China's reign as the globe's top offshore manufacturing center is quickly coming to a close. According to Bloomberg, China's manufacturing index dropped to a preliminary reading of 50.5, a three-month low, despite analysts expecting a 50.9 reading. The data comes from HSBC Holdings' Purchasing Managers Index, which indicated a 50.8 score for manufacturing in China in November. According to Bloomberg, any number above 50 shows expansion, but the drop in China's score indicates that manufacturing in the country is on the decline.
In fact, Barron's reported the Hong Kong Hang Seng Index, which also measures manufacturing in China, noted a 0.6 percent decrease from November, and the Shanghai Stock Market Composite Index a 1.6 percent loss. According to an op-ed piece for stock market news site Seeking Alpha, the recent drop in Chinese manufacturing productivity is due to the rise of Mexico as a global manufacturing leader. Not only is Mexico closer to North American end-markets, it's become increasingly competitive with China in terms of wages and innovation.
Mexico is taking business away from China
The op-ed piece cited data that noted a currency imbalance between the U.S. and China had been the primary factor in the movement to offshore manufacturing to China. The Chinese yuan has increased by 34 percent since 2006, the article noted. However, strengthening Chinese currency and the resurgence of U.S. manufacturing has taken the industry away from Chinese dominance and returned it to North America.
While many manufacturers are reshoring their production processes, there continues to be a need for low cost manufacturing. According to the op-ed, Mexico's low wages and interest rates are spurring foreign manufacturing investment in the country, especially as the Mexican peso remains weaker than the U.S. dollar. Compared to the Chinese yuan, the Mexican peso became 54 percent weaker within the past seven years. This means it is much more cost-effective for companies to establish production in Mexico compared to China. In fact, the op-ed suggested Mexico may soon take over the No. 1 spot from China as the top offshore manufacturing destination.
"Further evidence of manufacturing growth in Mexico, far and away above that of the U.S., is that the US.. has been experiencing a net loss of Mexicans back to Mexico for the past several years," the article's author wrote. "Mexico also has the advantage of being adjacent to the U.S., the largest export market in the world."