Manufacturing in Mexico, China or USA?

A business analysis whether to expand, outsource, or manufacture your service or products to Mexico, China, or the United States

1. Important Factors in an Expansion Process

Before any expansion, relocation, outsourcing, nearshoring, or offshoring is executed, you need to do a lot of research in order to find the right country and partner or provider abroad. There are various factors you must look at when you want to manufacture a product or outsource a service abroad as it takes a lot of time and money to undertake such a project.

We carried out an industry comparison between Mexico, United States, and China to evaluate the most important economic factors that must be taken into consideration when expanding or outsourcing. Each country has its advantages and disadvantages of launching a fabrication.

Tense relationships between China and other countries like the United States, or production stop due to coronavirus have disturbed the production. In addition, the exploitation of workforce and therefore not in compliance with the law have given China a bad reputation in Europe.

1. Important Factors in an Expansion Process

Before any expansion, relocation, outsourcing, nearshoring, or offshoring is executed, you need to do a lot of research in order to find the right country and partner or provider abroad. There are various factors you must look at when you want to manufacture a product or outsource a service abroad as it takes a lot of time and money to undertake such a project.

We carried out an industry comparison between Mexico, United States, and China to evaluate the most important economic factors that must be taken into consideration when expanding or outsourcing. Each country has its advantages and disadvantages of launching a fabrication.

Tense relationships between China and other countries like the United States, or production stop due to coronavirus have disturbed the production. In addition, the exploitation of workforce and therefore not in compliance with the law have given China a bad reputation in Europe.

Not only should you look at the labor or infrastructure costs, but also where you want to market your product, respectively where your clients are based and what trade agreements they have with other countries. Also, how would you handle return services and how cost efficient is the supply chain. In addition, you do not want to lower your quality standards as it would damage your firms’ reputation. Thus, you must seek skilled labor force who can be trained and execute the activities as if produced in your home country. They must also be taught how to live your vision and mission.

Due to cheap labor force, a large market and efficient operations, China has always been seen as the heartland of expansion, outsourcing, or nearshoring destination. They have huge fabrication cities and are attractive for start-up companies. They produce fast, cheap, and at large volume.

However, in recent years things have changed: Tense relationships with other countries like the United States, or production stop due to coronavirus have disturbed the production. In addition, the exploitation of workforce and therefore not in compliance with the law. On the other hand, countries like Mexico have made a strong and positive development in the last decade and have become an attractive destination due to its proximity to the United States and due to over 40 trade agreements with countries all over the world. 

2. Stability of the Government

Over the past decade, many countries have become less fragile. The United States on the contrary, have become less stable and there is a lot of turmoil within the society as well as strikes. Indeed, as you can extractt from the graph, USA is among the 20 states that have seen the highest percentage of increase in relative fragility over the past 10 years – a list that includes Syria, Venezuela, and the United Kingdom.

Even though the U.S. is stable according to some of the index’s economic, political, and social measurements, it has seen a stark drop in what the index labels as cohesion, an indicator that reflects internal divisions. Given the pandemic, recession, protests, and political turmoil, the 2020 score, which has not been calculated yet, will likely drop further. In the recent months with the election of the new president you could clearly see a quarrelling country – among the parties and among the society.

China on the other hand has always been a country with clear rules and standards, and they do not give other countries insights of their laws or transparency of how they treat their population. This is also shown by the tension that arises when people demonstrate in the streets.

Even though Mexico has a negative reputation as being very corrupt and for not offering much safety, the economy has been growing a lot during the last decade. This is also because of free trade agreements with over 40 countries. In addition, they have a very stable relationship with the United Sates thanks to the USMCA agreement, whereas China and the United States do not get along well with each other.

2. Stability of the Government

Over the past decade, many countries have become less fragile. The United States on the contrary, have become less stable and there is a lot of turmoil within the society as well as strikes. Indeed, as you can extractt from the graph, USA is among the 20 states that have seen the highest percentage of increase in relative fragility over the past 10 years – a list that includes Syria, Venezuela, and the United Kingdom.

Even though the U.S. is stable according to some of the index’s economic, political, and social measurements, it has seen a stark drop in what the index labels as cohesion, an indicator that reflects internal divisions. Given the pandemic, recession, protests, and political turmoil, the 2020 score, which has not been calculated yet, will likely drop further. In the recent months with the election of the new president you could clearly see a quarrelling country – among the parties and among the society.

China on the other hand has always been a country with clear rules and standards, and they do not give other countries insights of their laws or transparency of how they treat their population. This is also shown by the tension that arises when people demonstrate in the streets.

Even though Mexico has a negative reputation as being very corrupt and for not offering much safety, the economy has been growing a lot during the last decade. This is also because of free trade agreements with over 40 countries. In addition, they have a very stable relationship with the United Sates thanks to the USMCA agreement, whereas China and the United States do not get along well with each other.

3. Trade Agreements between countries

Over many years, China and the United States have been in a trade war and many tariffs went up to 25% for imports from China. The objective is to make production in China less attractive and to start producing in their own country. 

