The Labor Cost Advantage of the Mexican Manufacturing Industry
Market News

The Labor Cost Advantage of the Mexican Manufacturing Industry

There are many reasons for manufacturers to move their offshore or near-shore production bases to Mexico. The advantage of cheap labor is one of the most prominent.
Published: Jun 04, 2021
The Labor Cost Advantage of the Mexican Manufacturing Industry

Competitive advantages of Mexican manufacturing-

Mexico’s manufacturing industry has many advantages: lower labor costs, open trade agreements, and high-precision labor. Mexico’s manufacturing industry, especially the aerospace, automotive, electronic, and medical equipment manufacturing industries, not only has lower manufacturing costs but also has very good production quality.

  • Lower cost:
    When many companies move their business to Mexico, they can save 20-30% in labor alone. At the same time, they can save on daily expenses such as land and public utilities. This is thanks to the Mexican IMMEX/Maquiladora program. Through the plan, they are able to save considerable amounts on taxes and fees. By operating under the shelter program, they also save on external consulting fees and management costs.
  • Minimize risk:
    The shelter program is one of the reasons why Mexican manufacturing is so attractive. After joining the shelter program, companies can conduct business in Mexico with almost no legal risk. The shelter program provider is responsible for obtaining and maintaining all permits and licenses and ensuring that the company complies with Mexican law.
  • Benefit from skilled labor:
    More than 110,000 engineers graduate from Mexican universities and technical schools every year, and many talents are invested in industry. Companies can do more than simple manufacturing or basic assembly. Many companies conduct R&D and design new products and systems in Mexico.
  • Get high-quality products & timely delivery:
    Mexican manufacturing is known for producing high-quality products from high-tech industries. The country also has many of the most active cross-border and international transportation service companies in the world. Many companies choose to produce in border cities to ensure fast delivery of finished products.
  • Operate near home:
    In addition to cost savings, one of the main advantages of Mexican manufacturing is that it is close to the United States; located in the same time zone, and geographically close. Whether it is the supply of resources or the transportation cost of inbound and outbound resources, communication will be simple, and manpower and the demand for resources will be more sufficient.

Mexico labor rates help you save a lot of costs-

For many years, Mexico’s main reason for attracting foreign companies has been its competitive labor prices. For example, the average hourly wage of production operators in Mexico is approximately $2.60 per hour. Even skilled workers like production engineers, because of the lower cost of living in Mexico, have salaries is much lower than in the United States. In Mexico, companies can save 20-30% of labor costs on average.

Why are Mexico’s labor rates so competitive?

Mexico’s labor costs have long been competitive, especially when compared to the United States. It is worth noting that the price of labor in Mexico has remained relatively low, but the quality and complexity of the products produced in Mexico have increased. In addition, because Mexico’s weekly working hours are 48 hours, and these hours do not require overtime pay, production efficiency is usually higher than in the United States.

  • The average salary in Mexico:
    The average basic wage of junior workers in Mexico is about US$2.60 per hour, which is far below the US federal minimum wage of US$7.25. Because the average cost of living in Mexico is lower than that in the United States, this is a win-win situation.
  • Mexico’s labor price brings lower operating expenses:
    When business owners consider lower rents and utility costs, the cost savings will continue to increase. Although there are underdeveloped locations throughout Mexico, since manufacturing has long been a major part of the economy, there are enough industrial facilities available. Various types of public resources and construction are also gradually developed and improved.

Mexican workforce drives manufacturing growth-

With the development of the manufacturing industry, Mexico's labor force has been expanding rapidly. For companies, especially those in the aerospace, automotive, medical equipment, and electronics industries, it is particularly attractive to see that their industry growth includes the growth of high-precision technical personnel. The Mexican workforce is an attractive option for many American and other foreign companies.

  • The growth of high-precision technical personnel:
    Mexico is committed to training and education. From 2009 to 2015, the number of graduates in the fields of engineering, manufacturing, and construction increased from more than 60,000 to 114,000. Today, more than 110,000 engineers graduate from Mexico each year. The Mexican local and regional governments support and encourage specialized training programs to enable more people with technology skills and qualifications to work in higher-end technology industries.
  • Training and education:
    Mexico’s manufacturing industry has shifted from basic manufacturing and assembly to more complex product and daily necessities manufacturing. Mexico is the third-largest exporter of the IT industry, the sixth-largest supplier to the US aerospace industry, and a major supplier of US medical equipment. There are more than 2,500 higher education institutions in Mexico that provide well-ranked and popular education and training programs. Some schools even cooperate with foreign companies to conduct research and development and design projects, and most of those who have completed a bachelor's degree can communicate in two languages.
Skilled labor:

Cheap labor forces manufacturers to regard Mexico as their preferred manufacturing center. Mexico can use low cost to create high quality. Therefore, more manufacturers choose to set up production bases in Mexico. The professional skills of the Mexican working population have supported many outstanding complex products, which involve aerospace, medical equipment, and automotive industries.

