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Shortening Supply Chains: Mexico's Gain?

The 1990s saw a dramatic shift in manufacturing from sites in North America to sites in developing China. At that time, Chinese labor costs were minuscule, and the economy provided seemingly limitless workers. But that was then. Now, we see a shift in the reverse direction to companies that are moving manufacturing from China to Mexico. Chinese and other Asian companies seeking access to foreign markets are moving manufacturing operations to Mexico or expanding existing production facilities there in order to shorten their supply chains and be more regional.



In recent years Chinese exports have faced increasing obstacles. Tariffs on Chinese goods and an unfavourable political climate have been complicating exports to the USA. In response to this, Mexico has become an increasingly attractive place for Chinese industry to establish a foothold on the continent:  China’s Hisense Co. announced they were doubling their Mexican investment earlier this year. Foxconn (which currently has five factories in Mexico mainly making televisions and servers) and Pegatron are among companies eyeing new factories as they re-examine global supply chains.



As the value of the Chinese yuan has been rising, the cost of overseas shipping has surged, and increased competition among Chinese factories has resulted in labor shortages and longer lead times. Due to both distance and fluctuating oil prices, shipping costs are exponentially higher when manufacturing in China. In 2018, shipping a 53-foot container from China to Los Angeles cost close to $5,000. The same container from the border of Mexico (Tijuana) to Los Angeles costs about $600. Thanks to the North American Free Trade Agreement (NAFTA), goods imported from Mexico can enter duty free.



Mexico's wages are 40 percent higher than China's, at about $3.50 an hour. As a result, overall production costs are comparable in the countries, once you factor in Mexico's lower transport and customs cost. But Chinese factory wages are climbing 14 percent annually. Some analysts, believe that this strong trend will actually position Mexican wages to be 30% less than Chinese wages just two years from now.



Moving manufacturing from China to Mexico also means less travel expenses for executives, resulting in increased and more effective oversight into operations in similar time zones and, thus, more quality in production and increased productivity. While Mexico still relies on the US and China for inputs, its supply chain is well established. Given the high concentration of manufacturing operations in several industries, businesses can make use of established infrastructure and supply chain networks.



By bringing the goods of Chinese firms closer to the customer, Chinese firms can increase the demand for their goods. Industries such as automotive and electronics  require fast deliveries. Also delivered is the opportunity to diversify their products into not just the North American market, but also the markets of Latin America..



The two countries have recognized their mutual goals and complementing assets over the past few years, and taken noticeable steps to form a partnership. Mexico also has a strong reputation for protecting intellectual property, a valuable advantage over China where counterfeit products and IP protection remain a concern. Mexican business sees the current Covid crisis and US-China Trade War as allowing Mexico to attract more investment, lure companies and create jobs from both Chinese Companies looking to take advantage of Mexico’s location and the new North American trade deal (USMCA) and US businesses looking to relocate remote operations from China. Conversely the new government of President Andres Manuel Lopez Obrador is slashing investment in the kinds of infrastructure that manufacturers need: the proposed budget for new roads is down 45 percent, rails and ports don’t fare well and plans have been cancelled for a new world-class airport outside of Mexico City. The government’s new energy policies don’t ensure Mexico will have enough reliable and affordable electricity to support a manufacturing surge in the future. Mexico’s retreat right at the moment of a global manufacturing shakeup means it might just be losing an opportunity for significant gain in the years to come.



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