After China: Is Near-shoring to Mexico a Better Bet for My Business?
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Transcript of After China: Is Near-shoring to Mexico a Better Bet for My Business?
Near-Shoring to Mexico
After China: Is Near-Shoring To Mexico A Better Bet For My Business
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After China: Is Near-shoring to Mexico a Better Bet for My Business?
1
The initial wave of outsourcing to
China represented a ‘perfect storm’
of conditions – cheap energy, labor,
trade liberalization, uncertainty in
Mexico and reform efforts in China.
In recent years, Morris sees the
‘perfect storm’ going the other way.
When the United States granted China Permanent ‘Most
Favored Nation’ (MFN) status in 2000 and China
acceded to the World Trade Organization (WTO) the
following year, American firms increased investments
in the mainland. China offered US firms low wages,
stable governance, improved infrastructure and
capacity to produce on a global scale.1 The production
shift to mainland China has resulted in lower consumer
prices especially for some manufactured goods like
electronics and apparel and higher corporate profits in
the short term. More than a decade later, Chinese
manufacturing for North American and global
consumption poses serious challenges for US-based
firms. Global developments including rising Chinese
labor costs, design to production to consumption
feedback loops, and energy costs force US firms to
reconsider production location in China and Asia. A
growing trend toward ‘near-shoring’ production in
Mexico and elsewhere in Latin America offers
advantages for firms competing in the North and Latin
American markets.
What is ‘Near-shoring’?
Near-shoring is the sourcing of labor or services in a
location in greater proximity to design, development or
final consumption of the final product or service to
enhance control, quality, and timeliness of delivery.
Other variants include locating services or production
in places of cultural or legal affinity to enhance
efficiency of service or product delivery. For practical
purpose, an apparel-maker based in the US selling to
Europe and Latin America primarily re-locating a
manufacturing plant from Guangzhou, China to
1 Martin Neil Bailey, “Adjusting to China: A Challenge to the
U.S. Manufacturing Sector,” Brookings Institution, January 2011, Policy Brief #179; http://www.brookings.edu/research/papers/2011/01/china-challenge-baily
Monterrey, Mexico would be an example of ‘near-
shoring.’2
A Perfect Storm in Reverse?
In 2001, Chinese manufacturing wages averaged $.60 an
hour, far below that of Latin American production costs
and a tiny fraction of US costs.3 At the same time,
energy costs were low and stable. Crude oil, annualized
and inflation adjusted, averaged $30 per barrel in the 5
years before and after 2000.4 Combined energy and
labor costs made a move to China sensible for US firms
after the trade liberalization process was finalized.
The decision to move production to Asia, and China in
particular, was built on other assumptions as well.
Brookings Institution scholar Andres Rozental notes,
“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.”5 A decade ago, China was making substantial
progress on all of those indices, so coupled with price
2 The author recognizes that the term of art ‘near-shoring’
varies in meaning depending on context. For a discussion for common variations see, Partners Market “Will the real near-shoring please stand-up?” April 27, 2012; http://www.partnersmarket.com/will-the-real-nearshoring-please-stand-up/ 3 Crossborder Group, “Mexico vs. China, a Perfect Storm 2,”
Presentation to Hong Kong Association of Southern California, August 2012, http://www.slideshare.net/CrossborderGroup/2012-mexico-andchinaperfectstormhongkongassocsocalkennmorrisexcerpt 4 “Historical Oil Price Table,
http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp; access February 10, 2013 5 Andres Rozental, “Are Mexican Factories Gaining an Upper
Hand Against China's?” Brookings Institution, September 18, 2012;
For US firms, near-shoring means
moving facilities closer to the US
mainland to improve communication
and control of production without
sacrificing cost efficiencies.
After China: Is Near-shoring to Mexico a Better Bet for My Business?
2
competiveness – offshoring production there garnered
huge advantages.
Most of the advantages accrued by outsourcing to China
have been eroded over the past decade. The
Crossborder Group’s Kenn Morris argues that the initial
wave of outsourcing to China represented a ‘perfect
storm’ of conditions – cheap energy, labor, trade
liberalization, uncertainty in Mexico and reform efforts
in China. In recent years, Morris sees the ‘perfect
storm’ going the other way.6
China’s Disappearing Labor Price Advantage
According to the Boston Consulting Group, China’s
primary advantage over the rest of the world – low
wages – will be erased by 2015 when the hourly
manufacturing wage will rise to $6.7 At that price
point, manufacturing something in China for the US
market is no longer cheaper than in Mexico where
wages have been flat and are now below China’s.8
Average wage rises in China are partly to blame on the
increased valuation of the Chinese currency, likely to
rise even further in coming years, and another
unexpected concern – a growing labor shortage.