With the increasing number of employees in the manufacturing industry, the Mexican federal government, state governments, industry associations, and large manufacturing companies have invested heavily in personnel training, which has built a bridge of communication between companies and Mexican skilled workers. The Mexican federal government's public expenditure on education at all levels accounts for a high proportion of total government expenditure, ranking second among all the member states of the Organization for Economic Cooperation and Development (OECD). As pointed out by the OECD, to promote “economic development and social harmony”, all countries have increased investment in talent training to help their nationals get more demanding job opportunities. The Mexican government uses public funds to introduce effective incentives to encourage companies to continue to carry out talent training programs.

In addition, the OECD report shows that Mexico's increasing number of college graduates also helps improve the labor market environment. Researchers predict that by 2035, Mexico will be among the top 20 in the world for the number of college students. Many of these graduates will graduate from STEM (Science, Technology, Engineering, and Mathematics) subjects, which will facilitate the cultivation of knowledge-based management talents to meet the needs of employers.

Many other training programs can also help those unskilled workers to be qualified for the corresponding positions. Some companies concentrate resources to provide targeted technical training for workers to meet specific industry needs.

The benefits of Mexican contract manufacturing-

Many American and other foreign companies are considering entering Mexico for contract manufacturing. Mexican manufacturing has low labor costs and real estate costs while maintaining excellent quality.

  • Contract manufacturing, shelter plan:
    For companies looking for specific products or hoping for predictable products and stable operations, contract manufacturing in Mexico may be a good choice. In the early stage of business growth, the demand for its products is greater than the current production capacity
    • Purchase, manufacture, or ship equipment to Mexico
    • Sourcing raw materials
    • Staff training
  • Shelter plan:
    The Mexican Shelter Program is ideal for companies that want to achieve cost-effective manufacturing in Mexico, but want to retain control of their operations. If you are manufacturing or assembling more complex products, then Shelter Plan Manufacturing may be a better choice.
  • After joining the shelter program, companies can master:
    • Your production operations
    • Staff training
    • Purchase of raw materials
  • Enterprises do not need to deal with:
    • Taxes and accounting matters
    • Recruit and hire employees
    • Salary
    • Comply with government regulations on labor, health, and safety, etc.
    • Compliance content for trade and customs

For many foreign companies, a shelter program is a win-win approach. You can benefit from lower labor costs and favorable trade agreements without assuming any legal risks or responsibilities.

Advantages of Made in Mexico vs. Made in China

In many cases, after a company has decided to outsource production, most companies will be faced with choosing Mexico or Asia?

Made in Mexico vs. Made in China

Location & logistics
Especially for U.S. companies, Mexico’s geographic location provides a huge advantage. It is easier for personnel from American companies to visit factories in Mexico, and they can even go back and forth within one day. Compared with going back and forth to the Asian market, it will save more time and cost. And shipping from other continents takes longer and is more expensive. If your factory is in a city on the border of Mexico, your finished product will only take 24-48 hours from the factory to the destination in the United States. It may take three weeks for the same goods to be shipped from Asia to the destination, not to mention the difference in freight costs. Mexico is now known for having a diverse, highly sophisticated workforce, many people speak at least two languages. Mexico’s labor force is also relatively young, while the Asian labor force is aging and declining due to planned policies.

Mexico is now known for having a diverse, highly sophisticated workforce, many of whom can speak at least two languages. Mexico’s labor force is also relatively young, while the Asian labor force is aging and declining due to planned policies. When quality problems arise, they are relatively easy to solve when produced in Mexico. The product can be returned for repair or replacement, and the management staff can deal with it immediately. In Asia, due to distance and communication barriers, quality problems may occur more often and are more challenging to resolve.

Labor cost:
Over the years, the wages of employees in Asia have been far lower than in Mexico. Now, Mexico’s manufacturing labor costs are 20% lower than in some parts of China. If adjusted according to the productivity of workers, the gap will be even greater. Mexico also provides more stable wages, so companies can more easily predict labor costs.

