As China’s wages climb, Mexico stands to win new manufacturing business

Not long ago, Mexican factories couldn’t compete with the “China price,” the ridiculously low cost of production in the Asian nation.

But sometime this year, with rock-bottom wages soaring in China, the average cost of factory labour in the two nations will be roughly the same. This is a boon to Mexico, and its industrial parks are swelling.

The trend has caught the attention of chief executives such as Rob Moser, the president of Casabella Holdings, who recently started adding up the pros and cons of where to make the housewares that his New York firm designs and sells.

China was cheap — really cheap — when he first started buying there in 2003. But labour costs have climbed at a double-digit pace, and there were other factors that made China less convenient.

“You’ve got to get a visa to China, and that takes time. It’s a 16-hour flight, hours to the factory. It’s days at the very least to tackle some of these issues,” he said, referring to production problems that invariably arise.

“You literally can be in a facility in Mexico the same day and be fixing things. That is a huge benefit,” Moser said.

So, like a number of U.S. and Canadian businesses, large and small, Casabella decided to bring some of its business back to North America this year, specifically to Mexico, the United States’ third-largest trade partner after China and Canada.

Mexico’s charms look more attractive than ever to global supply-chain managers. Eclipsed in the past decade by the white-hot industrial juggernaut in China and marred by an image of rampant criminality, Mexico is again seducing global business, drawing billions of dollars in investment.

The Boston Consulting Group, a major business strategy consultancy, says average factory wages in China this year have hit about $4.50 an hour — including benefits and other costs — and are likely to climb to $6 an hour by 2015. Mexico’s National Statistics Institute says average manufacturing wages stood at $3.50 an hour in June, the most recent month tallied, but that figure doesn’t include benefits.

Word of caution

Yet to be seen, though, is whether Mexico can follow China’s path and leverage its low-wage status into sustainable fast growth. To do so, it needs policies to foster small and medium businesses and move them into higher-end production, and to draw workers into the formal economy and push them up the economic ladder. Some analysts have doubts.

“I would be quite cautious about talking of any Mexican euphoria over the return of these industries,” said Enrique Dussel Peters, coordinator of the China-Mexico Study Center at the National Autonomous University of Mexico.

Unlike in China, where the Communist Party identifies “pillar industries” and orders banks to shovel loans their way, Dussel Peters said, Mexicans who are eager to start or expand businesses even in strategic sectors can’t get cash easily.

“Smaller businesses in Mexico don’t have access to financing, and those that have it get it at a very high cost,” Dussel Peters said.

Even with the North American Free Trade Agreement, the sweeping 1994 accord that ties Canada, the United States and Mexico together in the world’s biggest trade bloc, Mexico suffers from an “enclave economy,” of which the vast gated industrial parks along the U.S.-Mexico border are the most visible sign. Goods are assembled there for export but rarely from parts manufactured in Mexico. That means the country’s economy doesn’t benefit as much as it might.

“It doesn’t make sense for Mexico in the long run to just sort of give up the production capacity by fiat to foreign suppliers,” said Frank Lange, the vice president of global development at Menlo Worldwide Logistics, a San Mateo, Calif., company that helps clients tighten controls of supply chains.

That, however, is an issue for Mexican politicians and businesses debating how best to develop their country’s economy. For multinational companies that are looking to keep a lid on costs, it’s of little concern.

“I was just on a call with a company that’s thinking of moving production from China to Mexico,” said Scott Stanley, the senior vice president of sales at North American Product Sharing, a Solana Beach, Calif., company that helps manufacturers set up and run operations in Mexico.

“There are a lot of companies that are saying, ‘China is not making much sense for us anymore. We should go to Mexico,’” said Vivian Olmos, also of North American Product Sharing.

No ‘flash in the pan’

Industrial parks along the U.S.-Mexico border — even in Ciudad Juárez, once known as “Murder City” because of its homicide rate — are feeling a boom.

“This is not just a flash in the pan. These companies are inquiring about leasing space for three to five years,” said Tapen Sinha, a business professor at the Autonomous Technological Institute of Mexico.

Moser, the 61-year-old Casabella president, said he’d been warily eyeing the prices of his suppliers in China.

“The clear cost advantage that these factories had in 2004, ’05, ’06, ’07 and probably up to ’08 and ’09, where it was material, it was significant: That gap is virtually nil,” Moser said.

Earlier this year, Moser worked through Ed Juline, an American consultant in Guadalajara, and found a factory in Mexico City that could meet his specifications for a molded dish brush. He’ll take delivery on the first order perhaps late this month.

He expects that in five years, half of his suppliers will be outside China and that Mexico is “certainly the most logical place.”

Tim Johnson
Dallas Morning News

Categories: Manufacturing & Industry

Tags: , , , , , , , ,

5 replies

  1. Reblogged this on OyiaBrown.


  2. Reblogged this on TransformationWatch and commented:
    As China’s Wages Climb, Mexicio Stands to Win New Manufacturing Business


  3. Mexico’s entry to the manufacturing arena began more than 50 years ago. At its inception, the draw for foreign manufacturers was its low-cost labor rates. Today the manufacturing landscape is much different; Mexico has attracted global corporations such as Volkswagen, GM, Bombardier, Bose, Eaton and other world class companies by proving it has the technical skills and capabilities to compete not only in North America, but on the world stage as well.

    Many of today’s Mexican manufacturing plants reach far beyond simple assembly. It is not uncommon to find companies that design, develop and manufacture some of the most complex products in the marketplace in a variety of industries. Aerospace, automotive, medical and electronics manufacturing companies find themselves at home in Mexico. From pacemakers to airplanes, Mexico meets and exceeds the standards set by world class companies. A close working relationship between industry and higher education has made this possible. Curricula at universities and technical schools are now shaped by the specific demands of industry.

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