In today’s global economy, U.S. manufacturers are reevaluating their production strategies to optimize costs and mitigate risks, especially when comparing manufacturing in Mexico vs China. This analysis examines key cost factors-labor, energy, shipping, tariffs and more- to provide insights for manufacturers considering their operational footprints.
Manufacturing in Mexico
A large number of global companies have been manufacturing in Mexico for 50 years, including General Motors, Medtronic, and Tupperware. Today, nearshoring is driving additional value for companies seeking proximity to the the consumer market in the United States.
- Economic Contribution: In 2023, Mexico’s manufacturing sector contributed approximately 20% to the nation’s GDP (INEGI via Tukan). The country accounted for about 3% of the global manufacturing value added* in the same year.
- Export Metrics: Mexico’s exported goods represented 8% of its GDP in 2023, down from nearly 10% in 2022. Manufactured goods comprised about 89% of total exports, according to BBVA Research.
- Leading Exports: Mexico is the world leader for exporting trucks and ranks among top countries for global sales of computers, cars and automotive parts and accessories.
- Manufacturing Employment: Mexico’s manufacturing sector represents over 16% of total workers, or 9.5 million workers (INEGI).
Manufacturing in China
With the signing of NAFTA and the entry of China into the World Trade Organization in 2001, many global companies sought to capitalize on China's expanding market and cost-effective manufacturing capabilities.
- Economic Contribution: As of 2023, manufacturing accounted for approximately 26.2% of China’s total GDP, with the country contributing about 30% of the global manufacturing value added*.
- Export Metrics: China’s total exported goods represented 18.9% of its GDP in 2023, a decline from 19.8% in 2022. Manufacturing exports constitute over 88.9% of China’s total exports of goods and services, according to China’s General Administration of Customs.
- Leading Exports: China is a top exporter of cell phones, electronic circuit components and automobiles, parts or accessories.
- Manufacturing Employment: In 2023, the industrial sector, which includes manufacturing, accounted for about 26.2% of China’s total employment. Approximately 123.17 million workers make up China’s manufacturing workforce.
*Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. Data source = The World Bank.
U.S. trade with Mexico creates approximately 5 million domestic jobs (The Wilson Center), while U.S. exports to China support over 1 million jobs (US-China Business Council). However, the U.S. has had job displacement across various sectors due to trade deficits with each country. About 40% of the content of Mexico’s exports to the United States originates from the United States. About 4% of the value of U.S. imports from China is of U.S.-origin.
Manufacturing in Mexico vs. China
Both China and Mexico are considered low-cost countries. Yet they each offer advantages as a destination for foreign manufacturers.
Labor Costs
Labor expenses are pivotal in manufacturing decisions, with notable differences between China and Mexico.
- Mexico: In the IMMEX industry (manufacturing-for-export), the average annual salary in 2023 was MXN 179,921 (approximately US$10,146), an 11% increase over 2022 (INEGI via Tukan).
- China: In 2023, the urban annual average salary for manufacturing in the non-private sector was RMB 103,932 (approximately US$14,568), marking a 6.6% increase from 2022. In the private sector, it was RMB 71,762 (around US$10,059), up 6.5% from 2022 (China Briefing).
Both countries offer labor cost advantages compared to the United States, where average production worker salaries are about US$35,000 per year (BLS, May 2023). However, factors such as labor productivity, skills level, and labor regulations also significantly influence overall labor efficiency and costs.
Energy Costs
Energy expenses are crucial, particularly for energy-intensive manufacturing industries.
- Mexico: Electricity is supplied by the state-owned company CFE, with rates varying by state and adjusted monthly. Natural gas was about MXN$270.76 per MMBtu (approximately US$13.15 per MMBtu). Electricity averaged about MXN$2.84 per kWh (approximately US$0.138 per kWh). Certain regions have experienced challenges with electrical infrastructure affecting availability. (rates correspond to March 2024)
- China: Electricity prices are state-regulated and vary based on factors like fuel costs and demand. The average price of liquified natural gas was RMB 5,510 / ton (approximately US$14.36 per MMBtu) but may vary, and electricity tends to range between 0.5 and 1 RMB / kWh (around US$.087 per kWh). If the facility uses a lot of electricity, the price will increase. (rates correspond to March 2024)
In comparison, the U.S. benefits from relatively low natural gas prices due to domestic production, about US$7.03 MMBtu (FRED) and electricity costs around US$0.145 per kWh. (rates correspond to March 2024).
