Mexico or China? Lower costs tip scales toward Far East
William Atkinson -- Purchasing, 4/17/2003 6:00:00 AM
While the global trade landscape changes almost daily, two of the most significant changes that have affected U.S. international commerce are the passage of the NAFTA almost a decade ago and the admission of China to the World Trade Organization in 2001.
The former, of course, opened up business opportunities for the U.S. with Mexico, while the latter generated broad appeal for doing business with China. The latter has also caused some concern for Mexico, which now sees China as a direct competitor for business, especially with the U.S.
Largely as a result of NAFTA, Mexico became the second leading trading partner with the U.S., with two-way cross-border trade exceeding $240 billion in 2002, according to John A. Adams, Jr., executive director of the Laredo Texas Development Foundation. In fact, by the late 1990s, the maquiladora ("twinplant") industry was the number one hard currency generator in Mexico, surpassing revenues generated by oil exports and tourism.
According to Adams, foreign plants in Mexico grew from 160 (with 20,000 workers) in 1970 to 3,200 (with 1.1 million workers) in 2002. By 2002, approximately 700 of the Fortune 1000 companies had a portion of their operations, production components or affiliates in Mexico.
Foreign businesses have found Mexico attractive for piece work and assembling and re-exporting component parts due to tariff laws and abundant, inexpensive labor. The U.S. in particular has found Mexico attractive for a third reason—close physical proximity that can meet ever-increasing just-in-time requirements.
In the last couple of years, though, there has been a fly in the ointment: As Mexico has become the land of choice for building plants and for outsourcing manufacturing operations, worker skills have increased. On one hand, the increased skills mean the maquiladoras can handle more complex manufacturing and assembly work. On the other hand, increased skills generally mean increased wages, and this is indeed what is happening. Wages are rising in Mexico's maquiladora region.
As such, while U.S. companies still find Mexico attractive for labor skills and physical proximity, they are beginning to find China more attractive for low-wage, low-skill jobs, especially in the areas of textiles, garments, footwear, some electronics and some auto components.
More and more companies are beginning to turn heads toward China, which went from essentially no workers in "foreign-owned"domestic manufacturing operations to over 18 million by 2002, according to Adams. "The very country that will host the 2008 Summer Olympics in Beijing has over 70 million people in abject poverty and another 100 million living on less than $1 a day," he says.
Due to interest in China, as well as a general downturn in the world economy as a whole, employment in the maquiladora sector has dropped nearly 18% in the last year, according to Adams, and the trend is expected to further decline in the next ten years. "What looms as more critical to the health of the Mexican economy is the increased dependence on the North American market," continues Adams. "The U. S. bought between 80 to 85% of all Mexican exports."
Conversely, by its own measure, China intends to double GDP by 2010 and its share of the world trade will triple to 10% by 2020, surpassing Japan at 5% and standing second only to the U.S. in the range of 12%.
In fact, growth has already been coming quickly. "Since 1998, Mexico has been the number two exporter of goods to the U.S., replacing Japan," reports John H. Christman, director, maquiladora industry econometric service, for Global Insight, Mexico City, Mexico. "As of January 2003, though, according to official U.S. Department of Commerce statistics, China replaced Mexico as the number two exporter of goods to the U.S," Mexico fell to third, and Japan is fourth. Adams believes when it comes to low-skill and low-paying jobs, Mexico will forfeit its competitive advantage in these jobs between 2010 and 2020.
Still, China poses some challenges to business relationships, according to Adams. These include state-owned companies that often operate inefficiently, an underdeveloped and overextended banking system, lack of reform related to property rights, corruption, and challenges with export subsidies.
So where should you be looking when you consider outsourced manufacturing? That depends on what is important to you and what products you need manufactured and assembled. Here are some advantages to Mexico and some to China.
Advantage Mexico:
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Delivery. "The fact that Mexico has the edge in terms of physical proximity is a very important point," emphasizes Adams. "It takes 21 to 23 days to ship from China. For some companies, this still qualifies as just-in-time. However, for other companies, turnaround needs to be a lot quicker. You can drop-ship out of Mexico in eight hours."
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Language. Another advantage of outsourcing in Mexico is the language capability. "Spanish-English is almost becoming standard across the board," notes Adams. "A lot of people in Mexico have attended tech schools in the U.S., so they are fluent in both languages."
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Control. You can own 100% of your business in Mexico. You can't do that in China. "For example, if you want to set up a distribution center to supply companies in Mexico, you can own that facility," explains Adams.
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Tariffs. "Over the next few years, Mexico will be working to make trade even more transparent in terms of regulations and nontariff barriers," states Adams.
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Worker Skills. Mexico also has the edge when it comes to job skills, training, and experience. "These include value-added jobs where the technology is in the next generation," notes Adams. "For the low-tech jobs, though, China holds the advantage."
Advantage China:
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Wages. As noted earlier, while wages in Mexico are increasing, they continue to be very inexpensive in China. "Chinese wage rates are a lot lower," emphasizes Christman. "In fact, if you take wages plus fringe benefits, the average Mexican wage for manufacturing is about four times higher than China."
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Labor Hours. China also has the advantage of working 24 hours a day, seven days a week, according to Christman. "The average workweek in a Mexican manufacturing plant is 44 hours, but some plants may work a second and third shift," he adds.
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Tax Incentives. China also offers tax incentives and tax holidays that Mexico does not offer, according to Christman.
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Infrastructure. "China has an excellent infrastructure in their manufacturing zones," continues Christman.
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Resources. Another very important consideration is water availability. "China has large supplies of water, but water availability is a significant problem throughout the northern part of Mexico," adds Christman.
Another important consideration in deciding where to outsource manufacturing is the type of products you want built. "Products that are small can usually be made less expensively in China, whether they are metal, plastic, or electronic," suggests Sal Nuñez, general manager of Cosmex International, Monterrey, Mexico, who has worked in a number of Latin American countries as well as China over the last thirty-plus years. Cosmex helps businesses locate local suppliers in Mexico and also incubates new U.S. companies setting up in Mexico. "Products that are more labor-intensive and large or bulky, such as construction materials, industrial equipment, and furniture should probably be outsourced to Mexico."
In sum, there is no easy answer when deciding whether to outsource to Mexico or China. It depends on what is important to your specific needs.
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