Labor costs in Mexico are still generally higher than in China but the total cost of manufacturing in the North American country has fallen recently below its Asian rival’s, spurring a rethink amongst OEMs about the best place to site production facilities.
In the last few years, many U.S.-based manufacturing companies have either moved or hinted at the possibility of relocating some of their production activities from China to sites in North America with Mexico the main beneficiary of this shift. This process, dubbed “re-shoring” by observers, has been embraced by companies like General Electric and Apple Inc., which has announced plans to make its desktop Macintosh PCs in the United States.
These two companies are not alone. In the electronics and high-tech market, companies that over the last 20 years massively outsourced manufacturing to China and other so-called “low-cost” centers are grappling with a new set of dynamics centered on the fact that labor costs are soaring as much as 15 to 20 percent per year in their favored production regions. Western manufacturers in China face other challenges, including factors such as difficulties securing and keeping expensive technical expertise and the transportation costs to move finished goods to markets in North America, observers said. Mexico, today, is looking like a very viable alternative, analysts said.
Mexico’s “cross-border manufacturing sector is thriving again after losing much of that business to China over the past decade,” said Kara Sissell, an analyst at IHS Corp. in a report titled Mexico: Targeting New Opportunities. “Growing trade with the U.S. and Canada, competitive raw materials, and proximity to the world’s largest market are reviving investor interest in Mexico.”
That assessment has proven even more prescient since the report was published in June 2012. Today, Mexico is on the radar of many manufacturers in all segments of the economy. Automotive manufacturers are especially keen on the country as are electronics manufacturing services (EMS) providers in the high-tech industry. The increase in manufacturing has in recent years boosted Mexico’s status and helped make the country the number one exporter of automobile to the United States and the world’s sixth largest manufacturer of electronics, according to Ildefonso Guajardo, the economy minister in a report.
It’s a long-term dream finally come true for Mexico. Decades ago, Mexican government officials assumed their country was the natural candidate to be the major manufacturing hub for goods headed up north to the United States and Canada but that hope was swiftly derailed by China’s ascent and its explosive economic growth. Not only did China overtake the rest of the globe but also its position as the world’s pre-eminent manufacturing location seemed assured for the foreseeable future.
Cracks are beginning to appear in China’s domination of global manufacturing amidst increased rivalry from traditional competitors like Mexico and even from Western nations, including the United Kingdom and, surprisingly, the United States. By far, though, Mexico seems to be the main challenger China now faces for Western manufacturing and not just in electronics but also for a wide range of goods, including automotive and industrial equipment. Its proximity to the United States and even Western Europe means more companies are now more seriously weighing either shifting some or more manufacturing to Mexico, according to industry observers.
“We continue to see offshoring and a lot of projects going to Mexico instead of to China,” said Gerry Fay, global president of the Electronics Marketing group at Avnet Inc., during a presentation to analysts while discussing the company’s fiscal 2014 third quarter results.
If Mexico continues to gain manufacturing jobs, the supply chain will be much more heavily impacted than it has been so far. China began attracting manufacturers decades ago, a majority of component suppliers eventually followed their biggest customers and contract manufacturers to the country. Today, companies like Intel and many other suppliers of semiconductor, interconnects, passives and electromechanical components have production or assembly plants in China.
Distributors like Arrow and Avnet have similarly increased investments in the region and now generate a larger chunk of their annual sales in Asia, according to company records. In fact, the massive outsourcing waves led to the rapid ascent of World Peace Group to the No. 2 position globally in components distribution, according to observers.
A similar development is building in Mexico as manufacturers pivot to the country. A lengthening roster of companies like Methode Electronics and other IP&E components vendors and many semiconductor suppliers have operations in Mexico and many of these support services are growing faster as the country becomes a bigger rival to China. The need to keep costs down will drive OEM manufacturing growth in Mexico as China’s costs – especially wages – continue to rise, and these companies will themselves ask more of their suppliers and other supply chain services providers, analysts said.
“Costs in China are rising fast. There are currently regions of China where hourly labor costs exceed hourly labor costs in parts of Mexico,” said the Entrada Group in a research report. “Wages in Mexico (particularly in the center of the country) have a long history of stability, compared to wages in China, which have been rising steadily over the last 5 to 10 years. While the Mexican peso in the short term remains stable, historically it has shown devaluation against the US dollar. This contrasts with the Chinese currency, which should continue to gain in value over the next 5 to 8 years.”
China’s political leaders have for some time operated on the assumption that cheap labors won’t hold foreign manufacturers forever. In fact, the government has actively championed higher wages and faster wage growth to raise workers’ living standards. The government also understands that while China’s rising wages and other production costs may have some negative consequences, most foreign companies will maintain manufacturing facilities in the country to service the local market and also because shifting entire operations elsewhere will be difficult. The Entrada Group believes manufacturers are more likely to use locations like Mexico as a secondary source for addressing nearer consumers.
“Manufacturers don’t have to decide between China and Mexico,” the consulting company said in its report. “In many cases, facilities in both places are a necessity. Production for delivery to Asia often makes more sense in China, while product for delivery to North or South America is usually better suited for manufacturing in Mexico.”