Why Mexico Is Becoming The New China

July 3, 2014

For several years, outsourcing, particularly the outsourcing of manufacturing jobs, was synonymous with China. China boasted labor costs below the competitive level that any other country could offer, making them a prime location for sending jobs abroad. By 2010, virtually everything was created in China and shipped to consumers and retailers in the United States and elsewhere. However, all that is changing.

Companies around the world, especially those servicing North America, are turning their attention to Mexico Manufacturing. Mexico was, in fact, a center for outsourcing prior to the rise of China and recent changes in the global economy are helping Mexico regain that position. However this time around, due to the government’s focus on education, Mexico is able to produce much more sophisticated products than before. From jet engines for commercial aircraft to implantable medical devices, Manufacturing in Mexico has very few constraints.

China on the other hand has become a victim of its own success. Partially due to outsourcing bringing money into the country, China has become more wealthy. A middle class has emerged in China, willing to buy foreign goods. This increased demand has put upwards pressure on prices. Wages in China have been rapidly rising, some 200% over 4 years, and people are looking for better jobs than just working in the factory.

Meanwhile, nations like Mexico that have not relied as much on American manufacturing have not experienced the same inflation in wages. That leaves Mexico as one of the leading new locations for locating production. Add in the fact that Mexico’s close proximity to the United States makes supply chain logistics much easier, and it is easy to see why more and more companies are choosing Mexico manufacturing over China.

The most common method of how these companies locate their manufacturing in Mexico is through the maquiladora system. Maquiladoras in Mexico operate under a government foreign investment program called IMMEX, which offers tax, fiscal and various trade benefits to foreign companies. The manufacturer imports raw materials and components, manufactures and/or assembles them into finished goods and re-exports the product into the US. The maquiladora industry promotes partnerships between American and Mexican firms, making establishing supply chains less expensive and simple. Manufacturing in Mexico has grown both in size and in sophistication. Although industry has suffered from the general slowdown in American manufacturing since 2008, savvy business owners have been trying out Mexico as their new source for outsourced production.

This is not a new system, but it is only recently that the wage difference between China and Mexico has once again made moving to Mexico profitable. The combination of cheaper labor, reduced border fees, and convenience of transportation is very attractive for a business owner looking for a low-cost solution to manufacturing. Furthermore, because the maquiladora industry is one of the largest parts of the Mexican economy behind oil exports, there is little risk of the special status of the partner firms being revoked. Meanwhile, new regulatory changes in China are affecting the ease of doing business in that country. Mexico is the future haven of manufacturing