Why China Will Start Off-Shoring to Mexico
By Rich de la Rosa, Director, Advisory Services
Mexico’s manufacturing boom has proceeded in stages. At first, it was built on auto manufacturing. While that continues to surge, American companies have now started relocating simpler manufacturing from China to Mexico.
There are many reasons for this newer wave of manufacturing. Mexican labor has long been more productive than Chinese labor. Now, as Chinese wages keep rising, it’s expected that Mexican manufacturing labor will cost 30 percent less than Chinese labor by next year, after you adjust for productivity. It’s also easier for US firms to oversee operations in Mexico. And thanks in part to the US natural gas glut, energy costs are far lower in Mexico than in China.
As a result, a slew of US companies like headset-maker Plantronics and hula-hoop maker Hoopnotica have been shortening their supply lines, moving their manufacturing capacity from China to Mexico. It’s a striking trend for those of us who saw the eagerness with which so many North American businesses set up manufacturing in the World’s Factory over the past 20 years.
But now, you should get ready for a more striking trend: Chinese companies will start moving their own manufacturing to Mexico.
Why? For years, Chinese photovoltaic manufacturers have been flooding the world market with cheap solar panels subsidized by the government in Beijing. It’s been great news for the global transition to sustainable energy infrastructure, but bad news for PV manufacturers around the world. In response, the US Commerce Department announced in June that it would slap tariffs on Chinese-made panels, some upwards of 30 percent. The tariffs are up for final approval in October.
As a result, Chinese PV-makers are likely to start moving manufacturing to Mexico, because Mexican-made panels will be able to enter the US market without a tariff. But the movement of Chinese manufacturing to Mexico will not likely end there.
Many of the same forces that are pushing global firms to wind down some of their Chinese manufacturing activity also effect Chinese firms. We’re now seeing that the extreme concentration of factories in China in recent decades was just a temporary part of the evolution of global enterprise, and it will be natural for Chinese firms to follow the rest of the world in right-shoring their manufacturing.
After Chinese PV-makers dip their toes in Mexican waters, more Chinese firms serving the US market will start to catch on and follow the trade winds across the Pacific.
For more information on manufacturing in Mexico, read another one of Rich's blogs, Business Expansion South of the Border: Manufacturing and the Mexican Miracle.