Supply Chains
The availability of local sourcing resources significantly impacts manufacturing costs.
- Mexico: the country boasts numerous industrial clusters, notably in automotive, appliances, medical devices, and a growing aerospace industry, among others. These clusters are primarily located in the northern and central regions, aligning with technical development and population centers. Manufacturing in Mexico has a high integration with U.S. manufacturing systems and intermediate inputs used throughout the supply chain.
- China: China has one of the world’s most intricate and expansive supply chain networks. China has developed industrial zones where specific regions or cities concentrate on certain industries which create synergies and economies of scale , promoting innovation and efficiency within the supply chain. Geographically, the renowned industrial clusters such as electronics, textiles, automotive and machinery, primarily located throughout 3 major economic hubs, formed by coastal cities: the Bohai Rim Economic Circle (BREC), the Yangtze River Delta, and the Pearl River Delta. The country’s robust infrastructures and supplier ecosystem with such massive scale and capacity really make its unparalleled competitive edge when it comes to supply chain.
U.S. businesses are increasingly adopting the nearshoring strategies, relocating supply chains to the U.S. or near it. This enhances reliability and reduces costs for the businesses, and has been prompted by changing trade policies. However, challenges still remain with sourcing local content across all industries, and many opportunities exist for development.
Shipping and Logistics
Proximity to the end market affects shipping costs and lead times.
- Mexico: Transit times to U.S. cities vary. For instance, over-the-road trucking from Mexico City to Dallas takes approximately 2-3 days, and 4-5 days to New York City. A cross-border shipment from Tijuana to San Diego costs around US$350, while a journey from Mexico City to Dallas ranges from US$2,600 to US$2,800. Shipping from Guadalajara to New York City could cost upwards of US$9,000.
- China: Ocean freight from Shanghai to Los Angeles typically takes 15-20 days, with transit times to New York city ranging from 20-25 days. A standard 40-foot shipping container to Los Angeles costs around US$4,000 to US$5,000 delivered.
Notably, 53-foot semi-trailers or rail containers in the U.S. can carry up to 50% more items compared to standing shipping containers used in ocean freight from China. Factors such as planning time, cash flow management, energy efficiency, and supply chain resilience also influence shipping and logistics costs.
Tariffs and Trade Agreements
Trade policies significantly impact manufacturing costs.
- Mexico: the country has over 40 trade agreements, including the USMCA where goods manufactured in Mexico can enter the U.S. duty-free, provided they meet specific rules of origin. Trade incentive programs such as IMMEX, VAT and IEPS Certification, PROSEC and the 8th Rule further reduce costs.
- China: China maintains 23 Free Trade Agreements with 30 countries and regional blocks.
Under the current geopolitical circumstances, trade and tariffs are a constantly evolving topic. Companies are preparing for tariffs by adopting different strategies- local for local, diversification, scenario-based planning, etc. When evaluating potential trade opportunities, it's essential to conduct a thorough due diligence involving the calculation of the total landed cost, accounting for variability and implementing risk mitigation strategies.
Manufacturing in Mexico vs China: Key Takeaways
- China represents a much larger manufacturing dominance, evidenced by it’s 30% of global manufacturing value added (26% of China’s GDP), versus Mexico’s 3% (or 20% of Mexico’s GDP).
- About 40% of the content of Mexico’s exports to the United States originates from the United States, where about 4% of the value of U.S. imports from China is of U.S.-origin.
- Both Mexico and China’s labor costs are about 1/3 of that in the United States, yet China’s manufacturing workforce is over 12 times that of Mexico’s.
- Shipping times are over 5 times greater from China than Mexico, affecting numerous critical costs related to operations management and cash flow.
For companies considering manufacturing in Mexico, Prodensa's integral services can support a range of business plans through a diverse range of solutions.