U.S. businesses have looked for years to reduce manufacturing costs by offshoring their production process to another country. Many companies went East to China as their low cost manufacturing solution, while others understood the benefits of staying close to home by expanding to Mexico. For those businesses that chose to offshore to the U.S.' southern neighbor instead of going overseas, they are now watching their competitors come to the same way of thinking.
According to The Wall Street Journal, the flow of manufacturing jobs to China is steadily decreasing as U.S. businesses start to realize the country wasn't the low cost gold mine they thought it was. Employing workers in China has become expensive for U.S. manufacturers, and the Chinese labor force is ill equipped to create high-quality auto and electronics parts compared to employees in Mexico. China has been hit with wage inflation in recent years, and when combined with higher supply chain costs and low logistical flexibility, China is quickly losing its attraction as an offshoring destination.
Manufacturers look to invest elsewhere
Industry Week reported in 2012 approximately half of U.S. manufacturers were thinking about removing their offshoring presence from China. Many businesses' said the move was not only due to the recent wage inflation in the country, but also to keep a better eye on production quality. According to Forbes, wages took center stage in why manufacturers are moving out of China in favor of offshoring destinations close to home that offer lower wage prices as well as a closer supply chain.
"When we do the numbers we're actually ahead manufacturing [in the U.S.] instead of paying for air freight and dealing with the logistical issues that we're having in China," Raymond Sjolseth, president and co-founder of Seesmart, an LED light company, said, according to Forbes.
The Wall Street Journal reported offshoring to China is only 20 percent less expensive than maintaining a factory in the U.S., which has much higher labor costs comparatively. According to the source, an entry-level manufacturing job in automaking in China pays workers only a few dollars an hour less than the same job in the U.S. Combined with increased shipping costs, lower quality goods and the high cost of operating a factory in the country, manufacturers are finding expansion to China is no longer an affordable option.
In fact, The Wall Street Journal reported new labor regulation in China is one of the factors pushing wages higher in the country as the rules limit the number of temporary workers factories can employ. As a result, an increase in permanent staff is boosting wage averages.
According to Forbes, offshoring destinations closer to home, such as Mexico, offer many of the same benefits as producing in the U.S., but without the increase in pay. The source reported China's competitive wages were one of the only advantages the country offered manufacturers. Taking that benefit away may cause a significant movement of manufacturing out of the country and into those that still offer advantages.
Mexico is quickly rising in popularity as one of the best countries for manufacturers to offshore their production process. Employees in the country are highly experienced in fabricating high-quality goods in specific industries that are increasing in demand, such as aerospace and medical devices. China may be able to produce a high quantity of products quickly, but the country's specialties are in light-weight goods that are cheaply made, not heavy items like auto parts. With its close proximity to the U.S. and its more affordable labor force, Mexico may overtake China as a global leader in the manufacturing sector.