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In lieu of success in China, some companies look to Mexico to cut costs

An American flag lays on top of a Chinese flag
16 Dec 2013

A recent survey by the U.S.-China Business Council, which polled 110 respondents comprised of companies that oversee a variety of manufacturing and services, revealed rising labor costs have become a big concern for a number of firms that moved operations to China, Bloomberg Businessweek reported.

Despite 90 percent of respondents citing profitability resulting from their China operations - the highest percentage ever in the survey's history - and 96 percent claiming China is still in the top five investment priorities, the ratio of firms that are increasing their margins of profitability are decreasing. For instance, last year 55 percent of respondents said they made more money in China than they did during the previous year, but by 2013 that number fell to 33 percent. Furthermore, the number of respondents who said China was there No. 1 investment priority fell this year to 15 percent from 22 percent in 2012. 

"Costs, particularly in major metropolitan areas, are moving to a point that China is no longer competitive," one respondent told the council.

Last year, 67 percent of respondents said they had plans to increase the resources they put into their Chinese operations - a figure that fell to around 50 percent this year, according to Businessweek. While companies to continue to profit from the economic conditions in China, 92 percent of respondents stated that higher labor costs were their biggest cost issue.

Labor costs, competition shrink margins for foreign-owned firms
The second-largest concern for respondents revolved around competition from surrounding Chinese companies that 98 percent of respondents claim get favorable treatment or receive benefits from China's state enterprises, special treatment not extended to foreign-invested companies.

"Tempered optimism sums up corporate America's view of the China business environment for the second year in a row," John Frisbee, president of the USCBC, told Forbes. "For the second consecutive year, respondents [of the U.S.-China Business Council's survey] suggested that companies' optimism about the prospects for the market in the next five years has moderated."

As labor costs rise and state-sponsored benefits continue to challenge U.S. companies's profit margins, many are eyeing Mexico's major manufacturing hubs, such as Guaymas, Satlillo, Queretaro or Jalisco, as prime locations for manufacturing operations. Its close proximity to the U.S. border enables companies to quickly move products into U.S. markets, but take advantage of significantly lower labor costs.

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