Mexico vs. China Manufacturing: How the Two Countries Compare

China is one of the economic hubs of the world with many countries outsourcing manufacturing and other operations to China for a variety of reasons. However, Mexico manufacturing is growing at rates not seen since NAFTA was introduced some 20 years ago as manufacturers from around the world take advantage of high quality, lower-cost labor in North America. Let’s take a look at how Mexico and China manufacturing differs.

Mexico vs. China Manufacturing: How the Two Countries Compare

China is one of the economic hubs of the world with many countries outsourcing manufacturing and other operations to China for a variety of reasons. However, Mexico manufacturing is growing at rates not seen since NAFTA was introduced some 20 years ago as manufacturers from around the world take advantage of high quality, lower-cost labor in North America. Let’s take a look at how Mexico and China manufacturing differs.

There are numerous reasons why so many multinational companies are moving manufacturing operations to Mexico. More affordable labor costs, a highly educated workforce, Mexico’s proximity to the United States—and that’s only the beginning. 

Expanding operations or moving manufacturing facilities to Mexico has become a reality for countless companies in recent years. And the trend is only set to continue. Is such an approach right for your business? Read more to see why so many companies are choosing to manufacture in Mexico.

Tangible Benefits to Manufacturing in Mexico

While companies have been moving production from countries like China to Mexico over the past 40 years, manufacturing in Mexico is now growing at its fastest pace in history. Many multinational companies, from virtually every country in the world, are considering a manufacturing footprint in Mexico.

There are numerous reasons why so many multinational companies are moving manufacturing operations to Mexico. More affordable labor costs, a highly educated workforce, Mexico’s proximity to the United States—and that’s only the beginning. 

Expanding operations or moving manufacturing facilities to Mexico has become a reality for countless companies in recent years. And the trend is only set to continue. Is such an approach right for your business? Read more to see why so many companies are choosing to manufacture in Mexico.

Tangible Benefits to Manufacturing in Mexico

While companies have been moving production from countries like China to Mexico over the past 40 years, manufacturing in Mexico is now growing at its fastest pace in history. Many multinational companies, from virtually every country in the world, are considering a manufacturing footprint in Mexico.

Manufacturing in Mexico vs. China

Prominent Industries

China’s manufacturers serve a wide range of industries with goods including iron, steel, aluminum, toys, chemicals, aircraft, ships, and more. Nearly 80% of all air conditioners in the world are manufactured in China. Chinese businesses are also responsible for manufacturing over 45 times as many personal computers per person as the rest of the world’s manufacturers combined. Mexico’s manufacturing has been just as broad. Manufacturing industries in Mexico include electronic, aeronautic and, most prominently, automotive industries. As a major auto manufacturer, Mexico is home to 89 of the world’s top 100 auto parts producers. Automotive exports from Mexico increased by over 300 percent between 2002 and 2018, while electronic exports increased 120 percent in that same time. Regionally, steel, electronics, and other high-end exports are headquartered in northern Mexico, while the automotive industry has expanded in southern Mexico.

Energy Costs

Mexico’s natural gas prices are tied to those of the United States, which are relatively low in the global market thanks to a greater supply propelled by new gas and oil discoveries in the U.S. By comparison, China has to pay 50 to 170 percent more for natural gas. At worst, natural gas prices can cost up to three times more in China.

Electricity prices in Mexico tend to be higher than compared to China and most cities throughout the United States. Mexico’s electricity market was deregulated in 2014 in an effort to reduce costs by encouraging more private producers and suppliers. As of 2019, the result of their deregulated market has yet to transpire into lower costs but there are signs of improvement.

Trade Agreements

Implemented in 1994, the North American Free Trade Agreement (NAFTA) allows easy access for Mexican goods throughout the United States and Canada. NAFTA essentially changed Mexico from a closed economy to an export-oriented industrial economy. This also allowed for greater global expansion. Manufacturing in Mexico has become more desirable as tariffs on Chinese goods and imports have increased due to trade negotiations between the United States and China.

The new USMCA, created under the Trump administration but has yet to be ratified by congress, essentially aims to level the playing field in the automotive industry by requiring suppliers in Mexico to have a certain percentage of higher-wage personnel contributing to the manufacturing process. Alternatively, automotive OEMS can pay a 2.5% tariff on all U.S. imports. Other than the automotive industry, the USMCA does not significantly impact or change the current trade regulations under NAFTA.

Manufacturing Options

There are various options for companies exploring ways to bring back their manufacturing from China to Mexico. While the fastest way is to identify a contract manufacturer in Mexico to produce one’s product, contract manufacturing in Mexico is far less prevalent than in China and there are issues with quality control and lead times.