Due to this constellation, Mexico can take advantage thanks to its NAFTA agreement and proximity to the United States. A lot of firms which expanded their production to China need to diversify their portfolio and produce in a different place like Mexico, as the United States itself is up to 4 times more expensive if you consider the total cost.

If you start producing abroad and cannot plan consistently because of unforeseen tax increases due to instable government relationships it can deeply affect a business.

3. Trade Agreements between countries

Over many years, China and the United States have been in a trade war and many tariffs went up to 25% for imports from China. The objective is to make production in China less attractive and to start producing in their own country. 

Due to this constellation, Mexico can take advantage thanks to its NAFTA agreement and proximity to the United States. A lot of firms which expanded their production to China need to diversify their portfolio and produce in a different place like Mexico, as the United States itself is up to 4 times more expensive if you consider the total cost.

If you start producing abroad and cannot plan consistently because of unforeseen tax increases due to instable government relationships it can deeply affect a business.

4. Free Trade Agreements

There is no other country with more free trade agreements than Mexico. They enforce to have such agreements and to be attractive in order to start business with other countries in their country while everything is worked out in one contract. On the other hand, China as well as the United States are not that much dependent on them due to the size of their market. However, you will face various challenges like different contracts with each country as they do not have such agreements.  

In 1994, the North American Free Trade Agreement (NAFTA) was implemented with the goal to ease access and decrease bureaucracy for Mexican goods throughout the United States and Canada. This also allowed greater global expansion and producing in Mexico became more desirable as tariffs on Chinese goods and imports increased due to trade negotiations between the United States and China.

The new USMCA, created under the Trump administration, which has yet to be ratified by congress, essentially aims to level the playing field in the automotive industry requiring that suppliers in Mexico must have a certain percentage of higher-wage personnel contributing to the manufacturing process.

4. Free Trade Agreements

There is no other country with more free trade agreements than Mexico. They enforce to have such agreements and to be attractive in order to start business with other countries in their country while everything is worked out in one contract. On the other hand, China as well as the United States are not that much dependent on them due to the size of their market. However, you will face various challenges like different contracts with each country as they do not have such agreements.  

In 1994, the North American Free Trade Agreement (NAFTA) was implemented with the goal to ease access and decrease bureaucracy for Mexican goods throughout the United States and Canada. This also allowed greater global expansion and producing in Mexico became more desirable as tariffs on Chinese goods and imports increased due to trade negotiations between the United States and China.

The new USMCA, created under the Trump administration, which has yet to be ratified by congress, essentially aims to level the playing field in the automotive industry requiring that suppliers in Mexico must have a certain percentage of higher-wage personnel contributing to the manufacturing process.

5. Labor and Infrastructur costs

China and Mexico are seen as the cheapest labor force country with highest productivity worldwide. However, certain wages in the manufacturing industries of Mexico were up to 20 percent lower in Mexico than they were in China, meaning greater efficiency at a lower price.

Foreign exchange rates also favor Mexico vs. China because the Peso has steadily declined over the past 30 years. Meanwhile, the Chinese Yuan has mostly been pegged to the U.S. Dollar. In fact, the devaluation of the Peso vs. the U.S. Dollar has reduced the effective labor rate inflation to about 3% per year. The United States on the other hand cannot compete at all with labor or infrastructure costs.

educated workforce

5. Labor and Infrastructur costs

educated workforce

China and Mexico are seen as the cheapest labor force country with highest productivity worldwide. However, certain wages in the manufacturing industries of Mexico were up to 20 percent lower in Mexico than they were in China, meaning greater efficiency at a lower price.

Foreign exchange rates also favor Mexico vs. China because the Peso has steadily declined over the past 30 years. Meanwhile, the Chinese Yuan has mostly been pegged to the U.S. Dollar. In fact, the devaluation of the Peso vs. the U.S. Dollar has reduced the effective labor rate inflation to about 3% per year. The United States on the other hand cannot compete at all with labor or infrastructure costs.

6. Cost-Efficient Supply chain

A significant advantage and difference is the reduction of transportation costs for raw materials and just in time manufacturing for Mexico. In addition, due to the distance to the United States and fluctuated oil prices, shipping costs are exponentially higher when manufacturing in China (which take around 3 weeks).

A shipment from China to the United States takes around 3 weeks and a container cost $5000. On the contrary, a shipment from Mexico to the USA takes less than 24 hours and cost around $600.

On the contrary, thanks to Mexico’s proximity to the United States, the commodity can easily be transferred by camions within 24 hours and at a much lower price.

  • Cost of a truck from Mexico to the United States by truck(s):

Where to where

By container

Cost of a truck

China to United States

$5000 / 3 weeks

Not possible

Mexico to United States

$600 / 3 days

$400 / 1-2 days

In addition, due to the recent events like the pandemic or the broken supply chain (sea freight blocked the river), which caused empty warehouses, many companies have to overthink their strategy and diversify their portfolio.

6. Cost-Efficient Supply chain

A significant advantage and difference is the reduction of transportation costs for raw materials and just in time manufacturing for Mexico. In addition, due to the distance to the United States and fluctuated oil prices, shipping costs are exponentially higher when manufacturing in China (which take around 3 weeks).

