When someone thinks manufacturing, usually it’s China that comes to mind. North America is all familiar with the iconic “Made in China” stamp that accompanies the many products we know and love. In fact, U.S manufacturing output in Asia has been large enough that during the Cold War, American media campaigns waged war against the brand and publicly ridiculed our involvement with the People’s Republic in China. For many, that sentiment never died.
Objectively, politics and patriotism aside, the cost-effectiveness and wages of producing goods in China made and continues to make sense. As China rose to meet Western demands, more efforts were put forth towards increasing the number of employees, lowering labor costs, and optimizing production. Simply put: China makes things efficiently, and they do so much cheaper than most countries. For many years, they carried on with little to no competition, especially when it came to American business.
Today, that landscape is changing. Player 2 has entered the game.
A Shift in Mexican Manufacturing
Around 25 years ago, in 1994, Mexico experienced a meteoric economic shift beneath NAFTA (North American Free Trade Agreement). NAFTA was a trade deal that married Canada, America, and Mexico—executed to support Mexican economic growth. It was done so with astounding efficacy.
One byproduct of NAFTA is the creation of maquiladoras, or Mexican manufacturing plants, which surfaced along the southern rim of Mexico and doubled then tripled in number. Mexican manufacturing once solely orbited textiles, soon they were assembling automobiles, electrical hardware, aeronautics, and other products. They quickly became an—albeit small—competitor of China in many things manufacturing.
This was then heightened by the IMMEX Program, a government run program aimed at increasing Mexico’s exports.
IMMEX, The Game Changing Advantage to Manufacturing in Mexico
14 years later, in 2006, the rollout of IMMEX harpooned Mexico into the international manufacturing landscape. By piggybacking on NAFTA and the resurgence of Mexico’s economy, the idea was to stimulate foreign investment by allowing maquiladoras to import goods with little to no costs, so long as the goods were to be used for production, manufacturing—and ultimately sold by the country.
So, what exactly did this change? In short: everything. But to put it in perspective, Mexico began to:
Greatly Increase Automotive and Aerospace Production – Today, Mexico is in the top ten countries of aerospace sales and contributes 20% of North American automotive production.
Create Massive Spike In Manufacturing GDP – Last year, Mexico’s manufacturing GDP landed at 2960421.00, a full 300,000~ more than only a half-decade prior.
Decrease Labor Costs – In today’s manufacturing climate, the labor costs in Mexico remain dramatically lower than the U.S., while manufacturing costs of labor have been on a steady incline the last three.
Increase the Dexterity of Their Workforce – As demand continued to skyrocket, Mexico began to implement programs that fostered skilled, specified, and versatile workers. This isn’t the cheap and uneducated workforce two decades ago. This is a hardened, pointed, and dexterous workforce that have cut their teeth amidst the manufacturing renaissance.
In which case, this information begs the question: Who wins in the Mexico vs China manufacturing debate? If Mexico has made a titanic push to become a leading exporter and they border the U.S., wouldn’t it be commonsensical to relocate American-pioneered manufacturing to the country just a few miles south?
Or, are there still advantages of staying in China?
Advantages of Manufacturing in Mexico Vs China
When speaking on the competitive advantage manufacturing in Mexico has over China—or even on a light comparison of both—it’s paramount to highlight the most important (statistically-driven) reasons that Americans are offshoring manufacturing operations to Mexican facilities. Many of the facts you’re going to find below might surprise you, including the benefits Mexican manufacturing provides in:
The Costs of Manufacturing Labor
The Costs of Shipping & Logistics
Communication & Ease of Travel
The Dexterity of the Workforce (comparatively)
The Costs of Manufacturing Labor in Mexico vs. China
“Everything is cheaper in China.” While this common thought-to-be-truth was once (Indonesia has always had the cheapest labor and products, historically speaking) a popular opinion, today it’s no longer consistent. Multiple sources claim that China is now in the middle of the “cheapest countries to manufacture in list,” but for the sake of this debate, we’ll compare China against Mexico.
