Mexico is becoming the new China. Is your business ready?

The tide of globalized manufacturing is turning. After decades of China holding the torch as the world's workshop, we are witnessing a fundamental shift towards nearshoring and near-sourcing.

Today’s article will explore China’s rise and fall as the world’s largest manufacturing hub and how Mexico picked up the torch supplying the US market.

The rise of the dragon: How China became a manufacturing powerhouse

Since opening up to the world in 1978, China has transformed itself from a poor and isolated country to a global economic force. Its GDP grew by an average of over 9% annually from 1978 to 2019, lifting more than 800 million people out of poverty.

For decades, China's economic ascent rested on a potent formula:

Low labor costs + A vast domestic market + Strategic government support

Cheap labor is what initially spurred foreign investment in the Asian giant. In 2015, the average wage in the Chinese manufacturing sector was close to 56,000 CNY, or roughly $7,400.

Compare that to the average salary of a US manufacturing worker of around $40,000, and it’s easy to see why companies would prefer setting up shop in China.

But cheap labor is only the beginning. China also offers a large pool of competent engineers for its factories and a robust industrial sector where companies can source almost anything.

Case study: Tesla Gigafactory Shanghai

Tesla’s Gigafactory in the Shanghai Free Trade Zone is a testament to China’s attractiveness to foreign investors—the factory benefits from China’s large and skilled workforce, advanced infrastructure, and supportive government policies.

Besides offering a 95% localized supply chain and a 99.9% local workforce, the Shanghai Free Trade Zone also offers tax exemptions, streamlined customs procedures, and preferential policies for foreign investment.

These factors enabled Tesla to lower its production costs and prices. The factory currently supplies the Asian market, but Tesla recently announced plans to supply EVs to Canada as well.

Cracks in the facade: China's sheen begins to fade

Despite the many benefits, cracks emerged in China's economic armor driven by three main factors:

#1 Increased wages

As its GDP exploded, so did manufacturing wages, eroding China’s main cost advantage. In fact, wages have doubled in the last 10 years, reaching almost 98,000 CNY, or $13,775 in 2022.

#2 The US-China trade war

Since June 15, 2018, after accusing China of unfair trade practices, the US government has imposed 25% tariffs on over $550 billion worth of Chinese imports. These tariffs automatically made products manufactured in China more expensive in the American market.

#3 The COVID-19 pandemic

COVID disrupted all global supply chains in 2020. The aftermath also included a massive shipping container shortage and manufacturing crisis, leading to the 2021 “Big Supply Chain Crunch.”

Companies worldwide began diversifying their supplier base to nearer countries, reducing China’s share of international trade.

The rise of the Quetzalcoatl: Mexico seizing the opportunity

Amidst China's challenges, Mexico quietly carved its path. In July 2023, the Latin American nation surpassed China to become the United States' largest trading partner by volume for the first time in history, a testament to its newfound prominence.

It’s a fact that today, more and more companies are choosing Mexico as the perfect solution to their supply chain woes. The question is, why?

Why choose Mexico for US-bound manufacturing?

Mexico offers a compelling value proposition for companies seeking to tap into the US market:

#1 Proximity

First, there’s no need to point out that it’s as close as you can get to the US, sharing a border of almost 2,000 miles. Proximity gives companies more flexibility and lowers shipping costs, allowing them to produce at their own pace and not depend on warehousing large volumes of parts or raw materials.

#2 Cost-effective workforce

Mexico also offers a large pool of low-cost, highly qualified workers.

The average Mexican manufacturing worker earns roughly $6,000, which is less than half of what Chinese manufacturing workers earn today.

Also, Mexico offers a competitive workforce as the 8th country with the highest number of engineering graduates worldwide.

#3 Rock-solid trade agreements

Stable trade agreements mitigate the risk of future tariffs on Mexican imports. Mexico and the US have had multiple trade agreements throughout the years, including the United States-Mexico-Canada Agreement (USMCA), a free trade agreement signed in 2020.

#4 Stable supply chain

Finally, just like China did during the 80s and 90s, Mexico has been growing as a manufacturing hub. For example, the country has one of the most diversified automotive sectors in the world, with 22 OEMs and more than 2,000 suppliers.

It is also the world’s seventh-largest passenger vehicle manufacturer, with most vehicles exported to the United States.

Mexico's challenges: Navigating the terrain

Mexico is a prime location for manufacturing for the US market, but it presents its own set of challenges.

• There are security concerns, particularly along the US-Mexico border.
• Mexico also has subpar roads, railways, ports, and other infrastructure.
• Finally, a lack of readily available supplier data makes finding qualified suppliers in Mexico challenging. This is where BabelusAI steps in to bridge the gap.

How BabelusAI can be your Mexican manufacturing ally

BabelusAI leverages cutting-edge AI and data analytics to revolutionize supplier discovery and management.

For the last two years, we’ve been helping large corporations find and work with Mexican suppliers, slashing supplier discovery times by 90%. In this time, we’ve developed a comprehensive knowledge of the Mexican supplier market, especially in the automotive industry.

If you want to start your manufacturing journey in Mexico, contact us today, and we can discuss how BabelusAI can help you build a more resilient, sustainable, and profitable supply chain in Mexico, or schedule a call now to discuss developing a pilot for your company at no cost.