News Flash – Mexico is Closer to the U.S. than is China!!
November 5th, 2009 by Kent KedlAn article in CNN Money a couple of days ago was headlined “Mexico overtakes China as the number one location for manufacturing goods destined for the American market.” A survey was done among U.S. manufacturers who said that, on average, fully landed manufacturing costs on products manufactured in Mexico were cheaper than those from China. OK … interesting so far as it goes. But that is also like saying: “News Flash: Mexico is Geographically Closer to the U.S. than is China!!”
Maybe I am being unfairly smarmy, but smarmy is sometimes the only club I have in my bag. However, there is a potential flaw here in that, in the interest of coming up with the Index That Explains All, we are missing a TON of subtlety. And trust me, I do the same thing … it is very human to want to find a Unified Theory. Oh … and I am usually not very subtle.
But I think there are a couple of things we should be thinking of here …
First of all, a single manufacturing index is potentially misleading because there is not a single manufacturing environment in the world. Sure, saying that “in general” Mexico is cheaper than China is OK, but you start breaking this down by manufacturing sector and you’d start to see a lot of differences. The article says that Mexico makes a lot of sense for things like automotive components being shipped to the U.S. … well, auto manufacturing in the U.S. just got the rug pulled out from under them and they DRASTICALLY cut all sourcing. And it would make sense that the first cut sourcing from China because, for landed cost to the U.S., it is not as competitive. Look at individual sectors: alternative energy; wafer fabrication; food and beverage. We might find the same thing but we might not.
Secondly, the business press tends to gloss over a key point of international business by focusing on EITHER cost savings OR growth, but never in combination. The simple fact remains that, while China might be getting more expensive on a bill of material line-item basis, the pull of its growing markets is enough for companies to ignore one-sided thinking about costs and, instead, consider their entire businesses. If I am an auto parts manufacturer and am thinking about the sales from a factory, I am going to look at my global sales opportunities … and if I am located in China where the auto market is still growing at double digits, I might be willing to trade a few points of manufacturing cost over a plant in Mexico where the markets in their sphere are receding faster than my hairline. As we’ve said before in these pages, cost cutting will only get you to business heaven … all companies need to find a way to GROW! And China is leading on the growth index in almost every sector, far greater than anything in North America. I’d rather see an index on manufacturing costs to products shipped to China … this is where the growth is and where our eyes should be also.
Third, I don’t think we should be looking at this as a competition, a horse-race between nations where we identify winners and runners-up. Some very grave errors have been made over the last 30 years by companies swinging on the Manufacturing Pendulum — first we move everything to Taiwan (and close down the U.S.), then we move it to China (and close down Taiwan) and finally back to Mexico (where we close down everything else and start all over again). A mature global business thinks in terms of “and”, not “or”. We should ALWAYS be thinking “China and Mexico” (and Poland and Russia and Brazil and…).
Fourth, I am very hesitant to base any view of global business on a survey done this year. We are in the Twilight Zone in terms of our understanding of the puts and takes of the global economy … the floor has dropped out and we are suspended in mid-air, Wiley Coyote-like with an “Acme” anvil in our hands an a panicked look on our face. Any survey of ANYTHING this year should have a big ‘ol asterisk on it making a disclaimer that the results may not have any relationship to a future reality. Based on points 1-3 noted above, I think we are going to be seeing a lot of changes in these numbers in the very near future.
In no way do I want to minimize the findings here … it is very true that manufacturing costs have been on the rise in China for a number of years. It is a fact of life. But as those costs have risen, the world in and around China has changed drastically and companies should not only look at raw manufacturing costs to plan their global strategies. First ask the question “How can we grow?” and then (and only then) decide where to put your operations.