As for this year, the current pay rate (per hour in U.S. dollars), according to Statista, is $6.5 in China and $4.82 in Mexico. This means, in terms of a dollar value, Mexico is cheaper to manufacture compared to its monolithic competitor. To many, this may be news. But to those who have studied foreign trade patterns and shifts in China’s economic policies, it’s been a prediction since 2010.
The reality is that, for the last decade, China’s manufacturing labor costs have experienced consistent growth. While Mexico’s also increased (a full dollar from 2016), they remained relatively static comparatively.
A Cheaper Production – When it comes to the manufacturing industry in Mexico over China, the cost is a standout attribute. Simply put, pound for pound, dollar for dollar, it’s cheaper to manufacture goods south of our border.
The Costs of Shipping and Logistics When Manufacturing in Mexico vs. China
It shouldn’t be a surprise that shipping to and from Mexico is cheaper than China. Mexico is our neighbor, with borders adjacent to our own. China is 7,000 miles away. Investing Daily claimed that it’s less than half the cost to ship a 40-foot freight container from Mexico, as opposed to China ($2800 vs $7000 (which roughly translates to $1/per mile from China)).
In which case, if the facilities are in Northern America, even on Mexico’s furthest southern border, it will be exponentially cheaper to ship any and all goods. Additionally, towns closer to the border (think Tijuana) can offer 1- to 2-day lead times for certain shipments. As a whole, the reduced shipping cost is greatly beneficial for the manufacturing bottom line, being that freight can be as much or more than manufacturing labor/materials.
Cheaper Shipping & Logistics – In addition to the lower costs, the shipping intermediaries between the U.S. and China can be somewhat of a quagmire to navigate. Being that Mexico is closer in proximity, should a problem arise, the road to a solution is quicker, cleaner, and easier to travel.
Communication and Ease of Travel in Mexico vs. China
When it comes to owning or working as an executive for companies with sizable manufacturing needs, visiting the facilities is an absolute necessity. Historically, for most American businesses, this means a trip to China was in order. Today, that’s not the case. One of the most attractive aspects of Mexican manufacturing is the proximity of the facilities themselves. If something is to go array, the cost and time of travel are exponentially lower.
Of course, many companies will balk at the idea that cutting down the costs of travel could impact the bottom line of the outfit as a whole—but there’s no price for the flexibility operations in Mexico grants North American business owners.
Cheaper & Faster Travel, Better Communication –In addition to the ease of travel, Mexican manufacturing leaders are quickly becoming some of the best communicators in the industry. The more Mexico pushes to increase the skills of their labor force, the better their facility owners and engineers can communicate, optimize, and delegate.
Which brings us to our next point:
A Highly Skilled Workforce in Mexico
If you revert back to the first two sections of this article, then it’s easy to understand why the Mexican workforce continues to improve, optimize, and expand their skill sets. Mexican Government can open their doors for import and export all they want—at the end of the day, they need the right people to perform. Why would anyone hear the siren call to move their manufacturing down south if the workers produce shoddy, low-quality goods? Worse yet, if they can’t properly run a facility and end up incurring additional costs?
No. To become a manufacturing powerhouse, you need the right engineers, technicians, and employees. And by right we mean both intelligent and educated. When you consider that Mexico is currently graduating over 100k engineering and technical-based students every year (a rate 3x that of America’s), this push to educate is realized.
An Educated & Skilled Workforce – In tandem with Mexico trying to fish foreign investments and engagement, internally, they’ve been tenacious about their VET (Vocational, Educational, Technological) initiative, which aims to:
Support secondary education
Optimize science and technology platforms
Provide further accessibility for secondary education, incentivizing the workforce to pursue it
Create the framework for those to educate themselves in the relevant needs of the current economy
Usher employees to become further certified and knowledgeable in their respective fields
Believe it or not, while the government is certainly spearheading VET, it’s not only nationally-mandated; private sectors are also actively trying to help educate and sharpen Mexico’s workforce. For instance, Bendix, a German manufacturer (works specifically with automotive brake mechanics), launched their own training program that educates some 250~ students per year. Afterwards, they’re privy to offer these scholars a job.