According to the Wall Street Journal, “The pool of
Chinese workers is getting shallower. China's one-child
policy and cultural preference for boys have led to a
shrinking population of young people, particularly the
women who work the floors of the apparel and
electronics firms.”9 That shortage has driven up labor
costs in China, without the necessary increases in
6 Crossborder Group, “Mexico vs. China, a Perfect Storm 2,”
Presentation to Hong Kong Association of Southern California, August 2012, http://www.slideshare.net/CrossborderGroup/2012-mexico-andchinaperfectstormhongkongassocsocalkennmorrisexcerpt 7 http://www.brookings.edu/research/opinions/2012/09/18-
mexico-china-rozental 8 Tim Johnson, “As China’s wages climb, Mexico stands to win
new manufacturing business,” McClatchy News, September 16, 2012; http://www.mcclatchydc.com/2012/09/10/167930/as-chinas-wages-climb-mexico-stands.html#storylink=cpy 9 Justin Lahart and Tom Orlik,” China's Export Pain May Be
Mexico's Gain”, The Wall Street Journal, February 6, 2012, http://online.wsj.com/article/SB10001424052970204662204577201361904633428.html.
productivity to make it worth the price. By contrast,
Mexico’s average wage is only $3.50 an hour, a dollar
cheaper before factoring in the logistics challenges of
managing a supply chain half a world away.
Calculating the Incumbent Costs of Production
Labor aside, the costs of sourcing a good abroad can
vary dramatically from location to location. Energy is
one of the largest costs for those sourcing materials
abroad, both energy for production and transportation.
World oil prices have proven to be extremely volatile in
the past decade, frequently exceeding $100 per barrel
– over three times the oil price average in 2000.10 As a
result, the cost of ocean freight from China to US ports
has increased significantly.11 Furthermore, electricity
rates are actually 4 cents per kilowatt hour higher in
China than Mexico.12 At the same time, Chinese
10
Historical Oil Price Table, http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp; access February 10, 2013 11
Crossborder Group, “Mexico vs. China, a Perfect Storm 2,” Presentation to Hong Kong Association of Southern California, August 2012, http://www.slideshare.net/CrossborderGroup/2012-mexico-andchinaperfectstormhongkongassocsocalkennmorrisexcerpt 12
Frank Lange, “Guest Commentary: Mexico – Manufacturing Companies Move Toward Near-Sourcing,” Logistics Viewpoint, April 19, 2012, http://logisticsviewpoints.com/2012/04/19/guest-commentary-mexico-manufacturing-companies-move-toward-near-sourcing/
China’s primary advantage over the
rest of the world – low wages – will be
erased by 2015 when the hourly
manufacturing wage will rise to $6. At
that price point, manufacturing
something in China for the US market
is no longer cheaper than in Mexico
where wages have been flat and are
now below China’s.
After China: Is Near-shoring to Mexico a Better Bet for My Business?
3
government incentives to invest have diminished as
property costs have increased in the coastal cities.13
Other related costs of production including taxes,
tariffs and regulatory compliance must be factored into
the ‘landed costs’ of a good to compare the efficiency
of locating in China. For logistics expert Frank Lange,
when these are fully accounted for, near-shoring to
Mexico proves cheaper.14 A 2011 study by AlixPartners
consultancy confirmed Mr. Lange’s hunch – the full
landed cost of a Chinese production rose from 2005 to
2010 to 87% of US costs, while Mexican costs actually
fell to 75% of US costs.15
Intangible Advantages – Communication,
Convenience, and Customers
Mexico’s strongest advantage for company’s
considering a move to near-shore production is
proximity both to corporate headquarters and
consumer market. Proximity reduces the total travel
time for goods Mexico to US to a fraction of the total
time between Chinese origins and US destinations.
Ocean freight from Altamira, Mexico to the port of
Miami takes 6 days while a similar shipment from China
could take as long as a month to arrive. Firms have to
factor in the value of lost time as well as the higher
incumbent transportation costs from China.
13
Yajun Zhang, “China Begins to Lose Edge as World's Factory Floor” The Wall Street Journal, January 16, 2013, 14
Frank Lange, “Guest Commentary: Mexico – Manufacturing Companies Move Toward Near-Sourcing,” Logistics Viewpoint, April 19, 2012, http://logisticsviewpoints.com/2012/04/19/guest-commentary-mexico-manufacturing-companies-move-toward-near-sourcing/ 15
Crossborder Group, “Mexico vs. China, a Perfect Storm 2,” Presentation to Hong Kong Association of Southern California, August 2012, http://www.slideshare.net/CrossborderGroup/2012-mexico-andchinaperfectstormhongkongassocsocalkennmorrisexcerpt
On a practical level, Mexico lines up with US time
zones, so business days are concurrent and
communication can happen in real-time. Distance
makes overseeing production in China is difficult. As
Robert Moser, the president of a housewares firm told
McClatchy News in September 2012, “You’ve got to get
a visa to China, and that takes time. It’s a 16-hour
flight, hours to the factory. It’s days at the very least
to tackle some of these issues.” 16 Communication is
also easier, with much higher rates of English fluency in
Mexico and Spanish in the US than Chinese-English
fluency.
