Over the past few decades, the consensus has been to ‘off-shore’ manufacturing operations from North America to those emerging market economies in Asia. Particularly for electronics assembly, this trend has shaped the industry for more than 20 years. Primarily as a result of lower labor wages and infrastructure that is at least good enough, many electronics systems choose to either move their operations to Asia or partner with contract manufacturers with a large presence in that region. China has been a primary beneficiary of this shift in manufacturing ideology.
The benefits of this strategy, at the time, were significantly lower labor costs and a large labor force that could accommodate the ever-increasing demands on manufacturing. However, as demographics and global economies have done for centuries, the benefits of this arrangement have changed. Let’s observe the disparities between fact and conventional wisdom using China and the growing North American economy of Mexico. On-shoring back to North America has a new appeal.
The Chinese economy – a brief history
The Chinese economy has been expanding with average GDP growth of more than 8% over the past 25 years as seen in Figure 1.
Figure 1 – China Gross Domestic Product Growth (%) vs. Year (tradingeconomics.com)
This economic success has been beneficial for the growing middle-class workforce. As demand for their skills grew over time, so did their wages as well as the cost of living in large manufacturing cities. In some part, this is also due to the appreciation of the Chinese yuan against the US dollar. What was once a largely unskilled workforce that could be trained for a globally low wage base is now significantly more capable. The average China worker demands a higher labor rate of nearly 10 times that of just 20 years ago with an average compounded increase of over 12% annually (Stenzel G). While the average hourly labor rate was less than USD 0.50 in 1997, it has risen to nearly USD 5.00 in 2017 and trending higher as can be seen in Figure 2.
Figure 2 – Mexico and China Manufacturing Labor vs. Year (Hunkar D)
Mexico’s changing economy
By comparison over the same timeframe, the average hourly manufacturing rate in Mexico has gone from USD 1.20 in 1997 to only about USD 2.00 today (Hunkar, D). The Mexican economy has been positioning itself within the North American electronics supply chain for decades. With both a large unskilled and semi-skilled workforce, the country boasts nearly 100,000 experienced electronics assembly workers within the technology-laden Baja, California state alone (ivemsa.com). Many of the largest global electronics companies now operate factories in Mexico. The country is positioned as the 6th largest manufacturer of electronics products globally and is the single largest exporter of flat-screen televisions in the world (ivemsa.com).
Mexico’s proximity to the United States makes it an attractive location for operations management. The Mexican time zones are the same as American Pacific and Mountain Time zones. Air travel from most of the United States is typically no more than a couple of hours in duration. The travel time, costs and hassles for US engineering and quality support staff should not be neglected as a secondary cost of maintaining a manufacturing operation.
Non-Labor costs to consider
However, labor costs are only one part of the consideration for the location of your electronics manufacturing strategy. All the other costs of business need to be gauged in relative comparison, including:
- Timely support
- IP protection
- Tariffs and customs
Trade tariffs with China have recently become unpredictable. Trade uncertainty appears likely to continue into the foreseeable future. In addition to this increase in costs comes the risk of longer shipping times due to heightened customs scrutiny at ports of entry. Shipping products from China to the US could take 3 weeks. By comparison, a 48-hour lead-time can be achieved across the Mexican border to customers within the USA (Stanley S).
In addition to the higher transportation costs to ship across the Pacific Ocean, the challenges and costs to manufacture in China may no longer make sense. For example, due to distance and unpredictable oil prices, the shipping costs can be more than 8 times higher when manufacturing in China compared to Mexico. In 2018, the cost of shipping a standard cargo container from China to the port of Long Beach was nearly $5,000. The cost of transporting the same container from Tijuana, Mexico to Los Angeles by land was roughly $600 (Stanley S).
Intellectual property (IP) protection should always be a priority across the supply chain. While protection of IP in Asia can be erratic at best, Mexico practices strong protections and enforcement, similar to the USA, for patents, intellectual property, and trademark rights (Arvilla J). This is key to the manufacturing concerns of your partners and customers.
The raw energy input for operations in Mexico is roughly similar to those in China. While the unregulated electric utilities can be higher in Mexico than those of China, natural gas prices are largely the same as those in the United States. China’s natural gas costs are considerably higher at 50 to 170% of the price seen in the USA (Stanley S).
Unless a company has a significant scale, most do not choose to establish their factory either in China or Mexico. Partnering with a contract manufacturer (CM) that has its operations in Mexico affords the options needed within a dynamic global economy. Alternatively, a CM that has wide partnerships across many expertise and locations provides the flexibility to manufacture where capabilities, costs, and logistics make the most sense.
Many electronics manufacturing strategies automatically determine that China is the location of choice for their operations due to the lower labor costs. However, after review of the latest financial data available, we can see that this general assumption, typically from the mid-1990s, no longer applies to 2020 and beyond. The manufacturing labor rate in China continues its >10% annual increase unabated. Working with a CM that has global partnerships, including those with the low costs of Mexico, provides the North American on-shoring manufacturing flexibility that your business needs to adapt within the global economy.
Stenzel G., 2018 Further Reforms Could Lead Latin American Economies to Become Bigger Growth Players
Arvilla J, 2018 Mexico Labor Costs Continue to Benefit Manufacturing
Stanley S, 2019 Mexico vs. China Manufacturing: How the Two Countries Compare
Hunkar, D, 2018 Manufacturing Labor Costs in Mexico vs. China
China GDP Annual Growth Rate
VentureOutsource.com Mexico hourly manufacturing wages, labor productivity, electronic industry infrastructure v Asian nations
Mexico’s Electronics Manufacturing Industry Is Among World’s Largest