Is Mexico The New China? How Near-Sourcing Could Eclipse Overseas Manufacturing

Photo courtesy of Esparta Palma via Flickr.

China has been the go-to for US manufacturing since the late 1970’s, when cheap labor and lax regulations seduced American companies into locating their factories overseas.

But lately, in spite of the prominence of “Made in China” tags, American companies have been making a switch from outsourcing from oversea nations like China, to “near-sourcing” from either US companies or close neighbors like Mexico.

Mexico vs China: Which is cheaper?

Wages in China, though low, are rising by 14% annually. And though at roughly $3.50 an hour, Mexico’s wages are 40% higher than China’s, lower transport and customs cost puts the two at roughly similar levels.

According to a study by Bloomberg, however, when calculating all expenses, Mexico is already cheaper than China, and China is nearly on par with the US in terms of cost.

The study found that Indonesia had the cheapest manufacturing, followed by India, Mexico, Thailand, and China, with only Taiwan separating China and the US, which took spot 7.

In contrast, the most expensive manufacturers were Australia, Switzerland, Brazil, France, Italy, Belgium, and Germany with costs 30 – 40% higher than America’s.

Advantages of near-sourcing

Mexico is growing more competitive. Already the US’ third-largest trading partner, its share of the U.S. import market has risen to an all-time high of 14.4%.

It’s also reaping the benefits of the same factors that are making US a more desirable manufacturer, such as stable wages, sustained productivity, and a post-shale-gas boom advantage.

Goods imported from Mexico can enter duty-free, thanks to the North American Free Trade Agreement. They also arrive faster – meaning a company need only order two weeks in advance rather than six.

But perhaps most ironically, it’s China’s success that is actually driving business back to the US and Mexico. As the Chinese yuan increases in value, overseas shipping becomes more costly, and increasing demand leads to shortages among competing Chinese factories.

Mexico also has markedly better intellectual property laws, depends less on crowded ports for faster, easier transport, and is able to conduct business with the US within a similar time zone.

But of course, there are disadvantages to manufacturing in Mexico as well, such as corruption, rigid labour regulations that hamper productivity, weak infrastructure, and clashes with drug traffickers.

What does this shift mean?

The latest data on competitive manufacturing nations, which demonstrates that there are many nations competitive with China, means that companies should think strategically about manufacturing investment decisions — many still assume China is best based on decade-old market conditions.

Forbes predicts that though rising costs in China and political pressures are driving American companies back to home soil, it will be advances in technology such as AI and robotics that ultimately change manufacturing as we know it.

As robots take over manufacturer jobs, outsourcing will make less and less sense — why ship materials to China to have them robotically assembled and shipped right back?  The risks are slowly outweighing the benefits as time goes by, meaning manufacturing in Mexico looks more attractive than ever, and will likely only get prettier.

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Jennifer Markert