This linguistic and cultural affinity intersects with the
strong and stable legal and regulatory system present
in Mexico. The challenges of doing business in Mexico
are known to many US firms. In contrast, unpredictable
Chinese regulatory and tax regimes have proven more
difficult to navigate– adding substantial unanticipated
costs.17 For other firms, intellectual property concerns
make doing business Mexico more appealing. According
to Forrester Research, Mexico guards intellectual
property rights much more strongly than China where
theft of patents and technology is rampant.18
The convenience of and ease of communication with
Mexico allows US firms to be more customer facing,
with shorter and more easily managed supply chains.
16
Tim Johnson, “As China’s wages climb, Mexico stands to win new manufacturing business,” McClatchy News, September 16, 2012; http://www.mcclatchydc.com/2012/09/10/167930/as-chinas-wages-climb-mexico-stands.html#storylink=cpy 17
Douglad Donahue, “Why Manufacturers Are Choosing Mexico Over - and in Addition to – China,” Area Development, August 2012, http://www.areadevelopment.com/BusinessGlobalization/August2012/why-manufacturers-are-nearshoring-to-Mexico-292711.shtml?Page=2 18
Sam Cinquegrani, “Nearshoring: A Smart Alternative to Offshore,” IT Today, 2008; http://www.ittoday.info/Articles/nearshoring.htm
The full landed cost of a Chinese
production rose from 2005 to 2010 to
87% of US costs, while Mexican costs
actually fell to 75% of US costs.
Ocean freight from Altamira,
Mexico to the port of Miami takes
6 days while a similar shipment
from China could take as long as a
month to arrive.
After China: Is Near-shoring to Mexico a Better Bet for My Business?
4
Simply put, with production in proximity to US
headquarters and consumers (North and Latin
America), firms can adapt to circumstances quickly.
With volatile energy costs, major natural disasters like
the Japanese Tsunami, and uncertain demand, shorter
supply chains allow firms to carry less inventory and
make fewer predictions of the macroeconomic future.19
In addition to the practical benefit of lower inventory
and storage costs, the shorter supply chains linked to
Mexico offer firms flexibility to meet customer needs
as they arise.
A Latin American Hub
For US firms, Latin America remains a large and
growing market. In 2011, Latin American traded $800
billion with the US – three times what it did with China.
Mexico has consistently been at the center of this
north-south trade relationship.20 Anchored by NAFTA,
Mexico has embraced free trade with the region and is
leading an effort to expand it with the Pacific Alliance
bloc of Mexico, Peru, Colombia, and Chile.21 As a result
of this integration with North America and economic
ties to the south, Mexico is the largest importer and
exporter in Latin America.
To grow Mexico’s competiveness, then-President Felipe
Calderon announced a huge investment of public and
private dollars in an infrastructure program of $37
billion to improve ports, highways, railways, roads and
airports. His successor President Peña Nieto plans to
triple Calderon’s funding for infrastructure to improve
logistics for international trade. The National
Infrastructure Plan (NIP) includes 1500 kilometers of
railways linked to Mexico’s ports. The NIP includes
19
Lisa Harrington, “Near-Shoring Latin America: A Closer Look,” Inbound Logistics, March 2012; http://www.inboundlogistics.com/cms/article/nearshoring-latin-america-a-closer-look/ 20
Shannon O’Neil, “U.S. is still Latin America’s biggest trading partner,” November 16, 2012, Voxxi; http://www.voxxi.com/us-latin-americas-biggest-trading-partner/#ixzz2KZqAGHsk 21
Randall Woods and John Quigley, “Latin America Commits to Open Trade After Protectionist Year,” Bloomberg News, January 28, 2013, http://www.bloomberg.com/news/2013-01-28/latin-america-commits-to-open-trade-after-year-of-protectionism.html
continued modernization of Pacific and Atlantic ports,
the expansion of the Port of Veracruz and new port
facilities at Lázaro Cárdenas, Manzanillo, Altamira, Dos
Bocas and Tampico.22
Considering Mexico
In deciding to relocate production, the rush to China
proved hasty for many US firms according Tom Page
director of customer solutions, international regions for
UPS, "Most companies decided to move production
using one-dimensional reasoning, based on labor costs,
which represented 70 to 80 percent of the criteria
considered."23 Over the past decade, that singularly
advantage has been largely eliminated although the
many disadvantages of Chinese production linger.
There is good reason to think the trend toward near-
shoring in Mexico may have more staying power since
Mexico’s wages have remained stable, there are
growing markets both to the north and to the south of
Mexico for its goods, and improved infrastructure will
keep Mexico competitive. Furthermore, Mexico’s
primary advantage – proximity – is unlikely to change in
the coming decade.
22
US Department of Commerce, “How to Successfully Navigate the Public Procurement Process in Mexico” Export.gov; December 2012; http://export.gov/industry/architecture/initiativesandupcomingevents/mexicoinfrastructure054717.asp 23
Lisa Harrington, “Near-Shoring Latin America: A Closer Look,” Inbound Logistics, March 2012; http://www.inboundlogistics.com/cms/article/nearshoring-latin-america-a-closer-look/
In 2011, Latin American traded $800
billion with the US – three times what
it did with China. Mexico is the
largest importer and exporter in Latin
America.