Over the past few decades outsourcing to Asia has been the default manufacturing strategy for many high technology companies but recent events at home and abroad are causing companies to re-think this strategy.
World events and trends in the global marketplace have combined to once again make Mexico the most attractive market in which to manufacture products for US high technology companies.
The outsourcing push began more than 50 years ago when U.S. manufacturers began outsourcing high labor content activities to countries with significantly lower labor costs, including Mexico, which was one of the first beneficiaries of this trend.
Thousands of jobs, mostly lower level assembly activities, were sent to Mexico where highly manual processes could be performed at a fraction of the cost in the United States.
Mexico was rapidly followed by Puerto Rico and Ireland as locations for high technology, low-cost manufacturing. In time, locations in Asia were developed as even lower cost venues and the trend to outsourcing began to focus on Asia.
It is interesting that what is true for U.S. companies is also true for European companies and Asian manufacturers from China, Japan, Korea and Taiwan. This is especially important for companies that plan to sell most of their product into the U.S. market and who also wish to retain the flexibility to sell output to other countries around the world without penalty.
Here are five key reasons why Mexico is an outstanding value for high technology manufacturing today and, looking to the future, will be an important location in years to come:
1. Competitive labor costs: Since 2005 Mexico has become one of the most cost-effective countries in the world for U.S. companies to conduct manufacturing operations.
The devaluation of the Peso by 20 percent relative to the dollar in the past year has more than offset any wage growth that occurred over the past 3 to 4 years. Simply put, labor costs in Mexico are at historic lows when denominated in dollars. And the productivity of the high technology labor force in Mexico is equal to that of any in the world.
It isn't just direct labor costs that have fallen to historical lows, however. Mexico's indirect labor costs for process improvement engineering and research and development are significantly lower than they ever have been before.
With Mexico's manufacturing and engineering talent located in the U.S. Central, Mountain and Pacific-time zones, an additional advantage becomes apparent: communication between the U.S. headquarters and/or market and the "near-sourced" manufacturing facility can be conducted in real time. No longer do managers, marketers and engineers have to deal with 12- to 16-hour time differentials.
When an issue arises that must be dealt with promptly by the factory, you can rest assured their management team is on the same schedule. And travel between the U.S. and Mexico can be done in hours rather than days.
Over the past two to three years, labor rates in many parts of Asia have begun to increase at 8 to 10 percent annually as Asian governments that once downplayed the role of labor unions become more union friendly. As a result, labor costs, fringe benefits and the resulting regulation of the labor market have driven labor rates up in Asian markets at close to double-digit rates for the past few years.
With Asian governments focusing on growing a larger middle class, employment policies in Asian countries will continue to support wage growth and more restrictive work rules in the foreseeable future.