As China Inc. Sputters, Mexico Gains

China has been the world’s factory floor for over a decade, but its manufacturing dominance is abating. Sure, a significant amount of investment will continue to enter the Middle Kingdom, if for no other reason than to target its burgeoning middle class, but factory investment that used to automatically go to China is diversifying. Much of the low-end assembly work is spreading across Asia, to Bangladesh where wages are half that of China’s, and to Indonesia, Vietnam and Cambodia.

Still, these countries aren’t full service alternatives to China; they lack infrastructure, skilled workers, and domestic supply networks. Mexico is, by contrast, especially for manufacturers eying American consumers. And given its attributes, Mexico stands to take on much of the high-end manufacturing that can’t be easily outsourced from China to Southeast Asia.

For starters, inflation-adjusted factory wages in China are now on par with those in Mexico (and, if a recent Boston Consulting Group study is to be believed, Chinese wages will rival those in the US South by 2015. This holds out the prospect of input production and final assembly between the two countries). Already manufacturers are turning a fresh eye to Mexico. In 2009, when the manufacturing revival may have begun, Foxconn, a firm best known for the iphones and ipods it produces, invested heavily in Mexico. Since then, other electronics firms and auto parts manufacturers have set up shop in Mexico or expanded operations.

In truth, wages are just a fraction of overall production cost, and a grab bag of other factors hints to the forces that make Mexico once again a hotspot for investment. Automation makes wages less of an issue, but a skilled workforce is needed to avail the technology. Mexico has it. Transportation costs account for a larger share of overall production costs than it did in, say, the 1990s. Here Mexico’s rapid access to the United States will save money for firms looking to sell in the Americas.

In my next post I’ll look at supply chains.