Mexico Offers Nearshoring Opportunities for Canadian Businesses

While there are no predictions Canadian importers are ready to move away from China as a leading provider of manufactured goods, favorable business and labor conditions in Mexico have resulted in a spike in Canadian interest in the country.  And with good reason.  The “2011 U.S. Manufacturing-Outsourcing Cost Index,” prepared by international business consultants AlixPartners, found that Mexico has become the top location for U.S. businesses looking for low landed costs.  This fact, according to Canadian Transportation & Logistics blogger Laurie Turnbull, “should be of interest to Canadian importers if for no other reason than proximity to [Canada’s] largest trading partner.”

In other words, as Mexico has become more cost-efficient and labor effective, and as manufacturers in the U.S. have taken note, so too should Canadian manufacturers interested in manufacturing and supply chain efficiencies.

The Alix study makes note of rising labor costs in China, as well as volatile exchange rates and increased freight costs.  Consider this – in 2008 the hourly wage for manufacturing workers in China was $1.36, a figure that is about 4 percent of the average wage in the U.S.  According to Alix’s forecasting model, wages in China will likely see annual increases of 30 percent.

At the same time, the Alix model assumes that Chinese freight rates will increase by 5 percent annually.  While this is not in and of itself outrageous, the bigger variable is the possibility of rates increasing at a faster pace.  Should that happen, North American businesses could face staggering costs for transporting their “low cost” goods back from China.

So as a growing cloud of uncertainty seems to be settling over China, those same clouds have cleared over Mexico.  Although Mexican labor costs ($6.23 per hour, according to the U.S. Bureau of Labor Statistics) are higher than in China, other factors offset that variable, including reduced transportation costs, greater control over the supply chain, along with heightened quality and accountability.

Mexico has become such a favored source of North American nearshoring, that a separate 2012 survey by AlixPartners found that 50 percent of manufacturing executives said that Mexico was their top option for bringing manufacturing back from China.

“As manufacturing costs have increased in China and elsewhere in Asia,” says AlixPartners director Russ Dillion,  “the cost and time factors involved in shipping goods across vast distances are magnified and, whether it’s in Mexico or the U.S., any company that’s not at least considering alternative manufacturing sources closer to their home market is certainly missing an opportunity.”

Central to this though, is how quickly a business is able to adapt its business plan to take advantage of cost efficiencies found closer to home.  But, as blogger Turnbull points out, locating product suppliers is only the first step.  “Another prime consideration is logistics suppliers, companies capable of providing integrated transportation, distribution, documentation and risk-management/compliance capabilities to support the importer’s objectives in increasing competitive advantage.”