Area Development August 2012: Why Manufacturers Are Choosing Mexico Over China
In addition to its lower labor costs, Mexico’s proximity to the Americas and its stable, transparent operating environment are making it a location of choice for many U.S. companies.
Byline: Douglas L. Donahue, Entrada Group
As manufacturers consider ways to maintain competitiveness, one of their most common questions is, “Where is it cheaper to establish manufacturing for the U.S. market, in China or Mexico?”
If only the answer could be so simple. But there are many factors for companies — whether they’re based in the Americas, Europe, or Asia — that come into play when deciding where to establish an operation. The short answer nowadays is that China is no longer the knee-jerk-reaction destination for many businesses considering a lower-cost manufacturing presence. Mexico has become a leading destination for foreign investment.
Rising Costs in China
Though still markedly lower than labor costs in the U.S. and European countries, labor costs in China are growing rapidly, up to 22 percent a year for some regions in China serving competitive industries. By contrast, wages in Mexico have remained stable during this same period and, in many cases, are in parity with manufacturing wages in China. That stability is very attractive to companies considering a long-term investment in a new manufacturing facility.
But it isn’t just wages that are rising in China. Increasing fuel costs, both in the near and short term, are making Mexico a more desirable location for manufacturing. With such a long distance to ship or fly goods to North American or European markets, rising and volatile fuel costs are causing many companies to reconsider new manufacturing facilities in China.
Currency is an additional cost area that isn’t always accounted for when comparing Mexico to China as a manufacturing location. China’s currency has been creeping up against the dollar and euro for several years. By contrast, in the second half of 2011 alone, the value of the Mexican peso dropped from a little over 11 to 14 against the dollar.
Benefit of Location
There’s a lot to be said for Mexico’s proximity as a manufacturing base for companies, particularly those in the Americas. The large distance between Asia and the Americas puts Chinese-based manufacturing at a disadvantage in areas such as just-in-time delivery, higher costs (or more complexity projecting costs) due to customs delays and potential storage charges, and protective tariffs. Moreover, manufactures must factor in the added cost of having to carry extra inventory while their new product is on the water for weeks on end.
Not so for Mexico. As a NAFTA member nation, Mexican manufacturing incurs no duty fees and enables companies to realize cost savings by complying with NAFTA rules of origin, which give greatest benefit to goods wholly produced in Mexico, Canada, and the United States.
Deliveries to North American customers can, in many cases, be made within several days from Mexico, while delivery from China might take several weeks unless sent by air, which can be prohibitively expensive. Practically speaking, too, it’s much easier for companies to manage manufacturing operations in Mexico, due to similar time zones and shorter travel distance in comparison to China. If you ever have a quality problem in China and have to send someone there to fix it, it can be a very lengthy and involved process. Anyone who now has manufacturing operations in China can confirm this for you.
With regard to Mexico, company executives are within two to three time zones from the U.S./Canada, flights are shorter, and they can realistically do a plant visit in a day or two — maybe three days from Europe. The annual savings in time and effort is tremendous.
Transparency and Stability
Mexico’s maquila system, or export manufacturing system, has a 45-year history. Over that time it’s become pretty transparent — company management knows what the range of issues are going to be in Mexico, i.e., there are no surprises. By contrast, many companies that moved operations to China faced a lot of unexpected costs, such as greater regulation and bureaucracies overseeing foreign direct investment.
Mexico has a long history of transparent, democratic values; environmental regulations; and labor laws. On the other hand, counterfeiting in China is still a concern, and authorities have shown inconsistency at best, disinterest at worst, about enforcing laws pertaining to intellectual property.
Mexico and China: Not An Either/Or Decision
It’s important to remember, when discussing the Mexico/China question, that companies don’t have to choose between the two destinations for manufacturing support. Obviously, you can set up facilities in both locations. And these days, savvy companies are doing just that. By diversifying manufacturing locations, companies can also avoid over-reliance on a single region, which is extremely useful should a particular region later face a natural disaster or political instability. So with some companies hedging on China and opening a manufacturing facility in Mexico to complement Asian-based production, they benefit from greater redundancy, security, and risk management.
Beyond that, as transportation costs increase and as markets become more regionally focused, companies are going to have to have a manufacturing presence everywhere. They won’t simply be choosing between Mexico and China, because they will have to be in both places. And Mexico will always be oriented toward the North American market, just like China’s orientation will be toward the Asian market. Thus, it won’t even be possible for companies to service all of these regional markets from a single manufacturing location. They will need diversified manufacturing.
Better Oversight of Production
While companies may not be closing their manufacturing facilities in China and moving them to Mexico, they are now more likely to move certain products out of the hands of subcontractors in China and set up their own operations in Mexico. This gives them better control of the product, the supply chain, delivery time, and — on the whole — quality. By working through shelter operators, companies are also finding it easier to establish their own operations in Mexico, gaining a lot in terms of product quality and speed to market.
One of our clients, Axiom, did just that. Axiom, a New York-based manufacturer of fishing rods, is owned by St. Croix Rods, and Rhapsody, Inc. St. Croix subcontracted the manufacturing of its entry-level product line to China. At one point, however, driven by quality concerns and a lack of transparency from its Chinese supplier, St. Croix decided to open its own manufacturing facility in order to gain control over production and enhance quality.
In 2008, the company decided on Mexico as a location primarily because the proximity enabled it to quickly get its product to distribution centers and customers. By manufacturing in Mexico, the company would also be able to adjust to seasonal swings in demand and efficiently manage the introduction of new products and technologies into the factory.
Additionally, because the company was not large enough to move to Mexico on its own, it chose to work through a shelter company. Axiom also appreciated Entrada’s established track record in central Mexico, which has a highly stable work force and much lower staff turnover. All of these factors contributed to a successful move to Mexico.
Like Axiom, many North American companies have realized the benefits of nearshoring in recent years. Where in the past it was simply assumed that companies had to have a manufacturing presence in China, now they are doing rigorous cost-benefit analyses and finding that, for many reasons, a manufacturing facility in Mexico makes a whole lot of sense.