The 1990s saw a dramatic shift in manufacturing from domestic sites in North America to sites in developing China. At that time, Chinese labor costs were minuscule, and the economy provided seemingly limitless workers. But that was then. This is now. Now, we see a shift in the reverse direction to companies that move manufacturing from China to Mexico. The rationale for nearshoring production has become more compelling as of late.
A decade ago, Mexican wages were 600% higher than those paid to manufacturing workers in China. But today, they are only about 30% higher. Some analysts, including those at the Boston Consulting Group, believe that this strong trend will actually position Mexican wages to be 30% less than Chinese wages just two short years from now. Even further, American manufacturers have discovered that Mexican laborers are typically more productive than their Chinese counterparts, meaning a higher ROI. Additionally, it is important to remember that China has been artificially suppressing the yuan, and that, as Far East’s leading economy continues to grow, the value of the Chinese currency against the US dollar continues to creep up while Mexico’s will, in all probability, remain stable. The dollar doesn’t go nearly as far in China as it did a decade ago – but in Mexico, one US dollar continues to translate into 10-15 pesos. For this reason also, the trend of companies deciding to move manufacturing from China to Mexico has picked up steam in recent years.
Many manufacturers are beginning to once again acknowledge that several location considerations make Mexico a more strategically sound country to invest in than is China. For instance, with fuel prices continuing to soar, many companies are feeling the heat when it comes to transportation and supply chain costs. It requires a much larger budget to ship goods across the Pacific (requiring long transit and inventory holding times) than to move products across the border directly into the largest consumer economy in the world. This is constitutes another significant impetus that can induce companies to move manufacturing from China to Mexico
Moving manufacturing from China to Mexico also means less travel expenses for executives, resulting in increased and more effective oversight into operations and, thus, more quality in production and increased productivity. It also means executives won’t burn out as quickly, since they don’t have to function on both US and Beijing time.
However, it is the unique free trade situation that the county has created for itself that potentially presents the greatest incentive for companies to move manufacturing from China to Mexico. As a NAFTA member, Mexico provides manufacturers the blessing of no duty fees or high protective tariffs. In fact, Mexico has free trade agreements with more countries than nearly any other country in the world, making it a perfect base from which to export to other countries besides the US. And since Mexico has been an established maquila manufacturing system for nearly 50 years, manufacturing just south of the border doesn’t involve any of the bureaucratic, cultural, or regulatory surprises of outsourcing across the Pacific.