Part I – Mexico to the fore
The financial meltdown in 2008 and the resulting recession in 2009 have moved the pieces of the world manufacturing chess board when it comes down to producing for the US market.
For years almost everything in the US looked as if it was "Made in China". Footwear, toys, apparel, electrical products and so on. China had become the "workshop of the world" due to its huge manufacturing base, competitive currency exchange rate, low labor costs and a work ethic second to none as the developed consumer nations continued their buying spree of Chine manufactured products.Flag of Mexico
However, latest research by corporate consultant Alix Partners shows that in terms of manufacturing costs for the US market China has been leapfrogged by other countries. One is India. And the other? Well, it should be no surprise that it is the US southern neighbor, Mexico.
Even the Chinese are active in Mexico
In fact, Mexico’s cost advantages and has become so cheap that even Chinese companies are moving there to capitalize on the trade advantages that come from geographic proximity in a sort of "reverse globalization".
Chinese owned manufacturing plants in Mexico include cell phones, televisions, textiles and automobile manufacturers. Auto companies include Zhongxing Automobile Co., First Automotive Works(in partnership with Mexican retail/media heavyweight Grupo Salinas), Geely Automobile Holdings and ChangAn Automobile Group Co. Ltd. (the Chinese partner of Ford Motor Co. and Suzuki Motor Corp.), all announced plans to place automaking factoriesin Mexico.NAFTA export corridor from Mexico to Canada Mexico’s allure as a production site that can serve the U.S. market is not limited to China-based companies. U.S. companies continue to realize that Mexico is a better option than China after the mass exodus there starting in 1994 with the signing of the North American Free Trade Agreement(NAFTA).
China - More wealth = Higher costs
Since 2005 China’s status as a wealth producing nation has grown. Thanks to higher wages, the population can purchase more consumer goods. It is impossible to keep manufacturing costs down if strict environmental regulations are imposed and finally a wealthier population emerges. Higher wages = higher manufacturing costs no matter how you slice and dice it.
The oil price binge of 2008 when a barrel of crude touched US$147 also undermined China’s competitiveness. Suddenly, the labor cost advantage China enjoyed wasn’t enough to overcome the costs of shipping finished goods thousands of miles from Asia to North America. The oil price has come down but according to the research carried out by Alix Partners, China’s price advantage even over the US is only 6% compared to 22% in 2005. The factors behind this changing dynamic are:
· 20% appreciation of the Chinese yuan
· Freight cost increases
· Labor cost inflation on China
Cost Ranking moved significantly from 2005 to 2008 with Mexico overtaking India and China
2005 Cost Ranking
End of 2008 Ranking