In what ways are Mexico more appealing than China?

The key concerns for purchasing manager and supply chain manager are rising labor costs, trade agreements with the US, costs of shipping, and energy costs.

So, let’s explore them one by one:

Labor costs – In 2012, the unit labor costs (which is equivalent to the wages adjusted for productivity) in Mexico was equal to that in China. However, by 2015, the manufacturing wages in Mexico had dropped to 30% lower than China. Many manufacturers, especially those whose products are labor-intensive, found the labor market in Mexico seductive.

Trade agreements – While China is battling with the US, Mexico has built a strong relationship with the US through North American Free Trade Agreement which allows easy access for Mexican goods throughout the United States without tariffs. Even the changes to the NAFTA agreement and the rhetoric around “the wall” have had little impact on Mexico’s competitiveness.

Shipping costs – Due to distance and fluctuating oil prices, shipping costs are much higher from China to the US. In 2012, shipping a 40-foot container from China cost about $7,500. The same container cost about $2,500 from Mexico. Furthermore, while products shipped from Asia typically need a few weeks to get to the US, it only takes a couple of days to ship products from Mexico.

Energy costs – Mexico’s natural gas prices are similar to those in the United States, which is relatively low in the global market. This is thanks to a greater supply due to gas and oil discoveries in the US. In contrast, China pays 50% to 170% more for natural gas.

These are compelling arguments for relocating production to Mexico, but before jumping to a conclusion, it is important to look deeper into the details.

Here’s where we see some challenges:

Weaker logistics and infrastructure – There is a shortage of trucking capacity in Mexico. The truck transportation sector is dominated by small players that lack the financial resources to purchase new equipment, and simply cannot keep up with the increasing demand. The result is likely to be rising costs of transporting goods. Inadequate infrastructure is also a headache. There are no navigable rivers to decrease transportation costs and improve the flow of goods. You might go as far as to say that geography in Mexico is an obstacle to production and trade. Meanwhile, logistics and construction of infrastructure in China have been booming. Logistics companies in China raised $30 billion in 2017, and infrastructure is the focus of the Chinese government in 2019 according to Bank of Communications in China.

Lack of suppliers – In China, there are several electronic production clusters, and according to The Economist in 2018, China has held more than half of the world’s manufacturing capacity for electronics. More than half of the world’s mobile phones are produced in China as are the vast majority of the world’s printed circuit boards (PCBs). However, many see Mexico as short on raw materials and the back-end supply chain, supporting services, still need improving. As a result many organizations source from the original suppliers or even from the US.

Of course, when making a sourcing decision of this nature, we should not neglect the interior factors of an organization:

Size of a company – For a small company that produces apparel or electronic products that require labor-intensive work, it might not be that hard to relocate. But for larger companies that depend on high-tech manufacturing, it is not simple to explore an alternate destination, especially of strong relationships with a great many suppliers in China already exist. The status quo is attractive for many reasons, not least that quality has been proven, and the risk of flawed quality is too high.

Target market – For companies that consider China as a major market, it makes sense to be in China, why would anyone ship from Mexico to China? In 2017, Ford moved production of the Focus compact car from Michigan to China, reversing a previous plan to move assembly of the car to Mexico, this was likely partly beacsue Ford saw China as a key market for the new model.

These complex dynamics create a real dilemma for many supply chain or purchasing managers, so what to are the best options?

Option #1 – Move part of the production to Mexico and source from China

It is probably safer to diversify the production in China, than have production in both geographies. Mexico still has a way to go when it comes to raw materials and back-end supply chain. Sourcing from original suppliers in China might cause some additional costs, but with less risk of quality flaw.

That said, it’s not an easy job to source from a reliable supplier in China, especially when you’re not familiar with how business works in the region and the local customs.

Option #2 – Stay with existing vendors in China

If you chose to stay in China how can you mitigate some of the rising costs and risks, particularly as related to labor rates and trade wars?

First, the Chinese government has been working on giving more preferential policies to support foreign investors by opening market access, offering tax breaks, and allowing foreign investors to set up wholly foreign-owned enterprises (WFOEs) in many industries.

The ‘Made in China 2025’ initiative highlights China’s ambition to digitally transform manufacturing, which means more automation and less labor for low-end manufacturers.

So, in China, chances go along with challenges. It is wise to not only focus on the products, but also focus on building a better business by seizing the chances and avoiding the risks.

Of course, it is hard to do both. The truth is we see these challenges daily and nothing gives us great satisfaction than helping our clients to find better solutions. That might mean finding the right qualified local suppliers or helping with supply chain management, mitigating risk, or fixing a specific issue so that you can make better products at lower prices, while staying completely focused on taking those chances to make your business better!

We are Hi-Bit a Globa EMS in Chinal, your trusted supply chain partner.