Mexican Manufacturing Revival

Raymond A. Perez & Alexander P. Trueba

After trailing China in attracting U.S. companies for outsource manufacturing and production for over the last decade, Mexico is making a comeback principally driven by a changing global landscape and soaring Chinese wages.

China burst onto the world economic scene in the early part of the 21st century, joining the World Trade Organization (WTO) in 2001 after a long 15-year negotiation.  China’s growth as a leading outsource location was fueled by a difficult economic period in the United States where anemic revenue growth forced managers to turn to cost reduction efforts as a way to increase margins and boost the bottom line. For this, China offered a seemingly endless supply of low cost labor, modest transportation costs (with oil hovering under 35$/barrel at the beginning of the decade) and a world class logistics and infrastructure network capable of supporting both large and small operations looking for a competitive edge. China had the perfect economic recipe that would enable it to become a world leader in manufacturing exports.

Mexico’s origin as an outsourcing hub began in the late 1970’s due to high U.S. interest rates and a resulting strong dollar; all but guaranteeing Mexico a competitive advantage to U.S. based manufacturing.  Economic turmoil and increased global competition in the early 1980’s sped up the process, culminating with the passing of NAFTA in 1993.  One leader in outsourcing was the U.S. auto industry, making high profile closures in Michigan, while opening new factories south of the border.  Of course, Mexico has always benefited from its strategic location bordering the U.S.  Initially, U.S. managers were more comfortable with keeping the outsourcing near by, but as the outsourcing matured, by the 2000’s managers were not afraid to send production half way around the world, especially given cost benefits.

The shift toward Asia-centric outsourcing took its toll on Mexico.  According to Barclays, China cut 60 basis points of growth from the economy in Mexico each year between 2002- 2006. However, it seems the tide has turned back to favor Mexico; the once business friendly labor force in China is shifting toward unrest, with workers demanding more benefits and increasingly resorting to strikes.  As a result, wages have skyrocketed.  According to the Boston Consulting Group, wages in China increased 10 percent annually from 2000-2005 and 19 percent annually from 2005-2010.  Similarly, Reuters reported that average hourly wages in Mexico are now 20% lower than in China, compared to 10 years ago they were approximately 188% more expensive.

Also playing a significant role in Mexico’s revival is the current price of oil, which has been in the $75-$100/barrel range over last few years, significantly increasing the cost of doing business abroad. Mexico’s proximity to the world’s largest importer allows for cheaper transportation costs and quicker delivery of goods to the American market. The average transit time for shipment from China to the U.S. is 30 days; from Mexico the delivery time can range from a few hours to a few days. This flexibility gives Mexico a distinct edge in goods produced to supply the U.S. consumer market.

The culmination of all these market changes has seriously eroded the benefit of Asia-centric outsourcing and has led some managers to increasingly opt to “reshore” jobs to the U.S. and Mexico, given benefits of simpler supply chains, less inventory in transit, and flexibility in production schedules. These benefits and market conditions are ideal for Mexico to take back the global manufacturing stage, which it once stood atop, and give the nation an edge over China.

 

Sources: Wall Street Journal, Bloomberg, Reuters, Emerging Money