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Mexico less expensive than China for manufacturing

A view of part of the globe on a map where different cities are connected with dots and lines.

Research by the Boston Consulting Group (BCG) now suggests that Mexico is more cost-effective to manufacture in than China. According to their findings, the "manufacturing cost-structures" of Mexico have become much better compared to any other place for building.

BCG writes that wages in Mexico are growing steadily in a controlled way, productivity is increasing across manufacturing groups and exchange rates are remaining stable. Additionally, energy is cheaper due in part to the influx of natural gas from shale drilling.

"While labor and energy costs aren't the only factors that influence corporate decisions on where to locate manufacturing, these striking changes represent a significant shift in the economics of global manufacturing," said Michael Zinser, a BCG partner. "These changes should drive companies to rethink their sourcing strategies, as well as where to build future capacity. Many will opt to manufacture in competitive countries closer to where goods are consumed."

BCG predicts that companies will begin shifting from China to Mexico as Mexico becomes an ideal site for low cost manufacturing. Additionally, the positions of companies on a geopolitical scale will likely change as countries like China lose a source of income and countries like Mexico can develop a great share of international manufacturing investments.

"With a better understanding of where rising costs and other factors are putting their manufacturers at a disadvantage, countries can take more effective action to shore up competitiveness," said Justin Rose, a BCG partner who coauthored the study.

Changes to the global marketplace
Other countries beside China that have lost ground in the manufacturing industry include Brazil, the Czech Republic, Poland and Russia. A variety of causes have led to those countries becoming less attractive to investors, such as currency fluctuations, wage increases, productivity issues and the price of energy. Brazil especially has taken a hit, becoming one of the most expensive places to build in the world.

Other countries that were difficult to build in have since become even more challenging - particularly in the so-called eurozone. Belgium has become more expensive by 6 percent, Sweden by 7 percent, France by 9 percent and Switzerland and Italy have found their manufacturing costs have both increased by 10 percent. According to BCG, the major reasons for these expensive countries becoming more costly for manufacturing are higher energy costs and low productivity growth.

In contrast, some countries have remained about the same in terms of how much it costs to build there. These countries include the U.K. and the Netherlands.

Mexico holds its interest rate in the face of economic slowdown
Offshoring benefits make it cheaper to build in Mexico, but there is still a general stagnancy in the global marketplace. Reuters reports that Mexico's central bank will likely keep interest rates at a steady 3.5 percent in order to keep the economy from slowing down. While Brazil has raised its interest rates to fight inflation in that country, Mexico is having the opposite problem - growth has been stagnant thus far this year.

"We expect the monetary authority to remain on hold for the foreseeable future unless the economy remains very weak and the output gap continues to widen," Goldman Sachs economist Alberto Ramos wrote to Reuters.

Part of this general economic sluggishness is blamed on America's new policy of reducing its purchase of treasury notes. This has caused the economy to slow down in the U.S. as well, in addition to countries that depend on the U.S. of their economic well-being, according to Reuters.

Reuters reports that most Mexican policy makers believe they will need to reduce their forecast of 3 to 4 percent growth for the coming year.

The Offshore Group: You Manufacture ... We Do The Rest.

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