A recent report states that the average manufacturing costs in Mexico last year dropped below those of China, the Boston Consulting Group said. Mexico is beginning to beat China as a manufacturing base for many companies, according to the report.
Just 13 years ago, Mexican labor was 58 percent more expensive than in China. It is projected that by 2015, that it will be nearly 20 percent cheaper as China labor wages continue to grow faster than those of Mexico. Mexico’s close proximity to the U.S. and less expensive labor costs will likely to continue to draw U.S.A. manufacturers out of China and also cut down on supply-chain costs.
That trend is expected to continue, especially after a recent labor reform law in Mexico that gives companies more freedom to hire and fire workers and pay them hourly rather than daily rates. This trend is expected to lead many U.S. manufacturers to relocate to Mexico.
The consulting firm’s research said this shift will add $20 to $60 billion in output to Mexico’s economy each year.
Mexico’s gain is also a huge a plus for the U.S. because Mexican factories use four times as many American-made components as Chinese factories do, says the consulting firm. Here are Mexico’s four key advantages:
1. Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015. China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000 but are catching up rapidly and will be slightly higher by 2015. And labor productivity remains higher in Mexico, even though the gap is narrowing. The crossover point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity) grew to equal those in Mexico. By 2015, Mexico will be around 29 percent less expensive.
2. Mexico has more free-trade agreements than any other country. The North American Free Trade Agreement gives Mexican goods easy access to the world’s largest market, the U.S., as well as to Canada. But that’s not all. Mexico has free-trade agreements covering 44 countries. That’s more than the U.S. (20 partners) and China (18) combined.
3. Mexican manufacturing has a significant advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S., which are exceptionally low because of a glut of supply on the market. China pays from 50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.
4. Industry clusters, especially in autos and appliances, are growing. Mexico has developed a national expertise in certain industries, which makes it more attractive for companies to locate or expand plants there. Because Mexico is a major auto manufacturer, 89 of the world’s top 100 auto parts makers have production in the country. The companies are concentrated in five Mexican states, reducing transportation costs. In appliances, more than 70 manufacturers are in the country, ranging from components makers to assemblers of both small and large appliances.
Mexico’s progress relative to China is major good news for the country because manufacturing accounts for 35 percent of Mexico’s gross domestic product (vs. 12 percent of U.S. GDP), Harold Sirkin, the report’s lead author, says in an interview. The U.S. benefits in two ways, he says. First, by selling more components to Mexican manufacturers. Second, by selling more consumer products, such as American-made beef, to Mexicans, who will have more money for imported products if their living standards rise.
Manufacturing in Mexico
Mexico is the United States’ second-largest export market and third-largest trading partner. Many large global companies have chosen to locate significant manufacturing operations in Mexico, particularly along the U.S. Mexican border. This is the case because of the low cost labor market in Mexico, yet with the close proximity to the U.S. consumption markets. Many of the raw materials used in Mexican manufacturing facilities are sourced from the U.S. Top U.S. exports to Mexico include electronic equipment, motor vehicle parts, and chemicals. Mexico is an active and constructive member of the World Trade Organization, the G-20, and the Organization for Economic Cooperation and Development. The Mexican Government and many businesses support a Free Trade Area of the Americas through The North American Free Trade Agreement, NAFTA. This economic zone is expected to thrive for many years into the future.
The U.S. and Mexico are partners in NAFTA, and enjoy a broad and expanding trade relationship. Since the first North American Leaders’ Summit in 2005, the United States and Mexico have cooperated more closely to improve North American competitiveness, ensure the safety of their citizens, and promote clean energy and a healthy environment.
The scope of U.S.-Mexican relations goes far beyond diplomatic and official contacts; it entails extensive commercial, cultural, and educational ties, as demonstrated by approximately one million legal border crossings per day. In addition, over a million American citizens currently live in Mexico. More than 18,000 companies with U.S. investment have operations there, and the U.S. accounts for more than 40% of all foreign direct investment in Mexico. Along the 2,000-mile shared border, state and local governments interact closely. Operating and manufacturing in Mexico’s border region may be relevant for your company is well.