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U.S. Companies choose Mexico when nearshoring

29 Jul 2012

While lower wages in China once motivated many low value-added operations to move there a decade ago, today a manufacturing resurgence is palpable in Mexico.

Factories are purring; some manufacturers in Mexico are even expanding their operations. This may be of surprise to many for two reasons:

• Mexican manufacturing is revitalizing, as the rest of the world struggles to claw its way out of the economic recession;

• Mexico’s manufacturers have not felt the adverse effects of the drug violence in some northern parts of the country that one might expect.

It is important to consider, however, that the economic advantages of doing business in Mexico far outweigh the costs brought on by the drug war hostility.

When trade between the United States and Mexico waned in 2009, it was because U.S. orders for Mexican-manufactured goods plunged, not because of issues related to drug trafficking, but due to a deep recession in the U.S. In spite of this, circumstances have visibly changed within the last couple of years; total U.S. trade with Mexico has increased 28% since 2009. Factories are secure. In fact, undisturbed Mexican manufacturing plant managers are hiring more workers and making plans to expand production operations. Despite the drug violence and the negative attention that has been damaging for border tourism, trade between Mexico and the U.S. has recovered and surpassed prerecession levels.

Mexico manufacturing continues to be a very large enticement for global top performers looking to allay risk as multinational industry leaders. Remember that supply-chains are continually shifting. Today’s model can be outmoded tomorrow. Recognizing that trends shift, industry leading multinationals frequently review their total costs of goods for both global competitiveness and the diminution of risk to their supply chain. Any supply chain can be affected by factors such as natural disasters, oil prices, political volatility, or sovereign debt. Even in the face of Mexico’s existent narco-violence, it has become sensible for Mexico manufacturers to offer a judicious near-shore production capability as companies plan to reduce supply chain risk. Corporations are signing multiple contracts with several service providers across multiple routes to alleviate potential disruption and loss. In other words, industry recognizes that it is dangerous to put all of its “eggs in one basket.”

The recent unprecedented economic downturn, combined with very unpredictable changes in key supply chain variables over the last few years, has demonstrated why shippers should take a more all-inclusive approach when making supply chain configuration decisions. The vivid spike in fuel prices last year represents a wonderful case in point. Precipitously rising fuel prices forces companies to re-examine their supply chain imprints. There are many factors that influence the effectiveness and efficiency of a supply chain and companies must take a number of quantitative and qualitative risks into consideration. Companies seeking to be competitive in today’s marketplace should calculate Total Landed Cost of goods when making supply chain decisions.

Total Landed Cost is the summation of all costs connected with making and delivering products to the point where they generate revenue.

The influence of changes in these factors can have a sizeable impact on the total cost of the product, which in turn affects the product’s price competitiveness in the marketplace.

Consider how understanding Total Landed Cost impacts the act of choosing to manufacture in Mexico as opposed to doing so in China. Mexico has become the more attractive option, as the costs of manufacturing in China steadily rises. These conditions lead businesses to reorganize their international sourcing strategies.

A number of factors are behind China’s rising manufacturing cost structure: a thinning population of skilled workers, escalating raw material costs, and government-controlled incentives to preferential industries at the expense of those seen as less crucial to China’s development. Costs of doing business in China have risen gradually over the past five years, most remarkably in the urban coastal areas. Wage inflation and the volatility of fuel prices will cause companies that sell product in North America to rethink how the do business.

In addition to wages paid to production workers, companies that calculate their actual landed costs scrutinize expenditures and economic impact in areas such as energy costs, exchange rates, transport costs, travel time and costs, taxes and tariffs. Today, electricity is less expensive in Mexico than it is in China. China’s electricity cost per kilowatt-hour is set at fifteen cents, while the cost per kWh in Mexico is nine. Currency valuation against the US dollar is also significant. The Chinese Renminbi is projected to increase in value at an annual rate of 3 to 5 percent for the next three years relative to the USD, while the Mexican peso continues to maintain its current value. Finally, trans-Pacific freight costs are expected to increase five percent annually over the medium term.

By comprehending and transferring costs connected with the assorted components of a supply chain, a company can establish the most favorable sourcing locations, optimize its supplier networks, and recognize elevated cost aspects of its supply chain. The Total Landed Cost model of decision-making allows business to predict their expenditures. This ultimately reduces working capital outlays and improves cash flow.

Mexico’s proximate distance to the U.S. consumer market will continue to be the country’s greatest selling point. There’s plainly no comparison between Mexico and China for top performers that mull over ease of access and reduced supply chains for manufacture, assembly and distribution. More firms will choose to establish a near-shore manufacturing base in a cost-competitive Mexico as global corporations appraise the risks of operating in an unpredictable world.

Benefits of Mexico Manufacturing:

Mexico Workforce

• Young and highly qualified workforce.

• Mexico’s labor rates are on average less than 40-80% below many U.S. labor rates.

• High weekly productivity with Mexico’s 48-hour work week.

• Steady and predictable healthcare costs

• High concentration and accessibility to trained, fluent English speakers.

Mexican Legal Framework 

• Existence of Intellectual Property Laws. Mexico has IP laws comparable to the U.S.

• Health and Safety laws like the U.S.

Mexico Shipping and Logistics

• Low freight and shipping costs

• Expedited delivery speed. Same day delivery to U.S. market.

• Preferential duty rates with NAFTA trade agreement.

• Border expedited crossing systems available.

Infrastructure for Manufacturing in Mexico

• Modern industrial parks

• Strong utility infrastructure to support manufacturing centers.

• Create the capital for reinvestment in your business through increased profits

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