There was a time when China dominated the marketing world as a manufacturing base. But not anymore. The benefits of manufacturing in Mexico include a superior labor force, duty-free trade agreements, more stable infrastructure, close proximity to the North America, and fast marketing response.
In spite of its highly reported incidents of violence, Mexico has now replaced China as a preferred manufacturing base location for many U.S. companies; this is because Mexican factories use quadruple the amount of American-made components as Chinese factories do, according to a new report from Boston Consulting Group. For businesses looking to relocate their manufacturing facilities to a more cost-effective manufacturing base, Mexico has four key advantages to China:
1) Labor productivity remains high in Mexico and Mexico’s manufacturing wages are roughly 30 percent lower than they are in China for 2015. Surpassing the trade partners of the U.S. (20 ) and China (18)combined, Mexico has free-trade agreements covering 44 countries, the highest number worldwide. In addition, the North American Free Trade Agreement gives manufacturers in Mexico easy access to the United States and Canada.
2) Due to its abundant supply of natural gas, Mexican manufacturing has a significant advantage in energy costs that are comparable to the exceptionally low natural gas costs in the U.S. Although power in Mexico isn’t produced as cheaply as it is in the United States, energy costs are still lower in Mexico than they are in China. The cost China pays for industrial natural gas is 50 percent to 170 percent more!
3) As a nation, Mexico has developed expertise in certain industries, especially in autos and appliances, which makes companies belonging to theses industries grab at the first opportunity to relocate or expand their plants there. Plus, Mexico is a major auto manufacturer. Out of the 100 of the world’s top auto parts makers, 89 of them currently carry out their production within five Mexican states, that greatly reduces the costs in transportation. A highly concentrated number (70 manufacturers) including components makers as well as small and large appliances assemblers are located in Mexico.
4) Since 35 percent of Mexico’s economy stems from manufacturing, U.S. companies’ partnership with Mexico benefits them in two ways: (1) They have the ability to sell more components to Mexican manufacturers. (2) By selling more American consumer products to Mexicans, they are in a better position to buy imported products if their living standards rise.
Mexico’s progress compared to China is significant, to say the least. More and more companies are learning that manufacturing in Mexico is not only cost-effective but profitable. Companies can quickly realize all of the benefits of launching Mexican manufacturing operations by being able to establish factories within six to eight weeks.
Stimulation of both U.S. and Mexican Economies
The choice to leverage maquiladoras in Mexico for manufacturing provides many benefits to the U.S. marketplace and to Mexico. On the U.S.’s side, the higher wage border region jobs related to Mexico’s border manufacturing industry decreases the occurrence of illegal immigration.
As a result, the burden of providing educational and medical costs to illegal immigrants by the U.S. is relieved considerably. Further, since the source of most of the raw materials for Mexico’s maquiladoras come from the U.S., the maquiladora industry creates a boosting effect to the U.S. economy. Also, companies have discovered that offshoring some low skilled jobs to Mexico allows them to invest the greater portion of their profits into more design and product development in the U.S. This results in higher skill and higher wage jobs in the U.S. and the acquisition of more market share. In Mexico, the maquiladora industry is a source of economic stability and serves as an important base of foreign exchange. In a fast developing Mexican economy, Mexican workers are presented with jobs that help develop their skills and are able to receive relatively higher pay.
How the Mexican Government Is Furthering Mexican Manufacturing
Key products manufactured in Mexico include, all-in-One PCs, Bluetooth accessories cordless phones, crossover cars, and desktop PCs. The Mexican government is fostering manufacturing in Mexico by making wise investments, by primarily financing improvements to national infrastructure and roads to ease the flow of trade. For years, governments have focused on building global trade agreements, and now hold agreements with 44 countries that allow duty-free trades.
Since 40 percent of Mexico’s exports to the United States consist of components made in the United States, it stands to reason that increasing Mexico’s manufacturing industry directly boosts American manufacturing jobs. On the other hand, when jobs are created in Mexico, it instantly boosts their economy, while multiplying the volume of imports going to Mexico from the United States. To sum it up in a few words, the symbiotic relationship between Mexico and the United States helps companies save money, stay competitive and keeps workers happy.
The Steady Decline of Offshoring
The shrinking manufacturing sector in China is a cause for jubilation among many Americans who have felt for years that their potential for getting jobs dramatically decreased when many American companies opted to move their operations overseas.
Moreover, the competitiveness of offshoring has been declining for years in China as it faces increasing wages and currency, higher fuel and transportation costs. There are also many hidden costs and risks that are complicated to predict. In recent years, people have come to realize that the disadvantages of manufacturing in Mexico are more beneficial than the disadvantages of manufacturing in areas overseas. Companies are just now becoming savvy to the long term disadvantage of manufacturing offshore in places like China and other countries that appeared to be cost-effective initially. While the exact number of U.S. companies relocating their factories to Mexico can’t be accurately tallied, it does appear that this trend is growing in the automotive, textile and aerospace industries.
The greatest incentive for U.S. companies moving to Mexico is its close proximity to American markets. For example, MFI International provides manufacturing services in the Juarez, Mexico region that conveniently provides collaboration between U.S. companies and Mexican manufacturers. Key benefits of producing in Mexico compared to China include:
• Lower transportation, labor rates and warehousing costs
• Quicker response to customer demands
• Better intellectual property control
• Ease of proximate time zones between management and production
• Similarity in culture between the U.S. and Mexican markets
• Access to educated workforce in Tijuana that has 40 tech schools and 18 universities
• Minimal language barrier
• Access to a high volume of English speakers at middle manager levels
• Establishment of skilled maquiladora manufacturing workers without legal hindrances
• Access to a young well trained maquila industry workforce
• Avoidance of double digit annual employee medical cost hikes
• Control of increases in workers compensation premiums
The decision to create manufactured goods in Mexico should be based on the type of product a company manufactures. Nearshore products have higher labor demands, involve more manual labor, and allow a company to compare labor costs between Mexico and China. Therefore, U.S and Canadian companies should opt for labor-intensive near-shoring operations. Due to the high crime rate, some North American companies express fear over manufacturing in Mexico. However, this fear is unwarranted and irrelevant due to the nature and location of violence in this country. The majority of manufacturing takes place in gated and secured industrial parks. As a whole, manufacturers, like MFI, will arrange transportation for workers from their homes to and from their workplace.