Why Manufacturing is Moving from China to Mexico | NAPS
August 11, 2015
It wasn’t long ago when businesses in North America were in a rush to get a foothold in China. Manufacturing in China seemed to be the solution to high-priced manufacturing costs in the United States. China had very inexpensive labor and operational costs, and even with a long supply chain, they could help companies undercut the competition on price alone. However, many of those companies are now in a bind as Chinese wages have doubled every few years, making them more expensive than Mexican wages at this point in time. It’s also not just a question of labor costs, though, as there are many reasons that Mexico is gaining favor as the place to move manufacturing operations when compared to China.
Reasons Companies are Moving Manufacturing Away from China
When companies flung themselves headlong into the manufacturing industry in China, they did not take into account anything other than the cost to manufacture goods. That alone was reason enough to relocate their manufacturing bases. No other country could compete on price as much as China. Now that the price point has shifted, other economies are able to compete, not just on price, but also on other factors such as:
Infrastructure – Chinese rural areas weren’t all equipped to provide the types of power and road usage that a commercial enterprise moving from the United States expected. That added costs and also created a need to research new locations thoroughly to make sure that they would meet their needs without required upgrades. Often, the same companies found themselves going to certain cities in China that had the infrastructure in place, driving up prices for the rapidly depleted regional labor at the same time. Moving to a country like Mexico is far less costly in terms of infrastructure demands because industrial natural gas and electricity are readily available everywhere. Plus the Boston Consulting Group estimates electricity costs 4% less than in China while natural gas is a whopping 63% less expensive.
Shorter Supply Lines – China may have been able to deliver the goods at a reasonable cost when their labor costs were minimal, however that’s not the case anymore. Long supply lines from China increase the cost of delivery, plus it delays the receipt of those goods for up to six weeks after production. Mexico is a neighbor, geographically, to most of the countries looking to buy the manufactured goods, making it quicker to deliver to the intended market than starting from China.
Less Red Tape – China has always been a country that has a ton of bureaucratic red tape. Getting permission to manufacture isn’t very easy. There are shifting political ties that can easily clamp down on manufacturing at any time. The language and culture barrier itself could make it difficult to navigate changing rules as well. Mexico’s main language is Spanish, something taught in American public schools and easily learned. Mexico may still have some complex political issues that affect crime and safety, but they don’t let that affect the desire to open their gates to new manufacturing companies. Those companies that choose to move their manufacturing to Mexico will have plenty of company from others who have made the same choice in recent years.
Why Is China Slowing Manufacturing?
On the other side of the ocean, there is decreased manufacturing in China. The government policies that were welcoming a few years back may be shifting priorities to more sustainable growth, rather than focusing on an influx of foreign investments. The rising labor costs in regions that could support manufacturing is another reason China is less competitive these days than in the past. In a way, China is a victim of its own success. The establishment of many foreign manufacturing centers in only a handful of regional areas that could support them led to:
Rising Real Estate Prices – Land is not so cheap when it is high in demand. Even the land that you’re allowed to get is not yours to do with as you please anyway as China keeps tight control of its land. It is a socialist country where everyone supposedly owns everything. Even if you happen to find an intermediary Chinese partner to help you buy land, you are going to be competing with multiple other companies in a specific geographical location able to support large commercial operations with power and road capabilities. You could buy cheaper land elsewhere, but you will have to install roads and work around power issues.
Rising Labor Costs – More companies competing for the limited labor pool in these areas meant that the workers could start to demand higher wages and they did. Even the extra pool of workers outside the main cities have been exhausted as some also require that workers have a basic education to be able to do some of the work. Wages continue to rise as the supply of educated labor dwindles.
Backlog of Goods – The global overproduction of goods couldn’t have come at a worst time. The recession that caused buyers to lose wages also dropped demand for those goods. Subsequently, companies can have a backlog of unsold goods they still need to sell. The drop in global demand affected Chinese orders and when they dropped, companies had to react fast by streamlining operations. However, they couldn’t change the long supply lines that forced them to price higher because of increased delivery costs. There are now many factories that are working on a minimal staff as they try to find more competitive areas to relaunch their manufacturing operations.
Where Should You Manufacture Products?
Mexico has become the new favorite for manufacturing companies. Some have even gone back to their country of origin after their explorations of the Chinese manufacturing environment. It’s basically dependent on what type of manufacturing you want to accomplish and whether the country you intend to do your manufacturing in can support those objectives. Companies that have been successful in moving their operations to Mexico include the following in their manufacturing process: transportation goods, appliances, and machinery. In addition, computers and electronics are easily assembled in other countries and shipped to other markets from Mexico. The country has the educated labor force required to assemble many of the technological toys that can be sold for at a premium in other markets.
How Costs of China Compare to Costs in Mexico
The cost of manufacturing in China has changed over the years. In the year 2000, Mexico’s labor costs were significantly higher than China’s, averaging 58% more expensive. However, since then wages have steadily increased so that by 2012, Mexico and China had similar labor costs. Yet, while China’s labor costs kept increasing, Mexico remained about the same. In 2015, the overall projection is that Mexico will now be about 20 percent less expensive than China in terms of labor costs. The difference may also continue to get larger as Chinese policies look for more sustainable growth and impact the cost of labor as well.
The cost of manufacturing in China isn’t just about labor costs. It’s also about the types of operating costs that include power and infrastructure. Some companies that moved to China opted for less expensive rural areas in China, but ended up having to put in roads to be able to navigate difficult terrain. They also subsequently had problems obtaining power on a regular and consistent basis as their operations expanded and demand increased. The cost of labor when adjusted for output per worker was affected such that now the output per worker is higher in places like Mexico, up to 30 percent higher, because the factory can run more consistently and make use of natural gas at a much lower cost. Even though electricity is only 4 percent lower than in China, the gap between the cost of using natural gas in China versus in Mexico is 63 percent less expensive in Mexico and more readily available in all areas of the country without changes to the infrastructure.
In addition, it can be difficult for executives to travel to and from China as the route is far more difficult and lengthy than traveling to Mexico from North America. When a problem occurs that requires their presence, they want to know they can get to their destination quickly and without much hassle. This can be difficult for a place like China. However, it is very easy to hop on a plane to Mexico and get there the same day from areas within the United States.
When the Boston Consulting Group took a lot of manufacturing variables into account, the report showed that Mexico is 6 percent less expensive to manufacture in than China. This gap only expands for places like Japan and Germany where the difference is more like 20 to 30 percent. When companies take into account the shorter supply lines and the ease of travel between their manufacturing offices and where they reside or market their wares, it becomes a clear choice in favor of places that are easier to get to, like Mexico.