Taxation in China vs. Mexico
It only takes a quick gander at news headlines to gain insight on the ongoing trade war between the U.S. and China. Of course, being that Trump wants to promote American business and job stimulation, he’s enforcing heavy US Tariffs on Chinese Goods. This is exacerbated by the fact that China is now enforcing tariffs on US imports.
As it stands, the U.S. has placed over $250 billion dollars of tariffs on Chinese goods. China’s retaliation? $185 billion dollars’ worth of tariffs on U.S. goods. Additionally, they’ve filed a complaint with the World Trade Organization as a rebuttal to Trump’s aggressive trade plan. In which case, what does this mean?
It means a shaky economy for both parties and a lack of visibility for future affairs. Federal Reserve representatives already cut interest rates (last month) as a preventative measure to avoid a fallout in the case that the economy crumbles from stunted growth.
Lower Taxation & Tariffs – Despite the war waging against China, President Trump has actually backed off on his plan to impose tariffs on Mexican goods exported to the U.S., a plan solely aimed at lowering illegal immigration spilling through the border. In June, the President tweeted “I am pleased to inform you that The United States of America has reached a signed agreement with Mexico. The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended.”
The above was met by praise across nations and, as is obvious, creates further trade fluidity between Mexico and the U.S.
It also greatly encourages businesses to bypass the raucous nature of trade and partnership between China and The United States of America. It’s likely, if this trade war continues in China, that both economies will suffer and manufacturing will grow evermore expensive.
Growing Relationship Between China-Mexico
Recently, the relationship between Mexico-China has been focusing on strengthening their economic and cultural ties, as a solution for the inference of the US obstructing international trade. Within the last few months and years, the strengthening and shifting of this relationship has opened new opportunities for both Mexico and China.
What is attracting China’s Firms to Mexico?
Mexico offers great growth and potential in its manufacturing, while China is on a stand still. This is allowing China to have more opportunity for expansion in operations in Mexico and just close enough to integrate with the US market. Within the last few years, Mexico has carefully articulated and made huge attempts to solidify the deal. Companies manufacturing in Chinese firms are attracted to Mexico because it allows incentives of the following:
Cost of Labor
Recent Improvements to Access to Energy, Labor Laws, Protection and Commercial Laws
Unification with the US Economy
The US labor is responsible for almost half inputs of Mexico’s manufacturing. Ultimately, the China-Mexico relationship is only going to allow immense possibilities and benefits for both countries. Companies currently manufacturing in China are seeing Mexico as a way to diversify their manufacturing so they can benefit from the pros and cons of each country while still producing the same quality of goods at great prices for the business.
Mexico, The New China
NAFTA planted the seed in 1994 and today, Mexico is blossoming into a manufacturing superpower. It’s no surprise that they’re quickly gaining momentum and beating out other countries on the leaderboards. The benefits are manifold, ranging from:
Cheaper costs of manufacturing labor
Cheaper costs of travel and logistics
Cheaper costs of shipping
An incredibly skillful and efficient workforce
Lower taxation and risk of tariffs
Convenient proximity to the U.S.
Despite, perhaps one of the biggest factors driving forth production in Mexico is the ongoing dispute between the Trump Administration and The People’s Republic of China. There’s a possibility that if both countries continue to point their proverbial barrels at each other, neither is going to win.
Rather, it’ll be other international markets – Indonesia, Vietnam, Mexico, Argentina, and even Brazil (although Brazilian manufacturing is notoriously expensive) – that stand the most to gain.
As Mexico continues to optimize their manufacturing process and China loses their foothold, offshore might quickly shapeshift to nearshore. This becomes a standout truth when you realize that Mexico has taken China’s place as our largest trading partner from January to June 2019.
Truth be told, it’s a surprise that we haven’t completely relocated already.