Mexico’s high production costs outweigh benefits of cheap labour

May 28, 2002

Free Market Foundation

Some Mexican companies are shipping thousands of low-wage jobs to Asia due to soaring costs. And although wage rates in Mexico are lower than in the United States, low productivity and higher costs for electricity and raw materials make it increasingly economical to manufacture some goods in the U.S., rather than Mexico.

In March, Japan’s Canon Inc. closed a computer-printer plant in Tijuana, moving production to Thailand and Vietnam.

VTech Holdings Ltd., the Hong Kong-based electronics manufacturer, moved to China last year, shuttering a plant in Guadalajara and leaving more than 4,000 jobless.

Monterrey-based Grupo IMSA discovered that it cost less to produce steel panels at their Lewisville, Texas, plant than at their factories south of the border even panels made for use in Mexico.

Nor are lower-tech goods immune from the price pressures; the Goodyear Tire and Rubber Co. and Continental AG cited higher costs in exiting their manufacturing operations.

China is emerging as a chief rival. A worker at a Chinese factory typically costs a company 50 cents to $1 per hour, compared with $2 to $2.50 per hour in Mexico and $8.50 to more than $20 for the U.S.

In the World Competitiveness Yearbook 2002, compiled by Swiss business school IMD International, Mexico slipped to 41st out of 49 countries, where it had ranked 36th in 2001 and 33rd in 2000.

China, by contrast, moved from 33 in 2001 to 31 this year.

One culprit behind Mexico’s slide is the overvalued peso. There are also long-standing obstacles to doing business in Mexico, including a creaky infrastructure, high crime and low education levels.

However, some Mexican firms are attempting to overcome their disadvantages by guaranteeing fewer defects and a higher level of craftsmanship than many U.S. and Asian competitors offer.

Source: Brendan M. Case and Angela Shah, Mexico Losing Its Manufacturing Edge, Dallas Morning News, May 12, 2002.

For text http://www.dallasnews.com/dmn/news/stories/051202dnbusmexjobs.64965.html
For more on Mexico http://www.ncpa.org/iss/int

FMF Policy Bulletin\21 May 2002