As conditions in China for manufacturers have changed significantly over the past decade, (higher wages, less incentives for exporters and an increasingly tighter market for labor), Mexican manufacturing options have had a resurgence. This “comeback” is marked by the country’s proximity and ties to the United States, which have enabled it to develop the high-tech manufacturing expertise that is required to serve U.S. industry customers and consumers. In summary, the comparative advantage that China once held, as a supplier to the United States, has diminished measurably.
From an economic and political persective, China has lost some economic ground, like most countries, as a result of the slowdown in the global economy of the last several years. It’s perennial annual growth rates of ten percentage points and above have been pared down into the seven and one-half percent range. While this is an impressive number, when compared to most other countries in the world, it is not optimal for China. Given the size of its population, and its need to constantly create sources of employment for its citizens, it is insufficient. Also, as a result of the deacceleration of global economic activity, the Purchasing Managers’ Index, or PMI, has been flirting with 50, as it relates to manufacturing activity in China. PMI numbers that exceed fifty indicate that manufacturing is expanding, while numbers that drop below this threshold indicate that a country’s manufacturing economy is in contraction.
In terms of total GDP growth, Mexico’s performance during the first quarter of 2013 was anemic. It registered a paltry .8% expansion compared to the healthy 3.2% growth figure reported for the last quarter of 2012. Going forward, however, there is optimism is being expressed as concerns the potential for a resurgent Mexican economic vitality.
The country’s president, Enrique Nieto Peña, has undertaken an effort to make changes to reform certain sectors of Mexico’s economy. Nieto Peña took on, and achieved, a significant labor reform earlier this year. Additionally, his administration is working to open up both the country’s telecommunications and energy sectors. Changes in how business is conducted in the latter will likely require that amendments be made to the Mexican Constitution. Some analysts believe that, should the president and his administration have success in liberalizing rules for investment in the oil and gas industry, Mexico will be much better situated to tap into its vast natural gas and shale oil reserves. As a result, access to cheaper domestic energy supplies will make Mexican manufacturing options more attractive, and, consequently, will help to drive the pace of economic growth to near six percent.
As a result of these conditions Mexico manufacturing options are on the forefront of the radar of U.S. companies. Mexico enjoys not only a cost advantage that is becoming roughly the equivalent of that available to manufacturers with faciities in China, but, also, the country is increasingly viewed by American manufacturers as a partner that can provide just-in-time turnaround times and support capabilities in manufacturing activities that are high-tech in nature.
In terms of the ease with which business can be conducted in Mexico, the country ranked number forty-eight in this years’ World Bank Ease of Doing Business Index, moving up from number fifty-three in 2012. China ranked ninety-one for each of the last two years.
The workforce available to firms involved in Mexico manufacturing presents another competitive advantage for the country, when compared to that of China. While Mexico’s population trends young and towards the economically active demographic, China’s longstanding “one child” policy has resulted in the shrinking of the Chinese labor pool over time. Mexican workers labor during a forty-eight hour work week, and go home, while Chinese workers typically put in longer hours, live in dormitories and return to their homes only for the New Year celebration.
Both country’s present challenges in terms of security. In the case of Mexico, the crackdown on narco traffic that began under President Felipe Calderon in 2006 resulted in a spike of violence that resulted in many company’s postponing and changing their Mexico manufacturing plans. Over the past two years, however, violence has been trending down. Company exectutives, however, still have to take this factor into account when doing their Mexico planning.
China on the other hand has had security issues that are related to worker safety. Incidents have happened such as the improper use of toxic chemicals at factories, and injuries and deaths have occurred at plants with workers engaged in the manufacture of electronic devices. Intellectual property theft is still a concern for executives that consider the Chinese manufacturing option.
In summary, over the last several years, Mexico manufacturing options have become highly attractive for U.S. companies seeking to reduce costs due to its proximity to the United States, its high tech industrial base, its competitive stable wages, as well as because of the ease with which company staffs can travel in both directions and communicate with greater temporal and cultural ease. Because of these factors moving manufacturing from China to Mexico has been on the “to do” list of a growing number of companies.
Read the primary source for this post at Morningstar.
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