News, Insights and Best Practices for Manufacturing in Mexico

Mexico ultimately a better choice for offshoring than China

20 Jan 2015

Category: Labor & Economics

American and European companies have begun to move out of China, according to the Oregonian.  It is becoming too expensive to do business there versus in other countries with better advantages. Wages in China have tripled in the last decade, and the yuan has appreciated by about 35 percent. Added to the rising costs of labor and the yuan, there is a shrinking workforce as China's age demographics shift toward those who are unable to work. The pool of 15-39 year olds, who do most labor in China, has decreased by 35 million people in the past five years, according to the Oregonian.

"It's a sea change," said Andrew Tilton, chief Asia economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked for the international office of the U.S. Treasury Department. "China's period of unusually strong competitive advantage in exports may have run its course."

As a result, companies are beginning to look elsewhere for offshoring.

A time for manufacturing in Mexico
The Oregonian said that many of these companies are moving to Mexico. Mexico is close to the U.S., and therefore cheaper for transportation and exporting to major North American markets.

Companies like Plantronics, which manufactures headsets, are increasing their Mexican production. Recently, Plantronics opened a major factory there after closing their Chinese factory.

Mexico linking with China
Mexico is also strengthening its ties with China, according to Bloomberg. Additionally, China is expanding its spheres of influence to countries in Central and South America.

Mexico is exporting tequila and pork to China, as well as receiving foreign investment. Even Chinese companies are beginning to offshore to Mexico. For example, businesses in the energy and infrastructure industry are taking advantage of Mexico's increased expansion of its road and rail networks, along with its power plants and electricity grids.

"There's space to seek better access for Mexican goods in the Chinese market," said Jose Antonio Meade, Mexico's foreign minister. "On the other side, China is very under-represented in terms of investment in Mexico. We're probably one of the Latin American countries where China has the least presence."

The Chinese and Mexican presidents visited each other's countries as part of an exchange program. This is part of Mexico's plan to diversify its economy to move away from exporting primarily to the U.S. It wants to build trade agreements around the world. In 2012, Mexico sent 71 percent of its exports to the U.S. However, it exported only 2.3 percent of its goods to China in the same year. Although this is three times what it was 10 years ago, it is still not enough.

U.S. companies will likely benefit from increased trade between Mexico and China. If Mexico forms trade agreements with China, then exports and imports between the two nations will become cheaper, and offshoring to Mexico will be even more affordable than it is right now.

Companies seeking to navigate the difficult and painstaking legal procedures behind expanding to Mexico through offshoring opportunities may benefit from a Mexico shelter. Such a company will handle the legal side, freeing a company to build its roots in Mexico and start manufacturing as soon as possible.

 

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