A shipment from China to the United States takes around 3 weeks and a container cost $5000. On the contrary, a shipment from Mexico to the USA takes less than 24 hours and cost around $600.

On the contrary, thanks to Mexico’s proximity to the United States, the commodity can easily be transferred by camions within 24 hours and at a much lower price.

  • Cost of a truck from Mexico to the United States by truck(s):

Where to where

By container

Cost of a truck

China to United States

$5000 / 3 weeks

Not possible

Mexico to United States

$600 / 3 days

$400 / 1-2 days

In addition, due to the recent events like the pandemic or the broken supply chain (sea freight blocked the river), which caused empty warehouses, many companies have to overthink their strategy and diversify their portfolio.

7. Central Location

If you produce in China and deliver to the United States or South America, you will need a return center located somewhere close by its clients.

Mexico is perfectly located if there are any issues with quality as it is reached within hours, so you can operate your location as production as well as return service or distribution center.

In addition, travel time to China is twice as long as travelling from Europe to Mexico. This again will reduce travel expenses.

select the right location

7. Central Location

select the right location

If you produce in China and deliver to the United States or South America, you will need a return center located somewhere close by its clients.

Mexico is perfectly located if there are any issues with quality as it is reached within hours, so you can operate your location as production as well as return service or distribution center.

In addition, travel time to China is twice as long as travelling from Europe to Mexico. This again will reduce travel expenses.

8. Educated Workforce

Mexican engineers get very good education

By far, the United States have the best workforce among the three countries – however also the most expensive one.

Mexico also has highly skilled workforce at every business level and provide a high level of global competitiveness in the manufacturing market. Much of the working base comprises skilled and semi-skilled direct labor.

This means that they have several years of experience and are at least partly bilingual.

8. Educated Workforce

Mexican engineers get very good education

By far, the United States have the best workforce among the three countries – however also the most expensive one.

Mexico also has highly skilled workforce at every business level and provide a high level of global competitiveness in the manufacturing market. Much of the working base comprises skilled and semi-skilled direct labor.

This means that they have several years of experience and are at least partly bilingual.

9. Market Potential

Obviously, the largest market potential is provided by China and the United States with their huge number of population and economic development. However, Europe is a large industrial consumer and has a lot of purchasing power since almost every European country is a first or at least second world country.

On the contrary, Mexico is an emerging country and on the edge of becoming a first world country thanks to its developments. Except for a few nations, a lot of other countries in South America have been going through a development like this as well a steady growth in the last decades.

enter new markets

9. Market Potential

enter new markets

Obviously, the largest market potential is provided by China and the United States with their huge number of population and economic development. However, Europe is a large industrial consumer and has a lot of purchasing power since almost every European country is a first or at least second world country.

On the contrary, Mexico is an emerging country and on the edge of becoming a first world country thanks to its developments. Except for a few nations, a lot of other countries in South America have been going through a development like this as well a steady growth in the last decades.

10. Bureaucracy to start a Business

According to the Best Countries Ranking of the news magazine U.S. News China and Mexico are ranked as 3rd respective 7th place in the category “Start a Business” – before many other large countries like USA, Great Britain, Germany, France, or Japan. The following properties were equally included in the evaluation:

  1. Financing is affordable
  2. Bureaucracy
  3. Favorable manufacturing costs
  4. Connection to the rest of the world
  5. Easy access to capital

The respondents are business decision-makers from 36 countries in America, Asia, Europe, and Africa

11. Tax Burden

Mexico has a corporate tax rate of around 30%. However, thanks to the program of “immex”, foreign companies have a tax advantage to manufacture their goods at a much lower tax than in many other countries!

The primary objective of the IMMEX program Mexico (“Manufacturing Industry, Maquiladora, and Export service) is to expand the Mexican economy by enabling foreign companies to import raw materials and components into Mexico where they will be processed into manufactured products to be then exported to other countries. The main advantage of this program is that the imported raw materials and components are free of general import duties, value-added taxes, and compensatory fees.

10. Bureaucracy to start a Business

According to the Best Countries Ranking of the news magazine U.S. News China and Mexico are ranked as 3rd respective 7th place in the category “Start a Business” – before many other large countries like USA, Great Britain, Germany, France, or Japan. The following properties were equally included in the evaluation:

  1. Financing is affordable
  2. Bureaucracy
  3. Favorable manufacturing costs
  4. Connection to the rest of the world
  5. Easy access to capital

The respondents are business decision-makers from 36 countries in America, Asia, Europe, and Africa

11. Tax Burden

Mexico has a corporate tax rate of around 30%. However, thanks to the program of “immex”, foreign companies have a tax advantage to manufacture their goods at a much lower tax than in many other countries!

The primary objective of the IMMEX program Mexico (“Manufacturing Industry, Maquiladora, and Export service) is to expand the Mexican economy by enabling foreign companies to import raw materials and components into Mexico where they will be processed into manufactured products to be then exported to other countries. The main advantage of this program is that the imported raw materials and components are free of general import duties, value-added taxes, and compensatory fees.