Trade contract:
Mexico has 12 multilateral trade agreements and provides preferential trade access to 44 countries, making it one of the most open international trade countries in the world. In particular, the North American Free Trade Agreement helped the Mexican economy transform into an economy driven by manufacturing and exports.

Management cost & shipping cost:
If you choose to manufacture in Mexico instead of Asia, you can save approximately:

  • 4% of energy costs
  • 60% of gas costs
  • 40% rental rate

Mexico enjoys a strong reputation for protecting intellectual property rights. There may be counterfeit issues in other countries, and courts are slow to enforce or recognize intellectual property rights, but this is not a significant problem in Mexico.

Nearshore services are more meaningful for business-

Nearshore manufacturing refers to companies outsourcing operations to nearby countries, usually countries that share borders with the country where the company is located. Compared with offshore manufacturing (companies outsourced to a distant country), near-shore manufacturing provides many benefits for American companies and foreign companies that want to operate in North America. Mexico’s proximity to the United States is one of the main advantages of choosing near-shore services.

  • Faster and more convenient transportation:
    In the past, China’s low manufacturing prices made up for the many shortcomings of mobile operations so far. Now, labor prices in Mexico are lower than those in China, but this is far from the only advantage of nearshore manufacturing. Even if all other manufacturing costs, labor, management costs, administrative services, and land use costs in Mexico and China are the same, Mexico will have an advantage in the delivery of finished products. In many cases, the company can provide next-day or same-day delivery to American customers at its Mexican factory. Shipping from Mexico is also cheaper and more flexible.
  • More convenient travel & communication:
    Visiting the Mexican factory is also more convenient. A business trip to China requires at least a full day's round trip time, costs more, and needs to plan and apply for a visa. Communication in Mexico is also much simpler, and the time difference is similar. Therefore, emails, telephone calls, and meetings will be answered faster, and related communications can be timelier.
  • Favorable trade agreement:
    With the help of the North American Free Trade Agreement, other trade agreements, and Mexico’s IMMEX/Maquiladora program, US companies can also save on tariffs when importing and exporting goods in Mexico. The IMMEX program allows duty-free imported goods and raw materials to be shipped to Mexico. The company can also purchase supplies and raw materials in Mexico. With the development of various manufacturing industries in Mexico, the industries that support and supply raw materials are also growing.

The labor cost advantage of Mexico’s manufacturing industry: Mexico’s highly advantageous demographic structure

The traditional manufacturing center is facing the pressure of a reducing working-age population, but Mexico has an abundant labor force. This is what the United States and Germany, which are experiencing a shortage of skilled workers, value most.

Data from the World Bank shows that Mexico's population is currently growing at a rate of 1.13% per year. Statista predicts that from 2015 to 2050, Mexico's total population will grow by 19%, reaching approximately 145 million people. The median age has slowly risen in recent years, and this value will reach 19.2 years by 2020. In the coming decades, the number of new jobs created each year will be enough to offset the impact of the retired population.

Advice for entering Mexico-

Companies new to Mexico will find that if the planning is in place, they can build a loyal and skilled manufacturing team. The employee turnover rate across Mexico varies with location and industry. Compared with the US's average attrition rate of 18%, Mexico's performance in turnover is unusually stable. However, only companies that truly understand the local culture and employee expectations can reduce the turnover rate.

Understand Mexican business culture. Learning to adapt to cultural differences helps companies win the loyalty of employees. For example, managers who establish emotional connections with employees are more likely to build trusting relationships with employees. In addition, managers must also be fully prepared before participating in business negotiations.

It is very necessary to pay attention to team building. After companies transfer their production lines to a new country, they will inevitably encounter various challenges at the implementation level. The management team promotes teamwork in the workplace, which is conducive to the smooth implementation of cross-border collaboration. Starting from defining the core goals of the company, the company must unite the entire team and move towards the same vision, while ensuring that this information will not be lost during the transmission process.
Compare local benefits. Although the federal labor law stipulates those employees can obtain corresponding benefits following the law, most manufacturers will provide additional employee benefits to improve employee satisfaction and productivity. Understanding the benefits provided by the target area can help manufacturers maintain their employees' loyalty to the company and the company's attractiveness to employees while operating at a low cost. Comply with local labor laws. Although the labor protection measures in Mexico are like those in other countries, companies still need to follow some special laws and regulations in Mexico and be subject to supervision by relevant agencies.

Published by Jun 04, 2021 Source :ivemsa

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