Manufacturers Leaving China – But Where are they Going?
Commentary by JP McDaris
Manufacturers are leaving China for many reasons – rising labor costs, unstable currency, intellectual property concerns…take your pick. But companies still need to keep operating costs as low as possible without sacrificing quality, meaning they have to find alternative low-cost production locations. Many are reshoring or nearshoring, as this article in Manufacturing.net explores.
For some companies with automated production processes (think injection molding or metal stamping), reshoring to the US or Canada may be more cost-effective in the long run. But for more manual processes such as assembly, a cost-competitive location is still essential. That’s where Mexico manufacturing is leading the way as a China alternative.
A common misperception about Mexico, one evident in the same Manufacturing.net article, is that companies are only coming here for low-cost labor. That vastly simplifies Mexico’s competitive advantage, overlooking the importance of Mexico as a manufacturing hub for the western hemisphere. Mexico, arguably the world’s most open trading partner, has 44 trade pacts globally. This means that companies looking to produce in Mexico for export to North America, South America, Europe and Asia will benefit from a Mexico manufacturing presence.
Companies are transitioning to Mexican manufacturing not just to benefit from low labor costs (as low as $1.40 per hour – even lower than in parts of China) but also to fulfill requirements that they add a certain percentage of production value within Mexico.
Location is Everything
Another important point addressed in the Manufacturing.net piece is the aspect of site selection within Mexico. In the article, a service provider (an Entrada competitor, in interests of full disclosure) cites the benefits of establishing operations in the US/Mexico border region, where there are concentrations of skilled workers and industry. She goes so far as to say that companies in border areas like Juarez, Mexico – in the backyard of El Paso, Texas – are “almost like being in the US.”
Proximity to the US goes both ways, however, as prices at the border are also almost like being in the US. Overall operating costs in central Mexico’s Bajio region can be as much as 40% lower than at the border. This is thanks to less competition for labor, greater abundance of direct workers and lower utility costs. Manufacturers with more labor-intensive processes have long since moved beyond the border regions, opting instead for sites in Zacatecas, San Luis Potosi and Guanajuato.