Mexico closes manufacturing competitiveness gap with and China
Low cost assembly and manufacturing has been done in developing countries by firms based in the industrialized world since the 1960s. The term “outsourcing” was coined by the information systems trade press in the late 1980s, and has continued and expanded significantly since then. Outsourcing was originally characterized predominantly by the movement of manufacturing work from the developed world to the developing world, resulting in drastic changes within the structure of modern industries. It is set apart from the concept of joint venturing by the fact that “internal” activities began to be transferred out of the country, and, at times, performed by third parties. There are many explanations for utilizing manufacturing resources in developing countries and the benefits sought, including but not limited to: organization, improvement, financial, cost, employee and revenue-driven reasons. Though many developing nations have been involved in offshore manufacturing, Mexico and countries of Asia are considered to be of among the most optimal destinations for locating a low cost manufacturing facility.
When the decision to manufacturing in a low cost country (LCC) has been made, it is important to remember that not only are the activities transferred, but the factors of production are too, which are the resources that make the activities occur and include people, facilities, equipment, technology, and other assets. Every business should keep in mind the potential inhibitors that could negatively impact such a move. To best determine which nation is ideal for external manufacturing, a few comparisons must be made, including: stability of wages, tax management, accessibility to labor, supply chain issues, intellectual property protections, shipping transit, ability to manage, efficiency of visits to plants from the U.S., quality of production, inflation, and social responsibility to the clientele. It is imperative to offshore manufacturing to form a low cost and low risk establishment that provides maximum profits without jeopardizing their credibility and reputation. When comparing China and Mexico, Mexico seems to have its advantages in most aspects. Mexico is in much closure propinquity to the US than China, reducing transit times and costs, improving communication and transportation infrastructure, and providing ease of visits from the U.S.
Figure 1 demonstrates that the average manufacturing wage in Mexico and China continue to converge over time. Due to yearly increases in Chinese wages, and a growing limitation of access to skilled workers in coastal areas, Mexico is again wage competitive with China. Additionally, the minimum wage requirements, and legally prescribed worker benefits, in Mexico are more suitable for supporting a family than the minimum wage requirements in China. From purely a wage perspective, Mexico has closed a competitive gap that, until recent years, made China a more attractive locale for some types of manufacturing.
The history of trade between the US and China versus that of the US and Mexico shows that trade with China is more imbalanced than US trade with Mexico, which has significantly improved since The North American Free Trade Agreement (NAFTA) of 1994. This is important to note because NAFTA also ensures tariff free trade between the US and Mexico, reducing costs even further for companies that choose it as a location over China.
Ease of Management:
Mexico is a few hour flight away, while China is half way around the world. There are completely different time zones to navigate, as well as completely different holidays from the US. In terms of distance, accessibility, business schedule, and culture affinity, Mexico is a much easier management proposition. If businesses cannot easily manage their low cost country manufacturing operations, supply chain cost and risk rises. It is also important to consider that Mexicans know more English due to the close proximity. Average flight times are represented in the following graph, demonstrating the drastic travel differences between Mexico and China.
Shipping Transit Time:
Shipping times are significantly less between Mexico and the U.S. versus China and the United States. Reduced transit times, in turn, represent less costly transport. If quality issues with product should arise, it is easier, less expensive and more efficient to send products back to Mexico for reprocessing. Quality issues emanating from China are more problematic in cost terms. It is also a possibility that a greater language barrier between Chinese workers and U.S. colleagues will be more pronounced, resulting in more frequent quality issues. For quality and shipping purposes, Mexico represents a better solution.
The economic status of each prospective nation is essential to low cost manufacturing success. It important that the economies are closely linked to ensure optimal production costs. The U.S. and Mexican economies track themselves more closely do those of the United States and China. This reality creates an environment of greater certainty and predictability.
Intellectual Property Protection:
The protection of intellectual property by a nation’s legal infrastructure is very important to ensuring the security of products, and a company’s ability to protect its investments in R&D and product development. In Mexico, intellectual property is well protected and Mexican courts respect and enforce companies’ rights to intellectual property. On the contrary, counterfeits in China are common and due to the huge population and different government and law enforcement priorities. Chinese courts have been slow to aggressively enforce or recognize intellectual property rights.
Qualified workers in Mexico are plentiful and high birth rates provide a sense of security that labor will continue to be plentiful for the foreseeable future. China also has a significant pool of skilled workers, but low birth rates suggest a diminishing access to qualified workers in China in the coming years. Additionally, Mexico’s government has also developed responsible employee safety practices, in addition to very strict child labor laws. Providing good jobs in Mexico is also a factor that helps to slow the flow of illegal immigrants to the U.S.
Chinese government employee safety practices are not as developed as those that have been implemented in Mexico. Child labor laws may not being heavily restricted or enforced as they are in Mexico.
In conclusion, given the wage convergence between Mexico and China, supply chain and transportation costs differentials, as well as access to workers and protection by a strong legal infrastructure more companies that are new to low cost country manufacturing consider to be Mexico the top choice. Many of the companies that started their low cost operations in China are reassessing its favorability as a location and are making their way back towards Mexico. Mexico has a fifty year history of being the source of quality work, is close to the U.S. in distance and culture, is a duty free trading partner and is favorable location when goods need to be delivered to market quickly and cost effectively.