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Wednesday, April 16, 2014

Cost Shift Favors Mexico as a Supply Source

What a difference 15 years can make. In 2000, labor costs in Mexico were 58 percent higher than in China. By 2015, however, Mexico’s average manufacturing labor costs will be 19 percent less than in China, and 30 percent lower when adjusted for worker output.

In addition, total manufacturing costs in Mexico will be 6 percent less than in China by 2015.

 

Credit: Salvatore Vuono at FreeDigitalPhotos.net

Credit: Salvatore Vuono at FreeDigitalPhotos.net

This is good for Mexico, and good for the U.S. and Canada, as a result of NAFTA. Procurement managers should be taking a close look, if they are not already, at Mexico for supply and determining how their operations and bottom lines can benefit from the purchasing opportunities that exist there, especially vis-a-vis China.

The statistics were released late last month by Boston Consulting Group (BCG), as part of its ongoing Made in America, Again series. This latest installment shows that Mexico is poised to benefit as an exporter from its developing cost advantage over China in many areas of manufacturing and assembly.

BCG predicts that in five years Mexico’s cost advantage could add $20 billion to $60 billion to its economy annually. The cost advantage, of course, derives from the country’s historically low labor rates and proximity to the U.S. — plants are often just miles from the border. Access to U.S. highways, railroads, ports, and intermodal transport brings Canadian markets close, as well.

Mexico has lower energy costs than most countries, including China, and a record 44 free-trade agreements, which grant many of its products access to countries at low or no duties.

With benefits such as these, more global companies could establish manufacturing in Mexico. While there are concerns about business there, notably the violence and crime that plague parts of the country and the skill levels of the workforce, the economics are compelling. In fact, BCG forecasts that production of transportation goods, computers and electronics, appliances, and machinery could increase 7 to 19 percent by 2017.

 

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