How Mexico outperformed China in auto manufacturing

Manufacturing automobiles is a global endeavor, and having the right production partners is imperative. Years ago, the stereotypical American consumer would assume that offshore manufacturing work went to China. Today, however, buoyed on the strength of globally competitive wages and solid trade agreements, Mexico is gaining ground as a manufacturing powerhouse.

Wage increases make Mexico more appealing than China
We can look to the automotive industry as a barometer for Mexico's growing strength. The Financial Times reports that Mexico's share of the automotive market surpassed China's for the first time in 2013. In the early 2000s, suppressed worker wages and a national appetite to dominate the global manufacturing market had China firmly ensconced as the leading player in the worldwide auto manufacturing market. In 2005, China claimed just over 17 percent of the overall market share. Mexico's share, on the other hand, was less than 2 percent.

But times have changed. Sustained and double-digit wage growth in China has chipped away at the country's seemingly unassailable market share. China's dominance may be slipping, but our trade partners closer to home are well equipped to pick up the mantle.

There is value in partnering with our neighbors
Labor costs are a significant cost driver in any industry. The same is true for auto workers, and laborers in Mexican auto plants are a better value than their Chinese counterparts. Since 2009, FT reports, the mean growth in China's overall automotive annual salary costs is a staggering 16.8 percent. This increase eclipses nearby competitors like Thailand (9.6 percent), and dwarfs Mexico's 4.9 percent mean salary cost growth. Mexico's nearshore labor cost advantage is undoubtedly a significant part of the calculus for automakers making labor market decisions. However, Mexico has other economic advantages over China, as well.

Mexico has many advantages over China as a place to offshore manufacturing operations.

The power of free trade agreements should not be overlooked. Mexico maintains agreements with 45 countries. China, FT reports, has only 12 agreements in place. What this means for manufactures is that Chinese imports - in addition to costly shipping and logistical burdens - must struggle over steep financial hurdles caused by tariffs. There was a time when American manufactures appeared willing to bear the additional burden of tariffs to gain access to the labor markets in China. Today, it seems that the increasingly prohibitive wages for Chinese workers is driving manufacturers and the automotive industry as a whole to look for profitable solutions closer to home.

Our partnership with Mexico provides more than a simple, one-way advantage, however. According to a 2014 article in The New York Times, 40 percent of the parts used to manufacture products exported from Mexico were originally produced here in the U.S. Compare that to China at 4 percent, and it starts to get easy to recognize the power of established trade agreements with nearshore neighbors. The Free Trade Agreement supports commerce flowing both directions, and the Times reports American manufactures are more excited about teaming with Mexico than at any time since the 1990s.

Bringing it home
Global economics don't happen in a vacuum. There are reasons why China's wage rates are increasing so dramatically. Similarly, automakers interested in North and South American markets don't simply look to relative labor costs when choosing manufacturing partners. Still, as Chinese workers earn more in wages, they are increasingly able to become consumers of their own automotive industry. While that may be a fine thing for the internal operation of Chinese markets, it leaves American producers looking for partners to supply domestic demand.

The numbers show that Mexico has stepped up the global challenge, and The Offshore Group is here to connect American automakers to that valuable, nearshore workforce.

The Offshore Group: You manufacture ... We do the rest