Is the Bloom Coming Off China’s Manufacturing Rose?

Manufacturing in Mexico was seen at the turn of the millennium, and prior that, as the hands down preferential location for U.S. and Canadian manufacturers to set up shop to reduce their costs and to enhance their price competitiveness in North American markets.

Manufacturing in Mexico, under the Maquiladora program, enabled companies to access resources on both sides of the international boundary to exploit comparative economic advantages that facilitated their successful participation in international markets.  In about 2002, however, Mexico’s exclusive position in this regard began to change.  China began to assert itself as the global leader in low cost manufacturing.

From the period 2002 – 2007, manufacturing in Mexico underwent a significant transformation.  Whereas prior to these years, Mexico was seen as the preferred venue for all types of low cost manufacturing, the appearance of China on the international manufacturing scene provoked a significant change.  During the years under consideration, many manufacturers in Mexico producing low-tech and high-volume products shifted their production to China. In 2002, China’s manufacturing wage was a third of that found in Mexico.    As a result, Mexico became a location that was preferred more and more by companies whose production was increasingly characterized as being high-mix, low-volume.  Manufacturing in Mexico was also the preferred choice by companies that required quick turnaround times, were subject to impact order demands, incorporated a high degree of engineering into their products and built items that were heavy in intellectual property content.

With the advent of higher fuel prices for manufacturers over the last several years, and as a result of some of the natural consequences of China’s economic growth, many companies that ceased manufacturing in Mexico have decided to rethink their strategies and, in some cases, have returned to North America.

These days the bloom is somewhat off China’s manufacturing rose for a variety of reasons:

• Higher fuel prices combined with a rising cost of labor in China has made the “China Price” not as attractive as it used to be Vis a Vis Mexico.
• Companies are less willing to absorb “floating inventory” costs.  (Goods take 45 days on average to reach the U.S.  from China), as well as other hidden costs that accompany a far flung supply chain.
• China’s government has lowered export tax rebates on many items.
• The Yuan has appreciated 11% against the $US dollar since 2005, and wages have risen 7-8% per annum during the same period.
• Due to the large influx of investment, skilled labor has been more difficult to find in China’s main coastal industrial areas.

Today manufacturing in Mexico is once again taking its place as the preferred low cost choice of North American manufacturers supplying the North American market.  Although some low-mix, high-volume products are still unequivocally more advantageously produced in China (these include toys, apparel and solar modules, for instance), “all-in” manufacturing costs in Mexico are 68% of those in the United States.  This compares to 73% in India, near 86% in China and 91% in Brazil.

Manufacturing in Mexico is the logical low-cost choice for companies seeking to increase their competitiveness in North American markets.   In the last few years some of the bloom has come off China’s manufacturing rose.