Mexico may be the next China for U.S. importers and manufacturers

Low cost transportation coupled with minimal import barriers allowed U.S. importers to access the low wages of China and turn that country’s manufacturing base into a U.S. workshop. Chinese wages are now rising to the point that Mexico is becoming the more competitive manufacturing base for the U.S. market.

If Mexico can maintain a safe investment environment and enhance its infrastructure, U.S. businesses increasingly will find it more desirable to manufacture in Mexico than in China. U.S. businesses that can benefit from lower cost goods should investigate that option now.

China in transition

Over the last 50 years China became the leading source country for U.S. businesses seeking lower costs and acceptable quality on a broad range of goods. These advantages arose primarily out of the low wages paid in China. At times the prevailing wage for a month of labor in a China factory was equal to about 10 hours of the U.S. minimum wage. That meant that a Chinese factory worker would perform a month of labor (working six days a week) for about the cost of employing an American for one day.

With that 25-to-1 labor rate advantage, manufacturing jobs rushed from the U.S. to China

But China’s fast growing domestic market has caused Chinese wages to rise rapidly, particularly over the last 10 years and especially on the eastern seaboard. In fact, wages in eastern China have risen so high that little of the country’s manufacturing is done there any longer. Eager for lower cost labor, Chinese manufacturers have been moving inland, just as U.S. textile manufactures began abandoning the U.S. Northeast for the Southern states about 45 years ago (before moving offshore).

But even in the interior, wages are rising. This turns out to be good for the people of China and, indirectly, Mexico.

Over the past 30 years Mexican manufacturing wages have been higher than those in China, the Mexican infrastructure less developed, and some believe the Mexican labor force less productive. Consequently, Mexico captured a relatively small share of U.S. offshore manufacturing work, despite its close proximity to the US.

Conditions are evolving

But conditions have changed and perceptions are catching up. Many large and medium U.S. businesses are performing operations in Mexico that would have gone to China a decade ago. Rising wages in China, positive internal developments in Mexico, and duty-free exports to the U.S. under NAFTA are rebalancing the cost savings equation increasingly in favor of Mexico. U.S. political sensitivity to China’s growing power and U.S. businesses’ interest in accessing Mexico’s growing domestic market are additional long term factors that favor Mexico.

Mexico is not the only attractive alternative to China for low cost manufacturing. Vietnam, as only one example, offers many of the features that enticed U.S. manufacturing and U.S. importers to China decades ago. But Mexico’s proximity to the U.S. and the shared contiguous border are unique among low labor cost nations serving the U.S. market.

One of the most obvious benefits is that a container of Mexican manufactured goods can reach the U.S. in a day or two compared with weeks for a crossing from Vietnam or China to California.

Eventually, as more competition develops for Mexican labor and as the Mexican economy improves the Mexican labor market will become less attractive relative to other regions, including certain areas in South America. But that day is still far off.

For the next couple of decades at least Mexico will become a less expensive, closer to home option. U.S. manufacturers and importers would do well to take a careful look at Mexico now, and again from time to time as this dynamic situation regarding China develops.