Why Mexico Manufacturing is Gaining Over China
By Doug Donahue
Currency fluctuations as well as increasing labor costs in China is helping to fuel manufacturing growth in Mexico. For years, China was the darling of US and European companies large and small that wanted to offshore all or some of their manufacturing and save money due to lower labor costs. But lately the knee-jerk reaction to turn to China has morphed into a more contemplative process in which companies are considering a wider range of factors when evaluating their offshore manufacturing options.
For one, wages in China have been soaring for the past several years – as high as 20% per annum. As the internal market in China continues to thrive, workers there are able to command a premium and the drive to open new factories there has slowed significantly. In fact, many economists have predicted that average wages for factory workers in China are rising so fast that they should equal wages for Mexican manufacturing workers as soon as this year.
In fact, a recent McClatchy Newspapers article* cites research from The Boston Consulting Group that says average factory wages in China of $4.50 per hour – including benefits and other costs – are about to climb to $6 per hour by 2015. In comparison, Mexico’s National Statistics Institute reported average manufacturing wages of $3.50 per hour this past June, the latest data available, excluding benefits. Average hourly wage for a factory worker in the US is about $23 per hour; it’s around $26 per hour in Germany.
The stability of the peso is another area where Mexico has an advantage over China. This factor is often overlooked by casual observers of the offshoring game. The yuan has appreciated by nearly 8% against the dollar since the Chinese government allowed it to float more freely beginning in 2010. Overall, the yuan is up about 24% against the dollar since 2005. Despite this, the most recent Big Mac index from The Economist (a gauge of purchasing power parity) indicates that the yuan may still be undervalued against the dollar by some 40% – indicating the Chinese currency could become even more powerful, especially if the US Government has any more success pressing Beijing on the true value of its currency.
By stark contrast, in recent years Mexico has seen a decrease in value of its currency, an additional reason companies are looking at manufacturing in Mexico as a more stable option. While no one can know future currency valuations, the general consensus over the medium-term 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.