Often the choice for manufacturing companies seeking to minimize costs and outsource manufacturing operations is between Mexico and China. For decades, China has been the popular choice. But that’s changing rapidly. And as the economic risks and complexities of globalization increase, it makes more and more sense to choose Mexico for outsourcing manufacturing.
In the previous century, China offered US manufacturers a nearly endless supply of cheap labor. Oil was down, so transporting goods and materials across the Pacific were negligible compared to the labor savings. China did an excellent job of creating embedded supply chains and processes for consistently producing goods on the cheap.
However, this hasn’t been the case for years. The world has changed. And China is not the easy manufacturing choice it once was. Let’s start with the largest factor: cost.
The cost of Chinese manufactured goods is rising rapidly. Their economy was already overheated in 2019 prior to global shift that occurred in 2020. The Chinese consumer price index is rising at the fastest rate in decades. And the cost for raw materials is at an all-time high. And at about $6/hour and rising rapidly, China’s low minimum wage is no longer such a bargain.
Then came the Trump tariffs that increased the cost of goods imported from China. In 2018, tariffs rose sharply on literally billions of dollars in Chinese-made goods. The cost of doing business in China spiked overnight.
Then COVID hit, and the world economy fundamentally changed. The container crisis, followed by sky-high fuel prices, have made international freight a far less attractive option for manufacturers in the US. And the costs are still rising. Add to this equation the stifling effects of China’s ongoing “Zero COVID” policy, and it’s a simple calculation that the situation in China is complicated at best.
Shortages and supply chain problems have made the situation even more difficult for companies servicing the US economy. The ability to respond to market changes in real time is paramount. Yet, in this model, relying on unstable supply chains that stretch across the world to Asia just doesn’t make sense.
So, it comes as no surprise that more and more companies instead choose Mexico these days. Many have recognized Mexico’s advantages since the advent of NAFTA. Yet in recent years, the contrast has become more striking.
For example, compare Mexico’s low and stable cost of labor. A highly skilled machinist position makes on average about $6/hour. But less skilled manufacturing and assembly positions make around $2.5/hour. And Mexico’s workforce is highly trained and capable, with numerous academia-industry partnerships training thousands of engineers and manufacturing professionals every year. The cost of skilled labor there is just lower.
There’s also the issue of intellectual property (IP). China is known for its knock-off brands and counterfeited goods. Due to lax IP laws, China’s prospects pale in comparison to the aggressive IP protections Mexico offers manufacturers. Proprietary information, technologies, and patents are strictly safeguarded in Mexico. And federal law is clear and well-established.
Another advantage for manufacturers who choose Mexico is their substantial tariff-free access to global markets. Of course, the USMCA offers unfettered access to the United States and Canada, but the Latin American country also has free-trade agreements with over 50 other countries all over the world. Mexico regularly imports raw materials from the US and exports the finished products back virtually duty-free.
The advantages of proximity to the US are myriad. Transportation costs are slashed, because most destinations in the US can be reached in a matter of days from Mexican manufacturing plants along the border. In many cases, that transport time is actually measured in hours. And because Mexican factories are in the same time zones as US companies who outsource to them, management is much easier, from phone calling times to on-site visits.
In reality, it’s the risk factor that makes it so advantageous to choose Mexico over China. Mexico’s economy is relatively stable. Wages are rising more predictably and slowly than in China. The country is pouring massive amounts of FDI and domestic investment into infrastructure for long-term economic growth.
And in a post-COVID world, where markets shift rapidly, shortages are commonplace, and the future looks uncertain, resilience is a key factor in this decision. Mexico’s response to COVID has been among the least intrusive and most consistent in the world. Outsourcing companies know that the ability to adapt to global supply shocks and crises with shorter lead times, a local supply chain, and consistent working conditions is a competitive advantage.
In spite of economic downturns, companies who choose Mexico trust they will have the wind at their back. This in turn will allow them to focus on maximum product quality and profitability for their business for many years, regardless of what the future holds.
