Mexico v China - a spicy supply chain challenge - Procurement Intelligence Unit

03
AUG
2011

Mexico v China - a spicy supply chain challenge

Recently I have come across many articles placing Mexico as one of the major competitors to China as a low-cost country. Having spent some time studying in Mexico and fascinated by its enormous potential, I find myself confident in supporting Mexico's potential advantage over the Chinese.

The post-credit crunch challenge has just begun for Mexico and there is still a long way to go. The rising costs of the Asian labour force plus the low cost of transport to the US - the world's major consumer economy - may even reduce Mexico's overall supply chain costs.

What does Mexico need to do to be fully competitive with and get ahead of China in the US market?

Mexico has many cards to play to win this game. First is its geographic position. Being a US neighbour, transportation is cheaper and quicker compared to long Chinese supply chains. Speed allows lower levels of inventory, which allows for cost saving and flexibility. Second is the potential revision of certain NAFTA regulations between Mexico and the US, stating that Mexican truckers will be allowed onto American roads. Many EU and Asian firms, from the automotive to the electronic sector, find Mexico ideal as a last link of their supply chain in order to be better positioned to serve North America.

The Mexican supply chain culture is partly designed by US multinational companies. Mexican workers have in many cases been trained in the US, giving Mexico another good card to play against China. This shared culture makes Mexicans more appealing than the Chinese in terms of capabilities, ease of doing business, supplier relationship management and language.

Given this close relationship, another interesting potential between US and Mexico lies in the capabilities of a range of value-adding services that Mexico can offer with greater ease than the Chinese. These services may include management consulting, IT outsourcing and other support services that can improve the efficiency of the whole supply chain. These services are still relatively undeveloped in China.

It's only the beginning of an interesting discussion and I look forward to addressing in depth the large number of issues that will make the difference in this interesting challenge. All Mexicans need to do is play their cards right in order to leverage and develop the many capabilities that they already have.

Comments

Jonathan Webb

Wed 3 Aug 2011 17:24

Interesting piece Pasquale, with some intriguing points for the future. However, I still think you are wrong about this.

The labour costs in Mexico are high and still substantially above those of China. Moreover, the geographical advantages that you cite in relation to the US, is a weakness in relation to Asian and European markets. To rival China as a global powerhouse, it will need to be able to service economies across the world with a variety of either high-value or low cost product.

Victor Partida

Fri 5 Aug 2011 19:47

Great article Pasquale, yes, i do agree with you, Mexican labour is growing and thinking exclusively in the competition vs China regarding the USA Market there are some advantages to consider. Even the language or tech skills.
There is a long way to cover in Mexico to exceed the coverage of Chine in the US market but for sure there are a huge potential in Mexico. Mexico besides Brazil should be the next emerging nations in America.

Hector Curiel

Tue 16 Aug 2011 15:34

I agree with you Pasquele, is a great article, but i think only one ting is missing:

The second city with more mexican is in the US, Los Angeles, it is more big than Monterrey or Guadalajara in Mexico.

Tue 16 Aug 2011 18:10

To Jon: Being closer to the US a Mexican plant can respond quicker than a Chinese plant to changes in demand, and can manage with lower inventory levels, therefore saving on inventory costs, those details are become more and more important in today's volatiles markets. Moreover there are many other issues in favour of Mexico such as transparency, patents and intellectual property, green and CSR, that together with quality can make a considerable difference.

For the future the growing usage of robots will eliminate completely the advantage of China of having a low-cost/low-skilled labour force, there the situation with get quite complicated for China with a possible slowdown after 2 decades of high growth fairly boosted by infrastructural investment.

Thanks Victor and Hector, I am sure that the emigration trend to US by Mexicans will have to slowdown in the future with more opportunities in their own country.

Jose Angel de Monterrey

Sat 24 Sep 2011 02:07

Great article.

I think Mexico is far more competitive than China, not only because of it's nearness to the US but also because of it openness and its many free trade agreements with Canada, US, Europe and a number of other important nations.

Mexico is also closer to Europe than China, not only geographically but also culturally and socially and that poses great advantages.

Mexico offers many other advantages in terms of qualified labor force and infrastructure that can challenge China's.

I am glad Mexico has chosen to compete against the great asian dragon as opposed to becoming its "derivative byproduct" as Brazil, Paraguay, Peru and Argentina have done, countries that are now highly dependent on cheap commodities like soybeans, cereals and raw materials which they sell to China at super low prices and in very high volumes. It is true that Brazil exports airplanes, but when you look at all the picture, more than 75% of Brazil's exports are raw materials and primary products, same happens to Argentina (25% of its exports exclusively dependent on Soybeans!!) and Paraguay and other south american nations now regularly called the Soybean republics.

Mexico on the other hand exports more manufactured goods than Brazila and Argentina together, better jobs with better salaries, you cannot compare the salary of a worker that manufactures cars or cellulars to one that carries bananas or sacks of soybeans.

So if there's a nation in Latin America that can really challenge China's manufacturing supremacy that is certainly Mexico.