“We needed to have a near-source option to complement our supply chains out of Asia,” said one U.S. manufacturer. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”
More and more companies seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.
Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S., reports The Wall Street Journal (April 25, 2023). It has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances to U.S. consumers that reduce the need to carry so much inventory. This also offsets the risk of production disruptions and lost sales because of freight delays.
But Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers. Building up similar ecosystems in Mexico will take years. And physical security is a concern in a country notorious for drug cartels and violent crime.
Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ said an industry expert.
China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.
Classroom discussion questions:
- Summarize the Mexico vs. China tradeoffs facing American manufacturers.
- Figure 8.1 (page 357) lists six KSFs for country location decisions. Compare Mexico and China on each.