Approximately a decade ago, China began to make its mark on the scene of the world manufacturing industry. As capitalization caused its economy to grow by leaps and bounds, China’s share of the international production trade also expanded exponentially, driven by a massive workforce ready to provide inexpensive labor to companies from around the globe. Although China’s growth was a boon for many, such as the commodity-rich South American countries that were ready to feed this burgeoning industrial superpower, it looked to be a death knell for the manufacturing industry in Mexico that did not appear to be able to match China in terms of costs.
But as Fiat’s recent $550 million investment in the Fiat 500 production line in Mexico shows, these trends are starting to change. What’s especially telling about this new facility, expected to produce 120,000 vehicles a year, is that while the majority of these units are destined for North and South America, at least some will be headed east. As Felipe Calderon, the country’s president said in a recent Financial Times article, “I think it is the first time that a Mexican vehicle, at least in recent times, is to be exported to China.” In fact, not only is Mexico holding its ground against China, it is even beginning to gain ground in its market share of total US imports, which is the world’s largest importer. The United Nations Commodity Trade Statistics Database notes that in 2010 Mexico accounted for 12.3 percent of all of the non-oil imports into the United States, up from 10.6 percent in 1999.
What has helped drive this sea change? Part of this is that China’s exceptionally low labor costs has proven to be unsustainable, helping to narrow the gap between the cost of manufacturing in Mexico and China. While Mexican wages were 237 percent higher than Chinese in 2002, this figure has shrunk to an estimated 14 percent today, with Chinese worker wages expected to eclipse their Mexican counterparts within the next few years. Even more importantly, rising fuel costs have further eroded into China’s market savings as it has become increasingly expensive to ship materials and finished goods long distances.
However, just as in real estate, location is also a big factor. Mexico’s proximity to the United States means faster shipping times—two to seven days as opposed to the 20 to 40 needed for transport from China. This is key for U.S. companies as they rely on third-party advice to guide their just-in-time manufacturing, a strategy that allows companies to reduce costs by shrinking their inventories. Mexico’s geography has also allowed it to be open to trade agreements with other countries. It’s 44 international trade agreements mean that companies can open manufacturing plants and source materials from a wide range of countries while avoiding hefty duties. Mexico’s prime location pays off in other ways as well; for one thing, there is less of a culture-clash for U.S. executives when working with Mexico, and Mexico shares the same time zones in the United States. This makes it easier for different business partners to communicate, aided by the fact that most university-educated people in Mexico speak English. Overall, Mexico’s setting provides a real edge to companies who are already realizing that the conventional wisdom—that China is the place for inexpensive manufacturing—may no longer apply.