Subscribe to our free, weekly email newsletter!


Mexico’s cost advantage over China, other economies will boost exports and U.S. manufacturers

Research indicates lower labor and energy costs are expected to propel Mexican manufacturing exports.
By Modern Materials Handling Staff
July 09, 2013

Within five years, higher manufacturing exports due to a widening cost advantage over China and other major economies could add $20 billion to $60 billion in output to Mexico’s economy annually. And due to the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for everything from automobiles to computers assembled in Mexico also stand to benefit, according to new research by The Boston Consulting Group (BCG).

The key drivers of Mexico’s improving competitive edge are relatively low labor costs and shorter supply chains due to the country’s proximity to markets in the U.S. Another important advantage is that Mexico has 44 free-trade agreements—more than any other nation—allowing many of its exports to enter major economies with few or no duties.

A tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China. By 2015, BCG projects, average total manufacturing costs in Mexico are likely to be around 6% lower than in China and around 20 to 30% lower than in Japan, Germany, Italy, and Belgium.

“Mexico is in a strong position to be a significant winner from shifts in the global economy,” said Harold L. Sirkin, a BCG senior partner. “That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It’s also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China.”

The research is part of BCG’s ongoing “Made in America, Again” series on the changing global economics of manufacturing, produced by its Operations and Global Advantage practices. BCG has previously released research predicting that rising U.S. exports, combined with production “reshored” from China, could create up to 5 million new U.S. jobs in manufacturing and related services by the end of the decade, thanks largely to significant labor- and energy-cost advantages over Western Europe and Japan and rising costs in China.

Global companies are expected to continue moving production to Mexico despite concerns over crime and safety. Research by the World Economic Forum has found that companies view violence and corruption as the most problematic factors of having operations in Mexico—as well as significant costs of doing business. Another drawback is the perception that Mexico lacks enough skilled workers.

But the cost advantages of producing in Mexico are becoming so attractive that many companies are finding ways to mitigate these perceived risks. “When the economics are a wash, U.S. manufacturers often keep production in the U.S.,” said Michael Zinser, a BCG partner who leads the firm’s manufacturing work in North America. “But when the economics are compelling, companies will invest in additional security and training to address these issues.”

Mexico’s labor costs are especially competitive when productivity differences with other economies are factored in. By 2015, for example, average manufacturing-labor costs in Mexico are projected to be 19% lower than in China, where wages are rising rapidly, and around 30% lower when adjusted for output per worker. In 2000, Mexican labor was 58% more expensive than in China. Mexico will also have lower energy costs than many other economies. Average electricity costs are around 4% lower in Mexico than in China, for example, while the average price of industrial natural gas is 63% lower.

The industries expected to see the biggest production gains are likely to be transportation goods, computers and electronics, appliances, and machinery. “These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico,” explained Eduardo León, a BCG senior partner based in Monterrey. Due to Mexico’s growing cost advantage, production in these industries could increase between 7 to 19% by 2017 over and above the projected level if current growth trends remain the same. This could result in 300,000 to 900,000 direct manufacturing jobs annually in Mexico and 1.5 million to 3.5 million jobs in related services jobs.

“Companies investing in Mexico must balance the economics with the potential downsides,” said Sirkin. “But the economic advantages are becoming so pronounced that global companies should include Mexico on a shortlist of locations for their next manufacturing plant.”

Subscribe to Modern Materials Handling magazine

Subscribe today. It's FREE!
Find out what the world’s most innovative companies are doing to improve productivity in their plants and distribution centers.
Start your FREE subscription today!

Recent Entries

MHI and our industry are in transition as materials handling’s profile is raised in the supply chain. The challenge is learning to speak the language of supply chain managers.

The acquisition of QuantiSense will extend Epicor's position as a leading provider of extended omni-channel solutions for midsize and large retail chains.

Partnership creates integral cleaning and sanitation program for reusable plastic containers.

Smatec brings 25 years of experience with solutions like bomb-bay and pocket sorters.

Frommelt Products Corporation – which has been a part of the Rite-Hite family since 1991 – will now be known as Rite-Hite Environmental Enclosures Corporation.

Article Topics

News · Economy · MHI · Mexico · All topics

About the Author

Josh Bond, Associate Editor
Josh Bond is an associate editor to Modern. Josh was formerly Modern’s lift truck columnist and contributing editor, has a degree in Journalism from Keene State College and has studied business management at Franklin Pierce. Contact Josh Bond


© Copyright 2013 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA