We have written about moving manufacturing to Taiwan and to Vietnam. Now we will move across the Pacific to a prominent area to manufacture in North America: Mexico.
Mexico’s Downfall as a Manufacturing Hub in the Late 1990s
Mexico has been a major location for manufacturing since the passage of NAFTA in the early 1990s. Mexico became synonymous with offshoring manufacturing jobs from the US until China became a major player in this arena in the late 1990s.
The reason for this was simple: Mexican labor was 3 times more expensive than Chinese labor in 2000. Companies, seeing this and an enormous labor market, made the switch. China eagerly invited foreign companies to manufacture in China. What followed was one of the most rapid industrializations in human history.
Why Are Companies Moving Manufacturing Back to Mexico?
Rising Chinese Wages
That industrialization does have a price of course. Chinese wages have risen rapidly. By 2012, Chinese and Mexican labor had converged. Now, full-loaded labor rates are higher in China than in Mexico and will likely stay higher for the foreseeable future. The structural changes in China (lower population growth, more people not wanting to work in factories, a developing economy, etc.) are fundamentally shifting the economy in that will continue to move it away from its low-cost low regulation roots. We mentioned before that Chinese wages are rising compared to even Taiwanese wages and it is likely that the difference with Mexico will continue to increase.
A Highly Developed Manufacturing Base Along the US-Mexico Border
In addition to lower wages than China, Mexico has a well-educated population that is familiar with manufacturing and a highly developed manufacturing base, especially along the US-Mexico border. Over $1 billion in goods travel across the border nearly every day. The current trade agreement, USMCA (NAFTA 2.0), lowers trade barriers significantly and the duty on most goods moving back and forth over the US-Mexico border is zero or nearly zero. The tariff rates are in stark contrast to the tariffs the US has imposed on China.
Mexico’s Location & Lack of a Language Barrier
Finally, Mexico has the advantage of distance and language. Mexico and the United States share a massive border and goods shipped from Mexico can arrive to American or Canadian consumers within a week while products from China can easily take 1 to 2 months on the ocean. There is a language barrier between Mexico and the United States, Spanish and English, respectively, but this barrier is not as great as the China/US language barrier. There are far more people in the US that speak Spanish than Americans that can speak Chinese. The same alphabet is also helpful.
Why Is This Move Happening Now?
If Mexico has all these advantages, you might ask why manufacturers haven’t made the transition to Mexico earlier. The answer has to deal with both economic and political factors.
Economic Factors
On the economic end, Mexico, despite its large and growing population, does not have the same capacity and breadth of companies as China. Mexican supply chains are well developed, and a wide variety of goods are produced there but not as developed as the Chinese supply chain. Mexico also does not use contract manufacturing to the same degree as China making it more difficult for smaller companies to quickly and easily find a producer for their products. While the wage gap is increasing, it is not yet greater enough to push many suppliers to make the change.
Political Factors
On the political side, Mexico is not a safe place though the situation is improving. Mexico was seeing an especially large surge in gang violence when Chinese wages surpassed Mexican wages in 2012. The situation is improving but Mexico still struggles with violence and political challenges.
The Bottom Line
The question of whether to move manufacturing to Mexico depends on your costs and your customer needs. If tariff and supply chain shortages and delays are eating into your margins and alienating customers, it is likely a good time to move. Many consumers now want more customized products. It is much easier to produce those products in Mexico and have it out to consumers in a matter of days rather than wait for products to arrive from China or be forced to carry a large amount of inventory. Conversely, manufacturers should wary of Mexico's IVA tax structure, and know how to navigate such a complex framework.
Now is a great time to investigate if moving to Mexico is the right move for you. Lockdowns in China may continue for a long time and the tariffs are not going to be lifted any time soon. Take a hard look at your needs and goals.
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