Reasons Why It’s More Attractive to Invest in Mexico than in China

Mexican labor is 33.5% lower in cost than that in China, according to Pricewaterhouse Coopers (PwC), and the coronavirus pandemic revealed the importance of rapid responsiveness.   These factors make it more attractive to invest in Mexico than in China.

For U.S. companies, sourcing Mexico’s manufacturing production over goods that are made in China would mean saving 23 percent in its supply costs.  This is the case when considering variables that include things such as destination costs, delivery times, and risk factors.  This is according to an analysis that was recently conducted by the consultancy PwC.

“China’s dependence primarily on its cost and scale advantages and the impact of the health crisis are forcing companies to broaden their horizons further and think of other locations, such as Mexico,” the consultancy asserted in its study entitled, “Beyond China: Towards Greater Diversification and Cost Efficiency in Supply Chains.”

In addition, according to a PwC survey, 16% of American firms operating in China already had plans to readjust their pre-pandemic production or sources of supply.

“One of the great lessons that are derived from the pandemic for manufacturing companies is the importance of balancing responsiveness to destabilizing factors, such as disruptions in supply sources and changes in product demand,” states Yamel Cado, a leading foreign trade partner at Pricewaterhouse Mexico.

While Carlos Zegarra, PwC’s leading Management Consulting partner, said the need to respond more agilely to changes in the supply chain ecosystem, coupled with an ongoing need to reduce operating costs and execution times, make it more attractive to invest in Mexico than China.

“The health crisis caused by the COVID-19 coronavirus added an additional variable to the trend towards establishing supply chains that are closer to home.  Data from 2019 shows that approximately 19 percent of executives in the United States was rethinking moving their supply chains from China to the region (North America) because of the trade war between that country and the Asian nation. Now the coronavirus adds to the reasons to seek to construct more resilient supply chains,” he said.

According to PwC’s “CFO Pulse Survey”, 38 and 25 percent of respondents in Mexico and the United States, respectively, ensured that “developing alternative sourcing options and/or changing contractual terms” in the supply chain is important for rebuilding or improving their sources of income.

Companies leave China

Under current conditions, companies such as Spin Master, SMTC, Motorparts Cars of America, and Techint have significantly accelerated the implementation of ‘moves’ closer to home to Mexico.  They have done this to meet and exceed their demanding production and delivery times to their customers, while in some cases this was done to protect their employees from the coronavirus in China where outbreaks have been severe.

Carlos Zegarra of PwC said that because Mexico’s labor cost compared against pay rates in China is 33.5 percent lower makes it more attractive to invest in Mexico than China.

“The model that we have in place is not for all companies and industries, such as the information technology industry, which remains competitive in China. Not only is production in this sector occurring in China, but also producers have developed effective supply Chains in the Asian region.  Because it is not easy to move, companies such as this should consider mixed models,” PwC’s expert said.

Eddie Smith, CEO of SMTC Corporation, a provider of comprehensive electronics manufacturing services, said at a conference held in the recent past that some of his company’s production in China was moved to Mexico, or the United States in locations like Florida and Fremont, California.  SMTC now only maintains a small Asia team to support their overall global engineering activities.

While David Lee, the chief financial officer of the auto parts firm Motorcar Parts of America, explained that he increased his investment in production in North America in a rapidly by expanding the company’s production lines into Mexico.  This was done to absorb what Motor Parts of America did in China.  This has resulted in significant savings in labor and transportation costs.

“We have just begun to realize the benefits of expanding our operations in Mexico by launching production of our new braking products.  We have great expectations of significant revenue growth in new and existing product lines,” he said.

The leadership of Canadian toy manufacturer Spin Master also believes that current conditions make it more attractive to invest in Mexico than China.

“We are increasing our supply and procurement activities outside China with new manufacturing capabilities in Mexico, as well as Vietnam and India. This global multidimensional platform gives us a competitive advantage in terms of our capacity to manufacture our products,” Ronnen Harary, CEO of Spin Master, recently expressed at a conference with analysts.

Main factors that make it more attractive to invest in Mexico than China

Mexico’s manufacturing sector has great potential and is more attractive at the moment due to 3 specific factors:

The United States-Mexico-Canada Agreement (USMCA)

The USMCA was implemented on July 1, 2020.  It is expected to be of great benefit to Mexico’s manufacturing sector because of the interest that both Canada and the United States have to engage with their neighbor to the South.  Manufacturing in Mexico will result in higher profits, as well as lower cycle times and risks. Mexico’s proximity to the United States make it more attractive to invest in Mexico than China

Another factor that makes Canada and the United States particularly interested in establishing factories in Mexico is that it can trigger the creation of more jobs in Mexico. This can lead to the continued reduction of migrants entering the U.S. and Canada illegally from Mexico and Central America.

Effects of COVID-19 on manufacturing

The COVID-19 pandemic revealed the difficulties that can arise when most of the world’s demand for manufacturing supplies is concentrated in one place, in this case, China.

Mexico’s manufacturing sector can be further developed to offer alternative supply solutions. Many companies that currently have their factories established in China must now look for alternatives. Mexico offers advantages over other countries, such as labor costs, market importance and geographical location.

Additionally, the current exchange rate of the Mexican currency against the US dollar makes it attractive for manufacturing companies to locate facilities in Mexico. This also translates into lower production costs.

China’s struggle to remain competitive

Companies seeking cover themselves with ongoing trade disputes between the United States and China are looking for alternative solutions as China-based manufacturing sources become less competitive. This is another key reason for the growing interest by industry in Mexico.

Another important consideration that is currently motivating foreign companies to turn to Mexico’s manufacturing sector is the atmosphere of mistrust that results from China’s lack of transparency regarding the Covid-19 epidemic.

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