Business Tips

When Producing Costs Less

Mexico is becoming one of the main destinations for international companies looking to relocate their production and expa nd globa lly. recent studies by firms such as bcg and alixpa rtners have concluded that the country has the lowest and most profitab le production costs of any country in the world.

There is something in Mexico that is calling the attention of investors from around the world. In the last five years, the country has become one of the main destinations for production-related investment, particularly from transnational companies that see in it a key piece of their international expansion strategy.

The reasons are many. They include: infrastructure and logistics capacity in all sectors; a large labor market that is mostly young and highly qualified; a favorable business environment due to a stable economy and political system. But the list continues: the country’s geographic location; its large network of treaties and economic agreements that on one hand favor free trade with the world’s main markets and on the other provide legal certainty to investment.

In 2008, a report by Boston Consulting Group (BCG, www.bcg.com) predicted such things as Mexico’s geographic location, logistics capacity and competitive labor market would make the country a strategic option for companies with international expansion plans, particularly those interested in entering the North American market.

In the report, titled “Mexico’s Evolving Sweet Spot in the Globalization Landscape,” BCG said Mexico is a unique and advantageous point for companies whose production processes have one of the following characteristics: significantly high logistics costs; strict responsibility requirements; high administrative involvement; and specialized work force as a fundamental component of its process.

The report estimates that if, for example, a company dedicated to the production of refrigerators (products with high logistics costs) established itself in an Asian country with low costs and tried to sell its product in the US market for 500 usd each, it would have to include 100 usd in shipping costs in the list price. This would be 20% of the total value of each unit. Sending them from Mexico would cost less than half that amount.

“To illustrate the magnitude of differences in shipping costs, we will compare freight costs to transport a container to Pittsburgh, Pennsylvania. From Mexico City it’s 2,679 usd; from Sao Paulo, Brazil, it’s 4,637 usd; and from Shanghai, China, it’s 5,437 usd (These figures represent estimates of total costs of going door to door, based on transportation over land and sea, according to MaritimeChain.com),” the report said.

Another logistical aspect is response time. The ability to offer “just-in-time” transportation is a very important factor for many companies and their suppliers. The time it takes to send products coming from the eastern coast of China to the interior of the United States is on average from three to four weeks through the US West Coast and four to six weeks through the East Coast. In contrast, the time for products coming from Mexico is less than a week. This is thanks to the country sharing close to 4,000 kilometers of border with the United States.

Another factor that makes Mexico a strategic point is the labor component. According to the International Labour Organization and the Economist Intelligence Unit (EIU), the hourly rate for manufacturing workers was estimated to be 3.46 usd in Mexico and 25.51 usd in the United States. In some areas of Mexico, labor costs can be 16 times cheaper than the United States.

And what if the production process requires strong administrative involvement? Mexico also has viable solutions. When the hourly rate becomes a critical factor, you have to take into account that the difference in hourly rates between Mexico and the main cities in the United States is minimal. For example, it is only one hour of difference with New York and two hours with Los Angeles. When administrative involvement is required in the comprehensive process, the availability of local talent can be an important factor. Mexico has a large sector of managers, most educated and trained in the United States, able to speak English and accustomed to the American way of doing business.

A recent study by AlixPartners (www.alixpartners.com), a leading business consulting firm, has identified Mexico as the country with the best production costs, followed by India and China.

In the Manufacturing-Outsourcing Cost Index 2009, AlixPartners analyzed production costs of different manufacturing and assembly components in China, India, Brazil and Mexico and compared them with what it would cost to make the same products in the United States. Also, the study reviewed seven key production cost factors in each country during the last three years: exchange rates; labor costs; transportation costs; cost of raw materials; inventory costs; equipment costs; and financial obligations.

The results are convincing: Mexico is the new number one while China, which at one time was the country with the lowest production costs, came in behind India. The study concluded that even if China’s position could improve by the end of 2009, it still would not surpass Mexico. With the clear advantages Mexico offers for business development, we need to add one more: the exchange rate between the peso and dollar. Recent movements in exchange rates have placed Mexico in a competitive position: producing goods in pesos results in a profitable business when it’s about selling in dollars.

The exchange rate in countries like China is undervalued, which creates an artificial difference in relative costs compared to Mexico. Once the yuan is free floating (like the Mexican peso), labor, logistic and transportation costs in China will be bigger in terms of dollars.

Mexico maintains itself as a competitive destination. Leading business consulting firms are pointing this out and different international companies from all sectors are taking advantage of what the country has to offer. In the last few months, companies from around the world have announced the transfer of their manufacturing operations to Mexico.

What’s the lesson from all this? Businesses that are looking for new production locations so they can enter the North and Latin American markets should seriously consider Mexico.

Source:Promexico/negocios/07/2009/Businesstips