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Mexico presents a significant cost advantage over China

Cheaper labor costs gives Mexico a competitive advantage.
11 Sep 2013

Category: Taxes & Finance

U.S. manufacturers that hope to achieve the highest possible cost savings should consider pairing up with shelter companies in Mexico. Not only are there skilled professionals located across the border, but these firms can take over human resource management, import/export services and regulatory compliance. With offshore shelter companies carrying out several business processes, U.S. manufacturers can focus on production. The comprehensiveness of these services, coupled with the rising cost of doing business in China, may make Mexico the most attractive expansion destination for manufacturers moving forward.

Mexico has created a high-cost advantage
While many manufacturers have outsourced to China due to low costs, a recent study from the Boston Consulting Group has found it may be smarter to begin offshoring in Mexico. In fact, the management consulting firm projects Mexico's economy could add between $20 billion and $60 billion in output over the next five years because of the higher costs associated with working with suppliers in China and other major economies across the world.

The North America Free Trade Agreement has made it easier for organizations to offshore to Mexico. With the 44 trade agreements that Mexico has with countries around the world, shorter supply chains, and lower costs it makes sense for U.S. manufacturers to seek out partners in Mexico if they really want to improve the cost efficiency of their company.

"Mexico is in a strong position to be a significant winner from shifts in the global economy," said Harold Sirkin, a BCG senior partner. "That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It's also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China."

Labor costs are lower in Mexico
Cheap labor and high output used to be the reason many U.S. manufacturers were drawn to outsourcing to China. But now, top chief financial officers and other decision-makers are taking note of the higher labor costs in China and evaluating their options to "reshore" back to Mexico. A recent Reuters article reported on new research by Bank of America Merrill Lynch that revealed Mexico's hourly wages are about a fifth lower than China's. With average hourly wages being nearly 20 percent lower in Mexico, this is a dramatic change from a decade ago when Mexico's hourly wage were 188 percent more costly than China's.

Bank of America Merrill Lynch economist Carlos Capistran believes this competitive advantage that Mexico has built over China won't be going away any time soon. He predicts the growing labor market in Mexico will continue to make the country more attractive to U.S. manufacturers than China.

"Today people are excited about Mexico because of the reforms, et cetera," Capistran said, according to Reuters. "But when I ask myself 'what is the most important thing that Mexico has today in terms of growth,' it's the demographic bonus."

Certain manufacturers should seek out Mexico shelter firms
Based on the findings of the BCG research, partnering with shelter companies in Mexico may make even more sense for U.S. manufacturers in particular industries. The study forecasts the biggest production gains are expected to be in: transportation goods; computers and electronics; appliances and machinery. U.S. manufacturers that want to achieve lower costs, benefit from cheaper labor and​ can see higher levels of output should they give serious consideration to shelter companies south of the border.

"These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico," said Eduardo León, a BCG senior partner based in Monterrey.

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