Mexico vs. China Manufacturing: How the Two Countries Compare
China is one of the economic hubs of the world with many countries outsourcing manufacturing and other operations to China for a variety of reasons. However, Mexico manufacturing is growing at rates not seen since NAFTA was introduced some 20 years ago as manufacturers from around the world take advantage of high quality, lower-cost labor in North America. Let’s take a look at how Mexico and China manufacturing differs.
Manufacturing in Mexico vs. China
China’s manufacturers serve a wide range of industries with goods including iron, steel, aluminum, toys, chemicals, aircraft, ships, and more. Nearly 80% of all air conditioners in the world are manufactured in China. Chinese businesses are also responsible for manufacturing over 45 times as many personal computers per person as the rest of the world’s manufacturers combined.
Mexico’s manufacturing has been just as broad and includes electronic, aeronautic, and, most prominently, automotive industries. As a major auto manufacturer, Mexico is home to 89 of the world’s top 100 auto part makers. Most of these companies are concentrated in five Mexican states. Automotive exports from Mexico increased by 152 percent between 2002 and 2012, while electronic exports increased 73 percent in that same time. Regionally, steel, electronics, and other high-end exports are headquartered in northern Mexico, while clothing and textiles continue to expand in southern Mexico.
Mexico’s natural gas prices are tied to those of the United States, which are relatively low in the global market thanks to a greater supply propelled by new gas and oil discoveries in the U.S. By comparison, China has to pay 50 to 170 percent more for natural gas. At worst, natural gas prices can cost up to three times more in China.
Implemented in 1994, the North American Free Trade Agreement allows easy access for Mexican goods throughout the United States and Canada. NAFTA essentially changed Mexico from a closed economy to an export-oriented industrial economy. This also allowed for greater global expansion. Mexico has free-trade agreements with 44 countries, while China has agreements with 18.
Most companies will employ contract or sub-contract manufacturing with Mexico. This allows companies in the United States to take part in the lower costs but high quality of Mexican labor without fully committing to a maquiladora.
Other companies, usually those in late stage growth, will take part in shelter manufacturing. These companies generally have an established manufacturing base but want to relocate some or all of their operations to facilities in Mexico.
Productivity in Mexico and China
Mexico’s manufacturing industry offers superior worker productivity. In 2012, the unit labor costs (which is equivalent to the wages adjusted for productivity) in China were equal to those in Mexico. By 2015, the manufacturing wages were 30 percent lower than they were in China, meaning greater efficiency at a lower price.
Shipping Costs to China are Higher
Due to both distance and fluctuating oil prices, shipping costs are exponentially higher when manufacturing in China. In 2012, shipping a 40-foot container from China cost close to $7,500. The same container cost about $2,500 when shipping from Mexico.
Furthermore, thanks to NAFTA, goods produced in Mexico can reach their U.S. and Canadian destinations quickly and efficiently. Along the border cities, such as Tijuana and Juarez, companies can offer 24- to 48-hour lead times on certain types of manufactured goods, such as consumer products. Shipping a product from China to the U.S. could take 3 weeks longer thanks to distance, customs, and importation.
A long history of manufacturing in Mexico that spans over 60 years has led to a diverse, skilled, well-trained workforce that crosses over multiple generations and industries. Much of the working base comprises skilled and semi-skilled direct labor. This means that they have several years of experience and are at least partly bilingual.
By comparison, China’s labor force is on decline thanks to its strict family planning policies. Workers are unskilled and often have to deal with unfit working conditions, and while it has generally been limited, child labor is still a problem in sweatshops and factories manufacturing electronics.
Overall Manufacturing Costs in Mexico vs. China
When looking at China vs. Mexico manufacturing over the manufacturing industry but labor rates in Mexico are now, in many cases, lower than China. In constant dollar terms, hourly manufacturing wages are lower than those in China. Mexico also offers much steadier wages, making it easier for companies to forecast manufacturing costs. In Mexico, the fully burdened direct laborer wage rate is about $2.50 to $3.00 per hour. In China, it’s $2.00 to $2.50 an hour.
Foreign exchange rates also pose a problem in China. Data shows that between 2003 and 2013, the Yuan became 26 percent more expensive than the U.S. dollar. The Peso, on the other hand, became 27 percent cheaper.
Disadvantages of Outsourcing to China
Manufacturing in China comes with a wide range of other problems including:
- Quality issues: Quality problems often end up as write offs as the logistics of fixing, reworking, or returning items is often not worth the trouble of dealing with distance, time, and communication barriers.
- Intellectual property: Counterfeit products are a common problem in Asia, where courts may be slower to enforce or recognize property rights.
- Poor conditions: Despite improvements, some Chinese manufacturers still have poor health and safety standards, which can lead to harmful chemicals (like lead paint) to be used on products entering the United States. Employee safety practices are generally underdeveloped.
- Visits: Visiting manufacturers can consume a great deal of time and expense. Acquiring visas for these visits can also cause delays.
- Strict monetary policy: China’s monetary policy prohibits the Yuan from appreciating value in world currency markets. This makes it susceptible to spikes, unsteady wage growth, and inflation.
The Advantages of Near Sourcing: Mexico vs. China
Sourcing in Mexico
Sourcing in Mexico is cheaper than sourcing in China. One of the most significant benefits of manufacturing in Mexico vs. China, especially for companies headquartered in the United States or Canada, is the reduced travel time to their Mexican facilities. In many cases, company executives and their employees can be at their Mexico manufacturing plant within hours of leaving their home, something China cannot offer. Reducing corporate travel has a direct effect on expenses, while also helping to boost morale.
Companies Manufacturing in Mexico
Many of the world’s leading companies from a wide range of industries have relocated at least some their manufacturing operations to Mexico. These companies include:
- General Motors
- Coca Cola
For more information on Mexico vs. China manufacturing or to learn how we can help your operations, contact us or give us a call at (877) 742-9608.