An Analysis of Manufacturing in Mexico vs. China
As companies explore Mexican manufacturing options they will encounter those who believe China is a better option. Here is a brief analysis.
Goods can be shipped from the factory floor in Mexico to North America in under a single day, as the road and rail network within the three NAFTA countries is good. Similarly, transport to Europe might take 1-3 days, depending on destination. To ship from China to North America, however, might include several weeks plus the uncertainty of customs delays, which introduces potential unknown costs and delays. Shipping by air from China can be quick, but it’s prohibitively expensive.
Stability of Wages
Factory wages in Mexico are among the most stable in the world. Wages there have changed little in the past decade, even accounting for inflation. That stability is very attractive to companies considering a long-term investment in a new offshore manufacturing facility. Similarly, factory wages in China have grown markedly over the past 6-8 years as the internal Chinese market has matured and become more competitive with foreign-based manufacturers. Some regions of China have seen labor wage increases of up to 20% per year.
Traditionally, the greatest advantage to moving production to China was low labor costs there – a fraction of the hourly wage of factory workers in the US or Europe. But the hourly wage gap between China and Mexico is shrinking these days, with the average Chinese factory worker earning about $4.50 (with benefits) per hour compared to $3.50 per hour (benefits excluded) for their Mexican counterpart. Experts like The Boston Consulting Group, a leading business strategy consultancy, even predict the rate in China to climb to $6 an hour by 2015, enhancing the attractiveness of Mexico as a manufacturing alternative.
The NAFTA Advantage
Mexico is the world’s largest exporter of flat-screen TVs, among other items. Companies appreciate the advantage of manufacturing in Mexico as household good like televisions, and others, assembled in Mexico can enter the US and Canada for free. Such goods imported from China come with a tariff. Low-margin goods like televisions bring a profit of only around 5%. So paying a tariff of 3-5% can cut into that profit substantially, making Mexican manufacturing far more appealing.
It isn’t just wages that are rising in China. Fuel prices are also going up, as is the likelihood of fuel costs spiking for short periods of time – both factors that can cause headaches to foreign-based manufacturers.
It’s obvious that Mexico is closer to final markets in North America compared to China. What may not be as obvious are the savings and advantages that come with this proximity. Mexico is separated by the US and Canada by just a few timezones, while China could be a full working day apart, making phone calls more inconvenient. Furthermore, English is more similar to Spanish, sharing a similar root. In contrast, Chinese shares no common roots and is more difficult for native Chinese to learn quickly.
Visits to the Factory
Mexico is a few hours away by plane, compared to China, which could be a daylong flight followed by an additional long train or car ride to the factory. An onsite visit to the production floor in Mexico could be completed in as little as two days, in part thanks to the ease of obtaining a work visa at the US/Mexico border. Entering China requires an authorized work/travel visa set up in advance, with possibility of delays.
Lately, the Mexican peso has seen a decrease in value while, at the same time, we’re seeing an increase, or anticipated increase, in the value of the Chinese currency. This results in greater costs for companies trading in U.S. or Canadian dollars or the Euro. While you cannot anticipate future currency valuations, the general consensus over the medium-term, say the next 5-7 years, is that the Chinese currency will continue to gain value, during a time when the Mexican currency will likely remain stable or devalue. In fact, the Mexican currency has a four-decade history of stability or declining value.