Low cost manufacturing in North America: An alternative to Asia
Opinion: In comparison to China, Mexico has emerged as a ?best cost country? for products destined for the United States and global markets. The reasons are relatively straight forward.
By Daniel J Hill, Silicon Border -- EDN, September 29, 2009
Recent articles in business magazines (Business Week, April 9, and June 15, 2009) and studies done by independent consulting agencies (Alix Partners, Manufacturing Outsourcing Cost Index, May 2009) have begun to cast doubt on the conventional wisdom that goods made in Asia are always lowest cost. In fact, recent calculations have shown definitively that the cost of Asian manufactured products is growing rapidly. Looking at prices overall, Asia is now approximately 15 to 20% more expensive that it was only four years ago. So, if Asia isn’t the lowest cost venue for manufacturing, is there an alternative?
In comparison to China, Mexico has emerged as a “best cost country” for products destined for the United States and global markets. The reasons are relatively straight forward. In addition to being a low labor cost country, six other key elements have emerged to provide Mexico’s advantages:
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Low transportation cost: Being immediately adjacent to one of the world’s largest markets -- especially when oil prices and ultimately transportation costs are so volatile -- is a significant long-term advantage. For any product that has any significant cost of transportation, being closer to the end-user market is always less costly than being farther away, no matter what the price of oil may be. Additionally, proximity to market generally means a shorter supply chain, minimizing time in transit. Less time in transit allows companies all along the supply chain to reduce inventory and the capital invested in that inventory required to maintain acceptable service levels.
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Favorable (and relatively stable) exchange rate: As Mexico’s leading trading partner, its economy is inextricably bound to that of the US. As a result, the Peso trades in a relatively narrow range relative to the US dollar. Recent devaluation (about 15%) of the Peso, relative to the dollar, makes manufacturing in Mexico even more appealing. Contrast that to some Asian currencies that have appreciated 10 to11% since 2005.
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Low, stable labor costs: Labor costs in many parts of Asia are appreciating at 7 to 8% per year. This has been driven by both government policy and the labor market. With the explicit approval of government, labor unions have become much more militant regarding work rules and wage scales in foreign-owned enterprises. Asian governments have mandated annual wage increases that equal or exceed the basic rate of inflation. Coupled with a huge influx of manufacturing facilities along Asia’s eastern seaboard, wages have begun to climb dramatically. Foreign companies looking for less expensive labor are now searching for sites in more inland areas. This may solve the labor problem, but lengthens the supply chain even more.
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Contrast the situation in Asia to that in Mexico: Labor rates in Mexico have actually declined when denominated in US dollars over the past five years. This is due primarily to a 15% devaluation of the Peso during this period. But wage rates alone aren’t the only advantage for Mexico. Labor unions in Mexico are relatively benign. Employer-worker relationships are often excellent where management communicates openly and utilizes experienced Mexican Human Resources professionals. It is common to find multiple members of the same extended family working for the same employer. A strong family-oriented social fabric also tends to promote workforce stability.
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Free trade status: As a consequence of NAFTA, Mexican products are exported, duty free into the US market. Mexico also has Free Trade Agreements with 43 other nations, the most of any single country. In addition to the US and Canada, its products can be exported, duty free, to the European Union, most of Latin and Central America, and Japan.
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Low tax profile: Many US companies seeking to locate in Asia request tax holidays from the host government ranging from five to as long as 10 years. That isn’t necessary in Mexico. Tax rates for foreign-owned companies are based on a very small percentage of total value-added in Mexico. Effective tax rates are extremely low and allow repatriation of profits without barriers.
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Protection of IP (intellectual property): Over the past decade Mexico has sought not only to harmonize its IP laws with those of the US and Canada, but has actively sought to enforce IP rights. The rampant piracy that plagues much of Asia simply doesn’t happen in Mexico.
For high technology companies that wish to prosper in the highly price-competitive US market, a low-cost manufacturing strategy is not only desired, it is essential. Mexico provides significant advantages for manufacturing companies such as low labor rates, pro-business environment, and low tax profile.
About the author
Daniel J Hill is the co-founder of
Silicon Border
and serves as the company’s CEO and chairman of the board. His past industry experience includes serving as a division vice president and general manager for National Semiconductor, and as a C-level executive with Cerprobe, InterConnect, and MCT. He spent 12 years transferring semiconductor technology to Asia, and eight of those years living in Asia. Hill has served internationally on several industry boards, is a public speaker, and is a published author on semiconductor industry issues. Hill earned his bachelor’s of science degree in industrial engineering from New Mexico State University.
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all analysis in the article is great.
but regarding to the labor cost, I would suggest to add more deepen analysis for the "Quality of employee"? For some high tech manufacutring, they not only look for the lowest labor cost, they are looking for the low cost labor with the appropriately high "skilled or educational" people. If there is any competitive advantage for "people" at Mexico? Just interesting about it.
Annie Z. - 2012-12-1 07:41:04 PST -
How is the edn works.I am from GHANA and i want to do business with you. I finished HND Accounting and i want to do something on my own.
PHILIP OFORI BOATENG - 2009-7-11 04:35:00 PST -
Excellent article, great information, most of the USA manufacturers should know this.
We’re a contract manufacturing plant located in Tijuana, Mx (San Diego, CA) and we can offer a very competitive prices and help you with our fast response.
We made:
• Wire Harness
• Toroids, Chokes
• Medical Devices
• Molding
• Packaging and Full Fillment
If you’re interested I can send you our line card.
Please contact me jchavez@rh-mfg.net
Web: www.righthandmanufacturing.com
Jorge Chavez - 2009-5-10 16:06:00 PDT -
So glad to see that someone is thinking logically regarding this. Why not take it a step further and bring back some or most of non-highend manufacturing to USA. There are a lot of very experienced people in this field who have been laid off and would be willing to work again(perhaps at a reduced salary). There certainly are enough fabs to do the job!
D P Mathur - 2009-5-10 13:10:00 PDT -
Mr. Hill failed to mention one important consideration -- quality.
Stanley Goodrich - 2009-5-10 12:48:00 PDT
