Rising Wages May Transform Manufacturing Geography

With wages in India expected to quadruple by 2030, many U.S. firms that have relied on offshoring manufacturing operations overseas in the past to maximize profit may look closer to home in manufacturing clusters in Mexico, given the proximity of supply chains, according to data from a PricewaterhouseCoopers study cited by Business Standard. 

"The large wage advantages enjoyed today by many emerging economies will shrink as their productivity levels catch up with those in advanced economies and their real exchange rates rise as a consequence," said PwC Chief Economist John Hawksworth. With emerging markets such as China, the Philippines and India experiencing wage gains, Mexico will become a more viable consumer market and become a prime target for manufacturing operations. 

However, according to the study, wages in the U.S. are 7.5 times greater than in Mexico. By 2030, that gap would shrink to less than four times greater, with Chinese wages rising to less than half of Spain's. Given this trend, many U.S. companies may begin to move closer to home, if not reshoring completely.

"Companies could begin re-shoring their manufacturing or service operations, as some U.S. companies have already started to do, or else move them to cheaper locations," the study added.

For example, companies that move their manufacturing operations to Mexico would see greater savings due to a greater degree of supply chains, and therefore, more control over product quality and raw material prices.

Mexico Trade Relations Improving

The U.S. Secretary of Commerce Penny Pritzker recently encouraged American businesses to take advantage of the opportunities in Mexico, The Los Angeles Times reported. Safety concerns due to drug cartel violence in the past has prevented some U.S. businesses from moving operations south, despite many businesses already taking the plunge to avoid rising labor costs in China. In numerous parts of Mexico, there are industry clusters that provide added safety and confidence to business operations and production.

Pritzker pointed out the aggressive actions taken by the Mexican government to crackdown on drugs and implement reforms that make the country more attractive for investment. She recently praised the Mexican President Enrique Peña Nieto for these efforts.

'He's really gotten great support in his country for education reform and other things," Pritzker said. "It's going to create continued opportunities for the two countries to work together, both diplomatically and economically."