One alternative that many companies use is the Mexico shelter model. This is when a foreign company operates under a Mexican entity that is already established, opposed to establishing their own Mexican affiliate corporation, making it faster and less expensive to expand to Mexico. Another benefit of operating under shelter is the limitation of liability and exposure in Mexico. The foreign company remains in full control of the manufacturing process, remains the owner of all the assets and maintains control of their intellectual property. While the employees are technically employed by the shelter company, they are directed and trained by the manufacturer and therefore feel a part of the foreign company. The shelter company provides 100% of the administration and compliance management of the facility, enabling the manufacturer to focus on production, quality control and growth.

The final option is for a foreign company to establish their own Mexican entity and hire local personnel to manage 100% of the operation. While this is a viable option when expanding to Mexico, the shelter model offers the same flexibility without a lot of the risk involved in doing it on one’s own.

Productivity in Mexico and China

Mexico’s manufacturing industry offers superior worker productivity. In 2014, the unit labor costs (which is equivalent to the wages adjusted for productivity) in China were equal to those in Mexico. By 2019, the manufacturing wages in certain industries were up to 20 percent lower in Mexico than they were in China, meaning greater efficiency at a lower price. While Chinese output remained marginally higher than in Mexico, the unit labor costs remain lower.

Shipping Costs to China are Higher

Due to both distance and fluctuating oil prices, shipping costs are exponentially higher when manufacturing in China. In 2018, shipping a 53-foot container from China to Los Angeles cost close to $5,000. The same container from the border of Mexico (Tijuana) to Los Angeles costs about $600.

Furthermore, thanks to NAFTA/USMCA and the IMMEX program, goods produced in Mexico can reach their U.S. and Canadian destinations quickly and efficiently. Along the border cities, such as Tijuana and Juarez, companies can offer 24- to 48-hour lead times on certain types of manufactured goods, such as consumer products. Shipping a product from China to the U.S. could take 3 weeks or more.

Talented Labor

A long history of manufacturing in Mexico that spans over 60 years has led to a diverse, skilled, well-trained workforce that crosses over multiple generations and industries. Much of the working base comprises skilled and semi-skilled direct labor. This means that they have several years of experience and are at least partly bilingual.

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Manufacturers in Mexico

Overall Manufacturing Costs in Mexico vs. China

When looking at China vs. Mexico manufacturing, labor rates in Mexico are now, in many cases, lower than China. In constant dollar terms, hourly manufacturing wages are lower than those in China. Mexico also offers much steadier wages, making it easier for companies to forecast manufacturing costs. As of 2019, the fully burdened direct laborer wage rate in Mexico is about $3.95 per hour vs. $4.50 per hour in China.

Foreign exchange rates also favor Mexico vs. China, being that the Peso has steadily declined against the U.S. Dollar over the past 30 years. Meanwhile, the Chinese Yuan has mostly been pegged to the U.S. Dollar. In fact, the devaluation of the Peso vs. the U.S. Dollar has reduced the effective labor rate inflation to about 3% per year.

Disadvantages of Outsourcing to China

Manufacturing in China comes with a wide range of other problems including:

  • Quality issues: Quality problems often end up as write offs as the logistics of fixing, reworking, or returning items is often not worth the trouble of dealing with distance, time, and communication barriers.
  • Intellectual property: Counterfeit products are a common problem in Asia, where courts may be slower to enforce or recognize property rights.
  • Poor conditions: Despite improvements, some Chinese manufacturers still have poor health and safety standards, which can lead to harmful chemicals (like lead paint) to be used on products entering the United States. Employee safety practices are generally underdeveloped.
  • Visits: Visiting China can consume a great deal of time and expense for key personnel.
  • Strict monetary policy: China’s monetary policy prohibits the Yuan from appreciating value in world currency markets. This makes it susceptible to spikes, unsteady wage growth, and inflation.

The Advantages of Near Sourcing: Mexico vs. China

Sourcing in Mexico

Sourcing in Mexico is cheaper than sourcing in China. One of the most significant benefits of manufacturing in Mexico vs. China, especially for companies headquartered in the United States or Canada, is the reduced travel time to their Mexican facilities. In many cases, company executives and their employees can be at their Mexico manufacturing plant within hours of leaving their home, something China cannot offer. Reducing corporate travel has a direct effect on expenses, while also helping to boost morale.

Companies Manufacturing in Mexico

Many of the world’s leading companies from a wide range of industries have relocated at least some their manufacturing operations to Mexico. These companies include:

  • General Motors
  • Volkswagen
  • Hewlett-Packard
  • IBM
  • Sony
  • Siemens
  • Nokia
  • Philips
  • Coca Cola
  • Motorola
  • Nissan
  • LG

Planning on moving manufacturing to Mexico? For more information on Mexico vs. China manufacturing or to learn how we can help your operations, contact us or give us a call at (877)742-9608.

The IMMEX Program

Manufacturing in Mexico

The IMMEX Program

Manufacturing in Mexico

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