China has long been the offshoring destination of US companies seeking to reduce costs. However, as China’s labor costs and freight costs rise, many are coming back home to North America in search of better alternatives. Many manufacturers leaving China are finding Mexico to be that better alternative.
Motivations for Manufacturers Leaving China
There are many motivating factors driving US manufacturers to choose Mexico over China. A few such motivations include:
- Currency Concerns: Chinese currency fluctuations have been a growing concern in determining profit margins for many US companies. Conversely, Mexico’s peso has remained relatively stable.
- Freight Costs: In recent years, the price of oil has shifted dramatically. Oil prices are now typically over $50 a barrel, and shipping freight back and forth across the Pacific is no longer an economically sound, long-term strategy for many US manufacturers.
- Proximity: Manufacturers leaving China find producing in Mexico allows quick access to US consumer markets. Often, goods can be in US stores within days.
- Labor Productivity: Chinese labor productivity is on the rise, but the Boston Consulting Group predicts the cost of labor is rising faster. Meanwhile, Mexican productivity remains high while labor costs are just as low as, or lower than, labor costs in China.
- Duties: Because of NAFTA, manufacturers leaving China for Mexico enjoy virtually no duties in exporting to and importing from the US.
China No Longer the Darling
For many years, China was the darling of US manufacturers seeking lower labor costs. Since their inclusion in the World Trade Organization, China was seen as the offshoring partner of choice. Extremely low wages easily offset the freight costs of shipping across the Pacific – and shipping costs were lower then, due to cheap oil. But that is all changing. In recent years, oil prices have risen. China’s wages have rapidly increased, as well, and will continue to do so. China continues to offer benefits for many companies, but it is no longer the darling of US producers. Many manufacturers leaving China have decided it is more worthwhile to reshore operations back to North America.
According to one recent study, “Footprint 2020: Expansion and Optimization Approaches for U.S. Manufacturers,” more manufacturers leaving China are establishing facilities in Mexico than in the US for the reasons listed above. US wages are relatively too high for many of these companies, but Mexico offers the right balance of skilled labor, low costs, and productivity – all while lying just south of the US border.