Why Manufacturers Are Choosing Mexico Over - and in Addition to - 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.
Douglas L. Donahue, Entrada Group (August 2012)
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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.