Once the offshoring destination of choice for manufacturing, China has lost significant competitiveness on the world market – and, as Chinese manufacturing slows, China’s pain is Mexico’s gain.
The Chinese manufacturing sector is slowing
China’s official manufacturing purchasing managers index has been low for over a year now. In the first month of this year, that number dropped further by .4 according to both indexes, the official PMI and the Caixin China manufacturing PMI. China’s official manufacturing PMI now sits at 49, and the Caixin PMI now sits at 48. This means that, according to the official PMI, China’s manufacturing sector has been in contraction for over seven months, and according to the Caixin PMI, over 12 months. Economists had predicted weak numbers for China in 2016, but the new year saw a weaker start than expected, underscoring the weak outlook for Chinese manufacturing. In fact, the Chinese economy, itself, is no longer growing by leaps and bounds as it typically has in recent years. This year, economic growth has dropped to 6.9%, the weakest growth rate China has experienced in about 25 years. And it’s no surprise what the primary driver is in this slow-down.
Cost of Labor
The Far East’s preponderant nation has lost its primary source of growth – cheap Chinese manufacturing labor. China once offered one of the cheapest labor rates for manufacturing in the world. But in the past decade, that dramatically changed. In 2010, China’s labor cost tied with Mexico and then quickly exceeded it, causing manufacturing investors to increasingly shift their focus even more to Mexico. Indeed, Chinese wages are increasing at a staggering rate of 10% annually, while Mexico’s remain virtually stationary. The wage contrast between the two countries has become so stark that even Chinese companies, like automaker Geely, are moving manufacturing operations to Mexico.
Building on momentum begun by the implementation of the NAFTA, Mexico has in recent years focused extensively on reforming the country’s economic atmosphere and infrastructure with the goal of becoming the next global manufacturing platform of choice. In addition to offering competitive wage rates, Mexico also offers increasingly skilled and productive workers for more high-end manufacturing.
Additional factors include:
- Lower input costs: the cost of energy and other inputs remains low in Mexico.
- Exchange rate: Mexico’s peso has depreciated against the US dollar in recent years.
- Demographic advantage: while China suffers from their one-child policy, Mexico’s young and highly trained workforce is growing.
The result has been a sustained increase in foreign direct investment as the pace of Chinese manufacturing slows, and, increasingly, moves to Mexico.