Once a global manufacturing advantage, the cost of labor in Asia has lost its upper hand.
In the last decade, investors looking for a competitive, low-cost manufacturing location frequently chose Asia as the smart investment for economic efficiency. With the cost of labor in Asia on the rise, however, Mexico is becoming increasingly attractive as a globally competitive source of highly skilled labor, especially for manufacturing. As a result many companies are moving manufacturing from Asia to Mexico.
The Cost of Labor in Asia
In 2010, Asia’s cost of labor reached parity with Mexico’s, before dramatically exceeding it. According to economists like Carlos Capistran of Bank of America Merrill Lynch, in terms of USD, the cost of labor in Asia is now 40% higher than that in Mexico. This is a startling reversal from a mere decade ago, when Mexican labor cost well over 100% more than Chinese labor. Clearly, the rules of yesterday’s international economy no longer apply when identifying cost efficient locations for offshoring – or as manufacturing in Mexico has come to be known, “nearshoring.”
It is further noteworthy that Mexico’s labor force has also grown to be highly skilled, trained, and capable in tasks previously reserved for the US or Europe. Today, on average, Mexican workers are more efficient, skilled, and productive than Chinese laborers.
Factors Contributing to Mexico’s Global Manufacturing Competitiveness
In addition to the proximity of Mexican manufacturing labor to US markets with the transportation savings and other benefits associated with it, foreign investors are increasingly interested in utilizing Mexican labor to meet their manufacturing needs for a myriad of reasons. The country has taken several progressive steps towards improving productivity, cost effectiveness, and Mexican workforce training and education reform under the administration of President Enrique Peña Nieto. Mexico now offers investors:
- Lower input costs – particularly in energy – have improved the profitability of manufacturing in Mexico;
- Labor cost and export friendly exchange rates – Recently, the peso has depreciated dramatically against the US dollar, making it even more profitable to utilize Mexican labor, rather than to employ workers in Asia. In just the past two years, the peso has slid nearly 50%, bringing the cost of Mexican labor down from $6 USD per day to $4 USD per day;
- Demographic advantage – The cost of labor in Asia has been negatively impacted by the harsh “one child policy” and a growing demand for manufacturing laborers. Conversely, a young and growing labor force in Mexico has ensured a stable price of labor in the Latin American nation.