Lower production costs drive manufacturers to Mexico

July 23, 2013

With Mexico holding significant labor and energy cost advantages over other countries, manufacturers have increasingly shifted or expanded the production process to the country. Over a decade ago, China was more affordable for manufacturers than Mexico, but that is changing. According to recent research, many companies are retreating from overseas and expanding to Mexico to benefit from the country's close proximity to the U.S. and low costs for skilled labor. The trend is only set to continue as wages drop in Mexico and the U.S. raises its demands for manufactured goods. As more organizations become aware of the advantages of the country's offshore manufacturing market, offshoring to Mexico is projected to grow at an accelerated rate.

U.S. sees greater profits in Mexico
According to a study by Boston Consulting Group, higher productivity levels in Mexico makes the country more viable in terms of labor costs than offshoring manufacturing to China or India. In fact, last year, employee wages were the same in Mexico as in China, but Mexico will be 29 percent less expensive by 2015. BCG projected production costs in Mexico will also be 20 to 30 percent less than in Japan, Germany, Italy and Belgium.

Harold Sirkin, a senior partner at BCG, said offshoring manufacturing to Mexico can result in stronger profit growth than overseas countries.

"Mexico is in a strong position to be a significant winner from shifts in the global economy," Sirkin said. "That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It's also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China."

Close proximity results in lower costs
Due to the shorter supply chain, offshoring the manufacturing process to Mexico increases revenue for U.S companies. According to the Arizona Daily Star, when a company expands its labor force into Mexico, the manufacturer earns 40 cents for every dollar compared to China, where the organization earns only 4 cents. In fact, electricity costs in Mexico are 4 percent lower than China and industrial natural gas is 63 percent lower. With rising fuel costs and the need to cut labor spending, Mexico is set to compete with other offshoring options. China is no longer the go-to solution because manufacturers are understanding the advantages of entering into the Mexican economic market, according to the Arizona Daily Star.

For industries with strict logistical requirements and highly skilled manufacturing workers, Mexico offers significant cost advantages. BCG projected numerous industries, such as electronics and machinery, will increase their presence in Mexico between 7 and 19 percent by 2017, resulting in nearly 900,000 new jobs. 

Offshoring the manufacturing process to Mexico can be an effective solution for corporations to reach budgetary goals. With the automobile industry, as well as others, staying competitive and companies continue to search for ways to reduce costs, offshoring the manufacturing process to Mexico can be a successful method in cutting budgets. In fact, offshoring allows manufacturers to still meet consumer demands. 



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