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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global SupplyChain Logistics
 

From SCDigest's On-Target e-Magazine

- April 8, 2013 -

 

Supply Chain News: Rise in China Wages Now Means Labor Costs about 20% Lower in Mexico, New Study Finds


Wages have Stagnated in Mexico for a Decade, While Rising Sharply in China, New Bank of America Study Says, as Country Becomes Increasingly Favored Sourcing Point

 

SCDigest Editorial Staff

 

It's not only the US that has recently seen its manufacturing sector benefitted from rising wages and labor costs in China. A new report from the analysts at Bank of America says that Mexico is also a winner from that change, leading to a dramatic turnaround in comparative wage rates.

SCDigest Says:

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What Mexico produces is no longer overwhelmingly headed to the US. Ten years ago, some 90% of Mexico's exports went to the US. In 2011, it was less than 80%.

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Just 10 years ago, Mexican labor rates versus the US dollar were 188% higher than those in China, according to the new report from the bank's chief Mexican economist Carlos Capistran. Now, as shown in the chart below, that situation has changed dramatically, with Mexican labor now about 20% less expensive than China.

What is going on here? It is simple supply and demand, at one level. China's population is aging, and draconian "one child" policies mean the availability of younger workers is stagnant. Combine that with huge growth in demand for labor in Chinese manufacturing, and state policies designed to push wages up (e.g., several increases in recent years of the minimum wage) and the result is predictable - average wage rates in the coastal areas at least have risen substantially in recent years.

It's the other way in Mexico, which has seen a rising population and a high percentage of young workers. Until the last few years, manufacturing need for workers was dampened as China took share away from Mexico in industries such as apparel and shoes after China entered the World Trade Organization in 2001.

The result: it's the wages that have stagnated in Mexico, not the supply of workers, now giving it a labor cost advantage versus China on top of its advantages in terms of proximity, speed of delivery , and operating at the same time of day as the US.

As shown in another chart below, although the US imported about $150 billion more goods from China than from Mexico in 2012, Mexican imports are growing at a faster rate. Since 2010, Mexican imports are up 32%, while those from China are up just over 20%.

 

 

Source: Bank of America


It's also worth noting that the US exports far more to Mexico than to China, such that the trade deficit in goods with Mexico is just $61.4 billion, while the trade deficit with China last year was a massive $325 billion.

All told, China accounted for 17.5% of US imports last year, while Mexico had a 12.4% share.

As a result of all this, there has been a lot of foreign investment in Mexico in recent years by the US and other countries. The US auto industry has been in Mexico for years. Now, despite worries about drug gangs and violence, others are also making the move.



(Global Supply Chain Article Continued Below)

 

 
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For example, plane maker Bombardier invested heavily in Mexico to build its latest general Learjet 85 corporate aircraft, which is scheduled for release in 2014.

 

 

US Imports and Exports with China and Mexico Last Five Years

 

 

 

Source: US Census Bureau/SCDigest

Industrial giant Siemens now assembles high-voltage electrical equipment in a new plant about two hours outside of Mexico City - work it used to have done in China or India.

And what Mexico produces is no longer overwhelmingly headed to the US. Ten years ago, some 90% of Mexico's exports went to the US. In 2011, it was less than 80%, as multi-national manufacturers increasingly see the country as the sourcing point for South and Latin America and even Europe and Asia.

The minimum wage in Mexico is somewhere near just 60 cents an hour. The Bank of America report says the average hourly wage in Mexico is just $2.50, though the US Bureau of Labor Statistics says in it more like $4.50.

The low and stagnant wage rates have given Mexico but there is s social cost to this situation too, as millions of Mexicans have seen their standard of living erode over the past decade.

Luis de la Calle, a former Mexican government official who helped negotiate the North American Free Trade Agreement, recently told the New York Times that "We need to increase wages to become a true modern country."

But the Bank of America report does not see the Mexican wage equation changing much any time soon, as the labor supply keeps growing there at least through 2020.


Any reaction to data showing Mexican labor costs are lower than China's? Will it continue to take market share? Let us know your thoughts either via email or in the Feedback section below. We will keep your comments anonymous by request.

 


 

Recent Feedback

 Question is, is this true on the ground? Anyone out there with direct experience of what manufacturing wages are in China and Mexico now - ie, what the situation really is, rather than what it is claimed to be? 


Michael Taylor
Director
Coldwater Economics
Sep, 20 2013
 
 
   
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