Mexico vs. China Manufacturing

This section presents fact based analysis to guide you in you decision making regarding costs and benefits of manufacturing in Mexico vs. China. Many U.S. companies that are exploring manufacturing or assembly offshore consider both Mexico and Asian options, such as China.

Mexico vs. China Hourly Manufacturing Wages

Figure 1 below illustrates a converging trend in manufacturing wage over time between China and Mexico in relation to the United States Dollar. As a result of steady annual increases in Chinese wages and low concentration of skilled workers in Mainland China’s coastal region, Mexico manufacturing is increasingly being seen as an alternative to China. Mexico’s predictable, steady wages offer certainty to companies looking to forecast manufacturing costs. Mexico has closed the competitive gap that, until recent years, made China a more attractive locale for some types of manufacturing.

Figure 1.
China-vs-Mexico-Hourly-Manufacturing-Wages

Mexico vs. China Shipping Costs

The difference in comparative shipping cost between Mexico and China has become exacerbated in recent years due to the rise in oil prices. The average cost differentials by year to ship a 40 ft container to the U.S. East Coast from Mexico and China are represented in figure 2 below. Due to distance, customs, and importation the difference in time in transit from Mexico to the U.S. and China to the U.S. can be as many as 3 weeks. The North American Free Trade Agreement (NAFTA) allows goods produced in Mexico to flow northbound across the U.S. border quickly and efficiently.

Figure 2. 
TACNA China VS Mexico Shipping Costs for a container to the east coast                                 (Source: CIBC)

Mexico vs. China Foreign Exchange Rates

When establishing manufacturing or assembly operations, one must pay close attention to foreign exchange currency rate trends and forecasts. Slight swings in an exchange rates can change the entire outlook of a business. Figure 3 below contains ten years of  foreign exchange data between the United States Dollar, the Mexican Peso, and the Chinese Yuan. The data shows over the last ten years that the Chinese Yuan has become 26% more expensive in relation to the U.S. Dollar while the Mexican Peso has become 27% cheaper in relation to the U.S. Dollar. Barring unpredictable events, the downward slope in the Chinese Yuan and and upward slope in the Mexican Peso will likely continue.

Figure 3.
Mexico vs China Foreign Exchange Rates Compared to the United States Dollar

U.S. Trade with China

Figure 4 below illustrates the imbalanced trade relationship between the U.S. and China. In 2011, the trade deficit between the two countries was $272.4B or 289% of total U.S. exports to China. The deficit has grown by 5.1% since 2007. The current trade imbalance is attributed to China’s monetary policy, prohibiting the Yuan to appreciate in world currency markets. Currency manipulation makes the Yuan susceptible to spikes and uncertainty in wage growth as China’s Central Bank relaxes its monetary policy. China’s main exports to the U.S. are electrical, machinery, apparel, textiles, iron and steel. In 2012, China ranks 91st out of 183 economies in “overall ease of doing business” according to doingbusiness.org.

Figure 4.

US-Trade-Deficit-with-China

U.S. Trade with Mexico

The trade relationship between the U.S. and Mexico has been significantly strengthened through the North American Free Trade Agreement (NAFTA), signed in 1994. Figure 5 below shows the trade deficit in 2011 between the U.S. and Mexico was $60.6B or 33.4% of total U.S. exports to Mexico. The deficit has decreased by 23.4% since 2007. Unlike China, Mexico allows it currency to “float” or appreciate in world currency markets. This allows wages in Mexico to remain relatively stable and certain. Mexico’s main exports to the U.S. are automobiles, electronics, televisions, computers, mobile phones, LCD displays, oil, and oil products. In 2012, Mexico ranks 54st out of 183 economies in “overall ease of doing business” according to doingbusiness.org.

Figure 5.

US-Trade-Deficit-with-Mexico

Comparative Analysis of Mexican vs. Chinese Manufacturing

Description Mexico China
Ability to manage
  • At most, a few hour flight away
  • At most several hour time difference
  • Similar holiday schedule
  • Many Mexicans speak English, and Spanish is the most common foreign language taught in U.S. schools. Both languages have the same Latin root.
  • Language and numbers use same characters
  • Half way around world
  • Time differences of many hours
  • Completely different holidays.
  • While China has many English speakers, the cultures have few common roots and the native languages are not grounded in the same root.
  • Language and numbers use completely different characters.
Visits to plant from U.S.
  • Technical, customer or training visits to the plant can be accomplished in as little as one to two days. Transit cost is minimal.
  • Work visas can be obtained at the border in as little as 30 minutes for a U.S. citizen
  • Technical, customer or training visits to the plant must be arranged well in advance and probably consume an entire week or more, not to mention the high travel expense.
  • Work or travel visas require preplanning and can result in travel delays.
Shipping transit time to U.S.
  • Less than one day
  • Several weeks not including transit to or from ports. Small quantities can be shipped by air in two days at a high cost per pound.
Quality Issues
  • When quality issues occur it is practical to send product back for reprocessing given distances and costs
  • When quality issues occur, which seem to be frequent in start up given distance and communication barriers it is very difficult logistically to deal with rework or returns. Most quality problems simply become write offs.
Inflation
  • Economy is closely linked to the U.S with long term trend of Mexican peso slightly deflationary to the dollar
  • Currency is artificially pegged to the dollar, but inflation is significant, putting pressure on China’s historically low labor cost advantage.
Other shipping considerations
  • Possible to ship in pallet or box quantities allowing flexibility with customer LTL orders.
  • Ocean freight not required
  • Shipping cost per unit is low and only slightly more than shipping from the U.S.
  • In most cases, little or no duties
  • Generally ship in container load quantities limiting flexibility
  • Potential dock strikes
  • Shipping cost per unit can be high, particularly for bulky items. And given the high demand for containers from Asia.
  • Duties can be substantial depending upon tariff code
Protection of Intellectual Property
  • Intellectual property is protected and Mexican courts typically respect and enforce companies’ rights to intellectual property.
  • Counterfeits are common in Asia and courts have been slow to enforce or recognize intellectual property rights.
Social Responsibility
  • Relatively strict environmental laws
  • 48 hour work week and a low, but livable wage in Mexico.
  • Tight family circles with employees going home daily
  • Provides relatively good jobs in Mexico, helping to stem the flow of illegal immigration to the U.S
  • Reasonably developed employee safety practices.
  • Strong child labor laws
  • Reasonable health and safety monitoring and inspections.
  • Less strict environmental laws
  • 6 day week 12 hour days are not uncommon. Wage level would, in many cases, not support a family.
  • Workers live in factory dormitories and go home for Chinese New Year.
  • Outsources U.S. jobs with little social benefit for the U.S. besides low cost products.
  • Underdeveloped employee safety practices
  • Well documented news reports of child labor and sweat shop conditions.
  • Poor health and safety standards and monitoring which allows such things such as Lead based paints to be used on toys coming to the U.S.
Availability of qualified workers
  • Generally plentiful, with seasonal tight periods. High birth rate bodes well for a long term supply of labor.
  • Generally plentiful, with some higher concentration of engineering talent. Low birth rate is a long term significant labor problem
Fully burdened direct laborer wage rate
  • Approximately $2.50 to $3.00 per hour.
  • Between $2.00 and $2.50 per hour.
Government
  • Democracy
  • Communist

For more information, contact us at sales@tacna.net.