the last thirteen years has been $2.6 U.S. dollars. There was a high of 3.8 USD/Hour in 2013 and a low of 2 USD/hour in 2017. Despite this, the average wage has remained relatively static over the past decade. 

This, of course, is one of the most attractive aspects of the market. If, for instance, these numbers were to fluctuate drastically, the inconsistency would raise an alarm for potential investors. Being that it’s remained constant, it’s a telling sign of what to expect for the future of the Mexican manufacturing sector. 

• Mexico’s Manufacturing Labor Costs: Mexico has averaged 2.60 USD/hour over the last 13 years, keeping a consistently low cost competitive to most manufacturing nations. 

The Cost of Manufacturing in China 

It might behoove you to know that the cost of manufacturing labor in China is more than double that of Mexico. And this isn’t some sporadic influx that occurred in the last three years. In fact, China’s GDP and labor costs have more than doubled since 2010, a rate that has pushed on consistently from one year to the next. 

Now, the counter punch to this cost spike is that China still produces quality goods. Despite the rise in prices, if companies continue to turn a profit due to the quality of their materials, they are and were willing to pay the price for it. But, being that America is currently imposing a $300-billion-dollar tariff on Chinese trade, the threat of the trade war and the rising costs combined have caused companies to look elsewhere. 

One of the biggest motivators, of course, is the fact that Mexico’s manufacturing costs have remained consistent. 

• China’s Manufacturing Labor Costs: China has a labor cost that is more than double that of Mexico, with wages that are higher than almost every other “competitive” territory. Their minimum wage continues to increase as workers demand more pay.

A Quick Story 

Fueling Global Inc., having learned of the imposed US Tariffs on Chinese goods, quickly pivoted and began to look elsewhere for their manufacturing. To avoid the imposed tariffs on Chinese goods, they reshored to Monterrey, Nuevo León, a city in Mexico that will allow them to offset labor and shipping costs (comparatively to China). This is only one of many stories that involve major companies (the factory is worth $4 million) moving manufacturing to Mexico. 

Additionally, in light of the above information, in 2018 Mexico increased its exports to the U.S. by 10.3%, amounting to an astounding total of $346.5 billion. During that same time, Chinese exports flowing to America were reduced by 33%~. No matter what shapes the global opinion of the manufacturing hubs of the world, companies are continuing to flock to Mexico. The proof is in the pudding, so to speak.  

Chinese Manufacturing Shipping Costs 

For the sake of this guide, we’re speaking on the costs of manufacturing for both Mexico and China objectively. Yet, when it comes to where it’s most cost-efficient and savvy to utilize facilities often depends on the company’s whereabouts. Location is key. Why? Because of shipping costs. In which case, while American companies might find it extremely advantageous to move their production to Mexico, some European companies might not. 

Thus, when it comes to Chinese shipping costs versus Mexico, the Latin team wins (objectively). To ship a medium sized order in China, according to Sourcify, costs $1021.54. This number only increases when you factor in the various duties required when shipping in China. And, being that Trump plans to add further tariffs in the midst of this trade war, it’s going to burden the shipping price even more. 

• Chinese Shipping Costs: it costs $1021.54 to ship a medium sized order in China, an average that will likely increase as the trade war between the U.S. continues. 

Mexico Manufacturing Shipping Costs 

In accordance with Mexico’s overall low production costs, its shipping costs less than China. Now when you take the perspective of an American business owner, not only does this average cost less, but the total as a whole dramatically decreases. It’s a much shorter road sending anything—let alone freight shipments—from U.S. to Mexico, to U.S. to China.

• Mexico Shipping Costs: it costs $842.39 to ship a medium sized shipment in Mexico, which is significantly lower than their Chinese competitors. This is one of the drivers that is bringing forth further production to the land down south; proximity and overall reduced shipping costs. 

In which case, that brings us to our next point: 

Mexico’s Duty-Free Manufacturing 

One of the great advantages that Mexico has over China—in terms of cost-efficiency—is its open trade agreements with the Western World. These free trade platforms that span well beyond the U.S. reduce the costliness of importing and exporting goods. 

