Published by Dialogue’s daily Latin America Advisor
Q: With the rising cost of wages in China, manufacturers are increasingly considering Mexico an attractive location to ‘reshore’ production, McClatchy reported Sept. 10. Is Mexico gaining a competitive edge over China in terms of manufacturing? Or will other low-wage countries come to replace both China and Mexico as manufacturing destinations? What are the challenges and benefits of moving production facilities to Mexico? Can Mexico leverage the low cost of wages into more sustainable growth?
A: Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior fellow at the Brookings Institution: “Low wages have never been the sole determining factor for companies to decide in which country to site manufacturing facilities; otherwise countries such as Haiti or Bangladesh would be the manufacturing capitals of the world. Many other factors, such as availability of skilled labor, infrastructure, certainty of rules and regulations and fairness of the justice system, all play a significant role. True, China’s wages are rising and no longer represent an overwhelming advantage for labor-intensive industries, but salaries in Mexico and other middle-income countries are also climbing. Studies show that the all-in cost for an average factory worker in a Chinese industrial zone is more or less equal to a Mexican working in a maquiladora near the U.S. border. Where Mexico does have a clear advantage over China-and this is what is driving companies to relocate facilities to our country-is in our geographic proximity to one of the largest consumer markets in the world, economic and political stability, ability to provide just-in-time sourcing and a relatively transparent regulatory framework in which to do business. One shouldn’t forget that Mexico is fundamentally a sophisticated manufacturing economy that is growing at a very acceptable rate when compared to other emerging market economies. While it is true that we depend enormously on the strength of the U.S. economy because of NAFTA and our huge bilateral trade and investment relationship, it is equally true that Mexico, together with Canada, will always be the first to benefit from an economic recovery in our neighbor. Tens of thousands of companies have taken advantage of Mexico’s benefits and foreign direct investment flows continue to show robustness even in the face of the insecurity and violence that affect parts of the country as a result of the fight against organized crime and drug trafficking.”
A: Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue: “China is indeed being priced out of labor-intensive manufacturing in certain cases. Rising wages and renminbi appreciation have made production in China’s famed Pearl River Delta much more costly in recent years. Firms once dependent on cheap, low-skilled Chinese labor are now seeking less expensive options in China’s poorer inland provinces, elsewhere in Asia (Vietnam and Bangladesh, for example) and in countries like Mexico, which saw an upsurge in manufacturing in 2011. Mexico does appear to have gained a competitive edge over China in manufacturing over the past two years, though specifically in that of the low-skilled, labor-intensive variety. In addition to low wages, well-trained workers and proximity to the United States make Mexico an attractive destination for global producers. Mexico is of growing interest to Chinese firms, even, who seek to benefit from NAFTA-related preferential tariffs. Despite Mexico’s labor-intensive manufacturing ‘comeback,’ China still maintains a competitive edge in investment-intensive, high-technology manufacturing. Furthermore, China’s decline in low-skilled manufacturing is largely attributable to national efforts to reduce dependence on low-value-added, export-oriented production. To this end, China has major plans to restructure and promote key industries and to further develop the country’s services sector. Sustainable growth in Mexico will require more than an upswing in labor-intensive production. As in China, it will require policies promoting intermediate and high-value manufacturing. It will also require efforts to further position the nation as a hub for regional trade, as well as progress on security, infrastructure, financing and corruption-related challenges. Mexico’s manufacturing sector has a skilled workforce and geography on its side, but additional progress will be largely policy-dependent.”
A: James R. Jones, member of the Advisor board and co-chair of Manatt Jones Global Strategies: “Mexico is clearly regaining its manufacturing base that was lost to China around the turn of this century. Then it was a question of wages as substantially lower Chinese wage rates versus Mexican labor costs attracted auto parts, electronics and other manufacturing away from Mexico. A combination of higher Chinese wages over the last decade, costs and timeliness of transportation and vastly improved quality of production in Mexico is quickly reversing that trend. A dozen years ago, China was distributing advertising pamphlets to U.S. automobile producers that substantially undercut the costs of auto parts produced in Mexico. But it became apparent that the quality and reliability of Mexican production were much better. While labor costs were comparable, transportation costs gave Mexican producers an edge. Today, automobile manufacturing is one of Mexico’s fastest growing sectors. Mexico’s manufacturing base is also growing in other sectors such as aviation and electronics. This trend will continue, especially if the Canadian, U.S. and Mexican governments find ways to improve regulatory efficiencies and border infrastructure.”
A: Felipe Canales, co-founder of BAS-Tech Group: “In 2002, Mexican wages were 237 percent higher than Chinese wages. Today, that gap has closed to just 14 percent. This represents a significant gain in Mexico’s competitive position as a manufacturing hub for global companies. Manufacturers focused on mid-volume customized products or the so called ‘3As’ (automotive, appliances and aerospace) have preferred to take their production to Mexico. Nissan for example, is building a $2 billion plant in Aguascalientes. But producers focused on high-volume products or the ‘3Cs’ (communications, computers and consumer) still prefer going to the East. Take Apple, which manufactures most of its products in Chinese factories, as an example. Global manufacturers are choosing China and Mexico over other lower-wage countries because both countries have key elements that others lack, such as economic stability, a robust infrastructure, high levels of productivity and advanced labor skills. As some economists claim though, one disadvantage of Mexico is the insecurity problem that may have dampened the country’s economic growth. Despite this problem, however, Mexico still seems to be an attractive destination as it received $20 billion in foreign investment in 2011. Nevertheless, 80 percent of Mexico’s exports still go to the United States so, as they say, when the U.S. gets a cold, Mexico gets pneumonia. Thus, given its strong competitive position reinforced by a narrower labor cost gap in relation to China, Mexico can achieve a more sustainable economic growth by diversifying its export markets. As China is the world’s fastest growing market, Mexico must see it more as an opportunity and less as a competitor.”