Douglas L. Donahue, Entrada Group (August 2012)
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.