What Is the Cost of Manufacturing in Mexico Compared to China?
We analyzed hundreds of news articles and websites to answer the question: Is it cheaper to manufacture in Mexico than in China? We uncovered some interesting findings that may change how you view manufacturing in China compared to Mexico.
Here is a Summary of Our Key Findings:
- Manufacturing Labor Costs are 19% higher in China compared to Mexico.
- Average rent per square foot for industrial space in Mexico is 15% Less expensive than China.
- The Price to Ship a 40-Foot Full Container From China to the United States Is Than 82% Higher Than Shipping From Mexico.
- There Is 514% Increase From 2020 to 2021 in Mexican Suppliers Receiving Bids From Its Big U.S. Buyers and a 155% Increase in Latin American Suppliers Receiving Bids. Manufacturers Sought Goods From 26% Fewer Suppliers in the Asia-Pacific Region.
- In Accordance With the USMCA’s Rules of Origin, Goods Are Eligible for Duty-Free Treatment, Avoiding 25% Tariffs. Goods coming from China pay a 25% tariff.
- Europe and Asia are paying up to nearly six times more for natural gas than the U.S. Natural gas prices in Mexico follow those in the U.S.
- The Exchange Rate for the US Dollar In China Is 66% Lower Than the Exchange Rate for the US Dollar in Mexico.
- With $536.7 billion in total (two-way) goods trade, Mexico is a solid, dependable partner.
We have details and additional data from our study below.
Source: Source: Manufacturing in Mexico vs China, Mexcentrix Strategic Solutions https://topforeignstocks.com/2021/05/24/comparing-manufacturing-labor-cost-in-china-and-mexico/
Manufacturing Labor in Mexico Is Cheaper Than China & Allows for Product Innovation
Several years ago, when China was emerging as a global manufacturing center, labor costs were very low; however, it is not the case any longer as labor costs in China have been steadily increasing for years. Mexico’s labor costs make it cheaper to manufacture in Mexico than in China as a result.
According to Statistia, in 2018 manufacturing labor costs in China were estimated to be 5.51 U.S. dollars per hour. This is compared to an estimated 4.45 U.S. dollars per hour in Mexico, and 2.73 U.S. dollars in Vietnam.
A study by PWC reports:
“Labor costs in China have risen with rising living standards, tripling since 2020, and surpassing labor costs in Mexico in 2015. This rise challenges strategies that have fueled sourcing and production decisions for more than two decades. And, more recently, the size of China’s manufacturing workforce has declined, as workforces in other ASEAN countries have risen.”
Companies in Mexico can invest the savings from manufacturing in innovation and features for their customers and products without having to deal with high labor costs.
For example, U.S. auto manufacturers are taking advantage of Mexico’s low labor costs to include costly fuel-saving features to comply with stricter gas mileage regulations, without increasing car prices.
Warehousing Space is Less Costly in Mexico Than China and There is Plenty Among the US Border
Global supply chains have become increasingly fragile over the past two years, and occupants have responded by realigning their supply chains, leading to a need for more warehouse space closer to their customers.
China’s average rent for a warehouse space in 2019 was 44.3 yuan ($6.62) per square meter. The demand for warehouses has been on the rise in that country, leading to rent increases. Conversely, Statista reports that Mexico City (CDMX) and cities in the state of Mexico have the highest prices for industrial warehouse rentals per month at 5.7 U.S. dollars per square meter, in Mexico City.
It has been reported by Supply Chain Brain that the affordability and availability has led to a boon of warehousing along the Texas/Mexico border:
“This, in the lingo of corporate executives, is near-shoring, one of the biggest economic transformations sparked by the pandemic: Shrink the length of the supply chain to keep production closer to its final destination and reduce the risk of some snag messing things up along the way. A shorter chain is a stronger chain, the thinking now goes, and there’s a growing sense that this new approach will remain in vogue in C-suites long after Covid fades.
For the multinationals that do business in the red-hot U.S. economy, near-shoring often means northern Mexico, where labor costs are cheap, land is plentiful and the border is just a short ride away. El Paso, Texas, is less than 10 miles to the north of most of the new plants in Juarez.
Other border cities — Tijuana, along the west coast, and Reynosa, Matamoros and Piedras Negras, far to the east — are undergoing similar industrial booms, providing a much-needed lift to a Mexican economy that has been slow to recover from last year’s collapse. “
Shipping from China is Expensive and Unreliable
In recent months, the global supply chain crisis has caused havoc among the shipping community, particularly between Asia and the United States. The cost of containers on these ships is increasing dramatically, not to mention the fierce competition for space on these ships.
