So Can Mexico Compete With China?

They can now. The days of the Chinamen snatching Mexico’s industries are over

An entire generation of Americans has come of age laboring under the assumption that the U.S. can’t compete in the manufacturing arena with low-cost competitors such as China and Brazil. That may have been true a decade ago, but it’s no longer true today.

The two countries making the greatest strides in manufacturing competitiveness were Mexico and the U.S. The key reasons were stable wage growth, (some would call it no wage growth), sustained productivity gains, steady exchange rates, and the big energy advantage the U.S. has captured since the shale-gas boom began.

When the most important economic factors are considered—total labor costs, energy expenses, productivity growth, and currency exchange rates — Brazil is one of the highest-cost manufacturing nations in the world, Mexico is cheaper than China, China is virtually even with the U.S., (as are most of the traditionally “low-cost” countries of eastern Europe), and the low-cost leader in western Europe is none other than the country that launched the Industrial Revolution: the United Kingdom.

So throw away the old playbook. Welcome to the new era.

The country with the lowest manufacturing costs, we found, is not China. It’s Indonesia, then India, Mexico, and Thailand. China comes next — with Taiwan’s costs just a tad higher and the U.S.’s a bit more than that, ranking America No. 7 in our study.

As Chinese labor costs rise, American productivity improves, and U.S. energy expenses fall. The difference in manufacturing costs between China and the U.S. has narrowed to such a degree that it’s almost negligible. For every dollar required to manufacture in the U.S., it now costs 96¢ to manufacture in China, and that’s before considering the cost of transportation to the U.S. and other factors. For many companies, that’s hardly worth it when product quality, intellectual property rights, and long-distance supply chain issues are added to the equation.

For the record, the countries with the highest manufacturing costs of the 25 nations we studied were Australia, Switzerland, Brazil, France, Italy, Belgium, and Germany — all of which have costs 20 percent to 30 percent higher than the U.S.’s.

Previous cheaper havens, including Brazil, China, the Czech Republic, Poland, and Russia, experienced a significant increase in relative manufacturing costs since 2004 because of some combination of sharp wage increases, lagging productivity growth, unfavorable currency swings, and dramatic increases in energy costs.

Several countries that were relatively expensive a decade ago, most in western Europe, have become more expensive compared with America. Manufacturing costs in Belgium and Sweden rose 7 percentage points from 2004-2014 relative to the U.S., and in France and Italy they rose 10 percentage points. Largely because of productivity gains, the U.K. held its own.

Many companies continue to make manufacturing investment decisions based on conditions from a decade or more ago. They still see North America as high cost and Latin America, eastern Europe, and Asia, especially China, as low cost. The new data show there’s a competitive marketplace of manufacturing opportunities today, with high-cost and low-cost countries virtually everywhere.

Here in Mexico, 42 car makers have official representation in the country with nearly 400 different models, making Mexico one of the most varied automotive markets in the world.

The automotive sector accounts for 17.6% of Mexico’s manufacturing sector, and Mexico is the third largest automobile manufacturing nation in the Western Hemisphere, after the United States and Brazil, producing 3.1 million vehicles in 2013, and many more than that by now.

The industry produces technologically complex components and engages in research and development, so much so, that Mexico has a serious shortage of engineers, and that is holding further growth back.

The “Big Three” (General Motors, Ford and Chrysler) have been operating in Mexico since the 1930s, while Volkswagen and Nissan built their plants in the 1960s. In Puebla alone, 70 industrial part-makers cluster around Volkswagen. In the 2010s expansion of the sector was surging. In 2014 more than $10 billion in investment was committed in the first few months of the year. Kia Motors in August 2014 announced plans for a $1 billion factory in Nuevo León. At the time Mercedes-Benz and Nissan were already building a $1.4 billion plant near Puebla, while BMW was planning a $1-billion assembly plant in San Luis Potosí. Additionally, Audi began building a $1.3 billion factory near Puebla in 2013.

Of course it all boils down to low wages and easy access to the United States market. The minimum wage here is a little less than $5 U.S. per day, although the auto industry pays on average more than that. GM workers in Mexico earn wages and benefits of 340 pesos a day ($26.40) on average, or less than $4 an hour, said Tereso Medina, head of the union for GM’s 5,000 workers in Saltillo, a city that makes one in four Mexican autos. Ford workers in the U.S. earn about $55 an hour with benefits, compared with $50 an hour for Toyota’s U.S. workers.

Of course NAFTA helps, as does Mexico’s more than 30 free-trade accords with European Union members, Japan, Colombia and other countries.

Turns out Mexico only looks like it’s asleep at the wheel. Over on the mainland the government is wide awake and hospitable to obtaining more (relatively) good paying jobs.