News, Insights and Best Practices for Manufacturing in Mexico

Mexico Logistics Costs Present Challenge to China: Part 1

04 Apr 2012

Category: Logistics Management, Manufacturing in Mexico

Mexico’s attractiveness as a manufacturing venue is on the rise – and China should be worried, a logistics expert has said.

Bill Golden agrees that escalating Chinese labor costs, coupled with mounting freight and other logistics-related expenses, could turn the heads of American manufacturers doing business in China. Golden is the retired president of International Logistic Solutions, which is The Offshore Group’s third-party logistics arm. (ILS specializes in international freight forwarding, third-party warehousing and import/export services for its clients.)

Chinese wages have increased exponentially over the past few years. For example, a worker earning 75 cents per hour in 2005 had almost tripled his hourly wage by 2011. Conversely, a Mexican worker making slightly more than $2 per hour realized a more gradual increase, breaking the $2.50-per-hour barrier last year. And while Mexico has set a 4.2-percent wage increase for its workers in 2012, it is expected China’s next five-year plan may double the country’s current minimum wage by 2015.

Still, it’s not just labor-cost anxieties prompting American companies based in China to consider a manufacturing move to Mexico, Golden notes. Escalation of Chinese freight costs and other concerns call for serious deliberation.

“Typically, it costs about $3,000 to move a freight container from China to Long Beach,” Golden explains. “On top of that, there are adjustments on fuel, and sometimes there is a PSA (Peak Season Adjustment). These are always unanticipated and hard to quantify. Each year we see that price continue to grow.

“Some of our clients – especially those who have regular shipments from China and have long-term agreements with their end customers – particularly are affected by this, because is hard to predict what their cost structure is going to be in the out years,” he adds. “Again, we don’t see that slowing down or reversing. We see a constant escalation in those prices.”

Time is another important factor in the world of manufacturing. The time it takes to ship goods from China to the end destination in the States can be appallingly slow. First, there’s inland freight from the Chinese manufacturer to the port. Golden says it is common for shipments to remain at the Chinese port for a day or two before freight transit resumes, the next destination being a U.S. port. This can take between two and three weeks, depending upon how goods are routed or the cost structure utilized. From the U.S. port, inland freight transports goods to their final location.

Other issues can further extend the shipping period. For instance, during certain peak seasons, a Chinese shipping line may have overbooked. Even if your goods are booked to ship on a specific date, that could change if another customer has paid a higher shipping rate than you.

By contrast, Golden says, a company shipping from one of the northern states in Mexico to the Midwest can expect a “worst-case total transit time” of four days.

“The time issue is incredibly important to manufacturers,” he affirms. “We have a number of our logistic-services clients who constantly ask us what we can do to shorten shipping time frames, because they recognize that every day that their product is in transit, it is costing them money.”

 

 

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