According to BR Logistics, a 20 ft. container will cost approximately $8,500 to ship from China to the U.S. West Coast, and a similar container will cost approximately $10,500 to ship to the East Coast of the United States, Additionally, a 40HC container can cost up to $15,000 to ship to the West Coast, and $18,000 to ship to the East Coast.
FreightWays reports that prices for shipping continue to rise and don’t appear to be slowing anytime soon.
Besides the high rates, there is another issue: due to congestion in many American ports; many ships are unable to leave Asian ports, and those that do leave spend many weeks at sea before being delivered.
S&P Global reports that congestion levels at ports in mainland China increased by between 30-40% since March.
The shipping problems China is experiencing have so far not affected goods coming from Mexico. The cost of transporting a 40-foot full container load of a shipment worth US $15,000 from Veracruz, Mexico, to San Francisco, California is about US $2,700. The cost of shipping a 40-foot full-truck load with the same value of goods from Mexico to San Francisco is approximately US $1,600.
Mexican manufacturers find rail and trucks to be more cost-effective than waiting for ships at sea to reach congested ports. The US Department of Transportation reports that nearly 35,000 trucks cross the Mexican-US border daily.
Source: Bloomberg. (2022, April).Mexico’s Border Bonanza Shows U.S. Importers Looking Outside China. https://www.bloomberg.com/news/newsletters/2022-04-05/supply-chain-latest-mexico-gains-as-companies-near-shore-from-china
According to Bloomberg, more investment is going to the border regions of Mexico, particularly for shipping:
“Due to strong U.S. demand and a revival of the auto sector, investors are moving in and banks are getting ready to finance new projects. Exports of non-petroleum goods grew almost 27% in February compared with the year earlier. If you’re interested in cars, toys, or medical supplies, there’s probably a company ready to ship through the world’s busiest border.”
Rates for shipments crossing the Texas- Mexico border and traveling 501-1,500 miles averaged $2.93 per mile. Time to market is also an added advantage: By ground, goods can be moved from Mexico to the United States in days – and in some cases hours. It is impossible to move shipments that fast when manufacturing products in China.
US Buyers are Buying Manufacturing Materials More in Mexico Than China
Trade tensions between the United States and China have also affected third countries, including Mexico. Since the generalized increase in tariffs on Chinese exports, US companies have increasingly looked abroad for raw materials for manufacturing that were previously purchased from China. The natural status of Mexico as an import and manufacturing destination for U.S. businesses has resulted in Mexico being a major winner.
Curtis Spencer, president of IMS Worldwide, said nearly two-thirds of North American manufacturers plan to bring their production and sourcing back to North America in a keynote speech in 2020 at the CORFAC International Virtual Fall Summit.
“People make supply chain decisions based on cost. Once you start adding more tariffs, you’re resetting your pro forma for supply chain costs, and maybe the North American continent becomes more cost effective” said Spencer.
A Wall Street Journal article also reports that American manufacturers are looking to Mexico as a viable alternative to China for their manufacturing suppliers.
The cost of materials in Mexico is the most important determining factor for manufacturing firms seeking to source materials, although the quality of the goods being sourced is also of critical importance, as is the reliability of getting these materials to their manufacturing plants on time.
The Advantage of Free Trade Agreements Like USMCA Are Clear
Manufacturing in China may initially appear to offer savings, but when you consider the cost of importing these products into the United States, those savings are quickly erased. As of July 2019, imported goods from China are subject to a 25 percent border tax. This tax, along with other tariffs on Chinese products, will increase the cost of buying products from China for American businesses and consumers. There is a 25 percent border tax on goods manufactured in China, which will result in higher prices for your customers or a decrease in profit margins for your business.
As a result of the USMCA treaty, there are no tariffs on goods imported from Mexico and Canada making it cheaper to manufacture in Mexico than in China. It is imperative that you become familiar with two acronyms if you intend to manufacture in Mexico: USMCA and IMMEX.
Source: National Association of Manufacturers. NAM Releases USMCA State Data Sheets
According to Investopedia, USMCA is “…a trade deal between the three nations which was signed on November 30, 2018. The USMCA replaced the North American Free Trade Agreement (NAFTA), which had been in effect since January of 1994. Under the terms of NAFTA, tariffs on many goods passing between North America’s three major economic powers were gradually phased out.”