But perhaps the most appetizing program in place is IMMEX (originally known as the IMMEX Maquiladora Program). Essentially, the government-backed program sought to incentivize the establishment of maquiladoras, or manufacturing facilities in Mexico. They implemented a mandate which allowed maquiladoras to import raw materials into the country without having to pay taxes or duty. 

The catch: the materials could only be imported so long as they were to be exported specifically by Mexico. As you can deduce, this was the government’s way of trying to claw their way into the manufacturing brawl. Obviously, IMMEX was successful.

• IMMEX: Due to IMMEX, raw materials imported into Mexico are tax- and duty-free. In comparison to the current trade war America is waging against China—where tariffs are the primary weapon—this becomes an especially motivating incentive for foreign investment. Additionally, being that America recently re-signed NAFTA with very few changes, there’s a good chance that these tax-free imports continue for the next decade. If that remains consistent with Mexico’s labor costs, then we’re sure to see a spike in companies that choose to reshore. 

Subjective Costs of Manufacturing Between China and Mexico 

In addition to the static costs listed above, there are a number of cost advantages of manufacturing in Mexico. Many of these, however, are subjective to the location of the company in question.  

Visiting Facilities and Overall Logistics 

It shouldn’t be a surprise that the cost of traveling to China from the U.S. far outweighs the cost of Mexico. The difference is in the thousands of miles. 

Flight Costs From U.S. to Mexico

In accordance with the average ticket price, if booked in advance it is not difficult to find a plane ticket to Mexico in the sub $300 range. 

Flight Costs from U.S. to China

When booking a flight to China, if the price is reasonable, usually it ranges anywhere (on the cheapest side) from $500-$700. In busier seasons, it can cost upwards of thousands of dollars. Being that its common practice for executives to fly private, the cost of a flight is exponentially higher than that of Mexico. 

The variable cost associated with business travel—for companies that have facilities in China—is usually a massive expenditure. In which case, it’s extremely cost-efficient to have facilities located south of the U.S. border, being that the plethora of business trips taken to manage production weigh considerably less on the bottom line. 

Lastly, the convenience afforded to American companies that offshore in Mexico means they have higher problem-solving efficacy. They can reach their facilities faster, with higher ease of travel, and typically have more resources to facilitate these endeavors. 

Currency

Another important factor to consider when it comes to the costliness of manufacturing offshore is the currency. Thus, what is the exchange rate between the USD and Mexico and China’s national form of currency? 

The Peso 

In the last ten years, USD to MXN has been on a steady incline, closing in around 1.0 USD/18~ MXN today. This means the dollar grows stronger, giving it further leverage in Mexico. This is another attractive component to moving production down south. If this rate continues and the labor rates don’t suddenly turn mercurial, this will prove to be a constant advantage. 

The Yuan

In the last ten years, USD to CNY has experienced a bumpy road. From 2010 to 2014 it was on a steady decline. A resurgence shot the USD higher between the years of 2014 to 2018, and since then it has experienced quite a few dips and rallies. Today, it’s stronger than it was in 2010 (1 USD/7~ CNY) But compared to Mexico, the growth comes in short by a landslide. 

• The Currency Debate: In short: the USD goes further in Mexico than it does in China. It’s also experienced steady growth rather than the volatile nature against the CNY. This could be perceived as another cost of manufacturing where Mexico comes in significantly lower than its competitor. 

Mexico, Pioneering the Future 

While China was always the flagship country for manufacturing, it’s simply no longer the case. Due to increased labor costs, shipping, and the trade war that rages on between the U.S., our once manufacturing titan could quickly become fractured. Due to these massive shifts, enterprise companies are now beginning to turn their heads and seek investment elsewhere. 

From the cost of labor, shipping, travel, to duty-free imports, Mexico stands to gain an insurmountable win given the circumstances. Chaos often lends opportunity and it’s no surprise that maquiladoras are currently thriving. As Mexico continues to concert efforts towards improving its process, lowering costs, and creating a haven for foreign investment, we’re going to see a ton of US companies doing business in Mexico. 

And, if it’s any indicator, companies operating in the manufacturing hub of the world are already jumping ship and heading to the southern borders of North America. 

Yes, we’re pointing at you, China.