Mexico's Advantages as An Outsourcing Destination

Decades ago, China established itself as a manufacturing dynamo. The universal view about China is its inexpensive labor. This view has been rooted in my mind for such a long time that I was surprised when I read that China now is losing its competiveness as an outsourcing destination. I can’t stop asking, if China no longer is no longer favored by these US companies, who is coming after China and how does that happen?

The article from this week lists Mexico as an alternative, mainly because Mexico has a smaller wage growth than China. Although the wages in Mexico are still higher than China, we can see the gap is narrowing and will finally come across in predictable future. A detailed wage rate comparison between Mexico and China is listed as below.

However, compared to Mexico, China’s decreasing competiveness is not only caused by its increasing wages. Mexico has other advantages over China, which creates more benefits to US companies on a management level. After I look into several analysis of manufacturing in Mexico versus China. These advantages can be concluded as:

Strategic location

As the lean manufacturing principles indicate, the inputs to production in an effective supply chain should arrive at their destination “just in time”. Mexico is nearer to US, which made the shipping time much less. Shorter shipping time will reduce manufacturers’ lead-time to place the order. Their product life cycle therefore is shorter, which improve their responsiveness to the market. Shorter shipping time in turn represents lesser transport expenses. Decades ago, China can complement this expense by lower labor costs. Now when Companies like Foxconn are considering moving inland to access cheaper labor, the transport expenses will actually increases.

Ease of management

The biggest problem for companies’ management is the difference time zones, as well as different holidays. There is less overlapping in work time between China and US, which makes the communication like making phone calls and factory visits inconvenient and costly, while there is only a little difference between Mexico and US. What’s more, Mexicans know more about English because the proximity between English and Spanish, while Chinese have to start from scratch to learn English.

NAFTA advantage

Mexico is included as one member of The North American Free Trade Agreement (NAFTA). The NAFTA ensures tariff free trade between US and Mexico. Since most of outsourced products are low margin like television and clothing. Paying tariff leaves little profit to the importers.

Steady economic status

China’s economy keeps growing fast, which brings risks like increasing wages, high inflation and currency appreciation. The general consensus says that the Chinese currency will continue to gain value in the next 5 to 7 years. By contrast, Mexican currency has decreased and predicted to remain stable. Outsourcing to Mexico is a better if companies want to reduce their currency exchange cost and bear less economic risks.

After all, if the wages in China keeps increasing, it seems Mexico will have all-round advantages over China. The most common seen “Made in China” may disappear in the future. Mexico will take over the role as a manufacturer, and China, as I know is, find other ways to sustain its economic growth. This is good sign for both Mexico and China.

Sources:

[1] http://www.entradagroup.com/an-analysis-of-manufacturing-in-mexico-vs-china/

[2] http://offshoregroup.com/2012/05/16/low-cost-manufacturing-china-or-mexico/

[3] http://offshoregroup.com/2012/09/10/mexico-to-be-top-us-trading-partner-by-2018/