There are many reasons why USMCA is significant, but the most important reason is the ability to save money for US businesses. Tariffs have been reduced between the nations; investments have been encouraged in North American industrial buildings, and international markets have been opened. The USMCA provides duty-free treatment for goods that qualify under its rules of origin, which avoid two percent tariffs.
The USMCA has also significantly strengthened U.S. supply chains. COVID-19 and increasing competition with China have highlighted the vulnerability of relying on Chinese supply chains. According to the Brookings Institute:
“The significance of USMCA is clear. Canada and Mexico are the United States’ largest export markets: 23 percent of U.S. exports go to Canada and Mexico (versus 5 percent to China), over 70 percent of Mexican exports are sent to the U.S. and Canada, and 62 percent of Canadian exports are to the U.S. and Mexico. Trade among the countries provides key inputs into regional supply chains’ value added (40 percent U.S. value add versus 5 percent China). “
Additionally, manufacturers with operations in Mexico should know about the labor cost savings provided by IMMEX (“Manufacturing, Maquila, and Export Services Industries Program”; in Spanish, “Maquiladora”). By using the IMMEX program, a manufacturing company can save money on operations that can’t be achieved by companies that use manufacturing options in another country, such as China.
The IMMEX program allows manufacturers to reduce their costs by temporarily exporting supplies and equipment to Mexico, having them manufactured or assembled, and re-exporting them to the United States for sale or distribution. Additionally, the IMMEX program provides American manufacturers access to a large, skilled, and economically priced labor pool.
According to the IMMEX program, a manufacturing facility in Mexico that uses temporary imported equipment, tools, and materials is exempt from the entire 16 percent VAT tax.
Energy Costs Are Cheaper in Mexico
The costs of energy for powering factories is a major concern for manufacturers all over the world. Global primary energy consumption has increased steadily over the past century as a result of several factors, including the rapid industrialization of China.
Compared to the rest of the world, China currently has an average industrial power rate of US$0.084/kWh. Compared to China, the average industrial power rate in Mexico ranges from US$0.09/kWh to US$0.11/kWh.
Although the unregulated electricity utilities in Mexico can be higher than those in China, natural gas prices are similar to those in the United States. Compared to the US, China’s natural gas costs are between 50 and 170% higher.
The high cost of natural gas in Asia has forced China to become more dependent on coal as an energy source. China’s government’s emissions-reduction campaign, however, is causing energy shortages in many of the country’s main manufacturing provinces due to plunging coal supplies caused by the campaign.
Justin Floyd, CEO of ecommerce and distribution company RedCloud, discusses the impact of the coal shortage on Chinese manufacturing production.
Mexico and Renewable Energy
Mexico is investing in renewable energy sources that may help reduce its electricity costs by the end of the decade, unlike the Chinese who are looking for alternative energy sources in the opposite direction.
According to the McKinsey Group:
“Renewables have a privileged cost position that will prevail under any scenario. Therefore, Mexico can become a global leader in clean energy and help cut electricity costs for the industry in half by 2030.”
“The transition from fossil fuels to a more diverse set of renewables could increase the economic viability of Mexico’s energy sources.”
Source: McKinsey& Company. (2019, November).How Mexico can harness its superior energy abundance. https://www.mckinsey.com/industries/oil-and-gas/our-insights/how-mexico-can-harness-its-superior-energy-abundance
The Exchange Rate for the US Dollar is Better in Mexico Than China
The yuan exchange rate is a cornerstone of China’s economic policy. Most advanced economies have a floating exchange rate determined by market forces, but not China. Rather, the yuan (or renminbi) is pegged to the dollar. This practice allows the Chinese to keep their exchange rate at a favorable level regardless of how the market performs. As a result, your dollar investment will not go very far if it is invested in China.
Furthermore, the true exchange rate of dollars to Yuan is difficult to determine because the Chinese government consistently undervalues its currency. According to Investopedia:
Mexico, on the other hand, has a 66% lower exchange rate for the US Dollar than with China. Years of conservative fiscal policies have paid dividends for the Mexican peso allowing it to become one of the strongest worldwide market currencies. The Mexican peso is uniformly low against the dollar throughout the country, so your money will go far wherever you are.
A recent analysis by Ramsé Gutiérrez, senior vice president and co-director of investments at Franklin Templeton Mexico, indicated that the rate hit a high in early March following Russia’s invasion of Ukraine, reaching 21.4 pesos to a dollar. It has since appreciated steadily, reaching 19.5 to a dollar.
The proximity of Mexico to the U.S. and our shared border also contributes to the Peso’s liquidity. Investopedia
China Cannot Compete With Mexico’s Shelter Manufacturing as a New Destination
In the face of trade tariffs against China and the Chinese government’s zero-Covid policies, manufacturing companies in the US and other international locations are not only rethinking China but manufacturing in Asia as a whole. Now, Mexico is being considered the most logical location. In terms of manufacturing destinations, Mexico offers advantages that China cannot match. Some of these advantages have been covered previously: competitive labor, proximity to the market, free trade agreements, etc. It is also important to note that Mexico offers a number of other cost-competitive advantages over China.
Companies based in Mexico are eager to welcome these Chinese companies leaving the country and are willing to make concessions in order to gain their business.
Moving Manufacturing to Mexico Can Save Time and Paperwork
Additionally, moving manufacturing to Mexico can save time and paperwork, which will ultimately result in significant cost savings. For these reasons, U.S. goods and services trade with Mexico totaled an estimated $577.3 billion in 2021.
Reduction in Legal Liability
A foreign investor doing business in Mexico through a Mexican subsidiary has traditionally been protected from liability for the debts and obligations of the Mexican subsidiary.
Knowledge of Mexico Business Practices
Manufacturing companies often make the mistake of assuming they know enough about Mexico to do it on their own. The majority of shelter manufacturers can assist you in cutting through the red tape in starting your manufacturing operation by providing analyses, site visits, classifications, permits, factory setup, and training. Also, Mexico’s industrial capabilities make choosing a location for a manufacturing operation less difficult; most places in the country have some sort of industrial facility, although some locations are more suitable than others.
Quick Setup Model
There are many factors that influence this, such as equipment, training and sourcing materials. However, some companies who are interested in starting manufacturing in Mexico can do so within a month. Since many shelter manufacturing companies are incorporated in Mexico, and hold current maquiladora permits, there is no legal aspect to this process.
Protection of Intellectual Property
Intellectual property theft is a tremendous problem in China. The new USMCA agreement strengthens intellectual property rights even further in Mexico, with one of its main objectives to protect the Intellectual Property Rights of products between the United States, Mexico, and Canada. In accordance with the Office of the United States Trade Representative:
“The United States, Mexico, and Canada have reached an agreement on a modernized, high-standard Intellectual Property (IP) chapter that provides strong and effective protection and enforcement of IP rights critical to driving innovation, creating economic growth, and supporting American jobs.”
By enforcing these rights, it becomes very difficult, if not impossible, for companies manufacturing in Mexico to have their intellectual property rights stolen.
Conclusion: It is Cheaper to Manufacture in Mexico Than in China
All the data analyzed in this report indicate that, although manufacturing in China may offer some immediate cost benefits, it is more cost effective to operate manufacturing operations in Mexico in the long run.
- Manufacturing Labor is Less Expensive and More Plentiful than China
- There is an abundance of warehousing and manufacturing space on the border of the US & Mexico (particularly in Texas) that is significantly more inexpensive than in China.
- In light of the current supply chain problems using sea freight, the speed of the arrival of goods from Mexico to the US is perhaps the greatest advantage offered by manufacturing in Mexico. In comparison to China, it takes a fraction of the time for your products to reach American warehouses and stores.
- US buyers, citing poor quality and delays from China, are buying more goods and supplies from factories located in Mexico.
- Due to the US Free Trade Agreement with Mexico, it is relatively inexpensive and almost seamless to move goods across the border. Currently, Chinese goods entering the US are subject to high tariffs, which makes the process of transporting them into American markets very expensive.
- In Mexico, energy costs are comparable to those in the United States, making them both cheaper and more environmentally friendly. There is a high dependence on coal in China, and there is a gas shortage, making energy costs high and causing frequent power outages.
- The exchange rate for the Peso compared to the US dollar is very favorable, allowing investments in Mexico to go further than investments in China.
- The intangibles of manufacturing in Mexico; easy setup model, protection against intellectual property theft and limited legal liabilities are benefits that are not offered when manufacturing in China.
As a manufacturer in Mexico, NovaLink employs a unique approach that transcends the traditional model of shelter production. More than just the location of your manufacturing, we would like to become a partner in your manufacturing in Mexico. You will be able to relocate or initiate manufacturing for your company in Mexico in a low-cost labor environment with very little delay or up-front costs. Find out how we can help you by handling the manufacturing process.