11 Mar 2020 Should You Consider Moving Your Production from China?
Major Shifts Have Occurred over the Last Several Years with Sourcing from China
In this article:
- Even before the U.S./China trade war, the costs of doing business with China had risen to an unsustainable level. We discussed how companies ended up with the current China situation in our blog “China First: Wrong Reasons for the Decline of American Manufacturing.”
- Mexico is a viable alternative to China, offering many advantages to U.S. businesses.
- Complexities in moving products to Mexico require a strategic partner with experience bridging those differences.
The headlines have been full for the last year of the trade war with major tariffs on imports introduced by both the United States and China. Although the Trump Administration and China agreed to somewhat of a truce in late 2019, there are still hundreds of billions of Chinese goods coming into the United States subject to a 25 percent tariff. While President Trump shows no signs of backing down on the 25 percent tariff, no viable Democratic presidential candidate has even hinted at lifting such sanctions on China for unfair trading practices. The failure of China to honor previous agreements on intellectual property protection and the large subsidies of export businesses by the Chinese government are not likely to change. Tariffs will be here for the foreseeable future.
Labor costs in China have been increasing at 25 to 30 percent per year for the last two decades. As a result, many products from China are no longer a bargain, as they once were. The official minimum wage in China is 257 percent higher than it is in Mexico today. Products with a high labor content can often be less expensive in Mexico.
The headlines this year have been dominated by Coronavirus (COVID-19) which, to date, has greatly disrupted Asian supply chains. This virus has the potential to do serious and permanent harm to those supply chains. There is also the strategic implication of pharmaceuticals based upon China production, rare earth metals critical to national defense, and other products which have shaken confidence in China. Clearly, alternatives are needed immediately.
Mexico currently has many advantages over China, which makes doing business with Mexico even more appealing.
Time Zone and Language — Operating in the same time zone and speaking the same language (many Mexican executives study in the United States) make communication much easier than with China. Mexico’s business culture and protocol are also far more Westernized and in line with the United States when compared to such practices in China.
Location — Proximity to the U.S., coupled with sound transportation and infrastructure, greatly reduces supply chain inventory and increases responsiveness to changes in product demand. The reality of such a nimble supply chain from Mexico is the dream of many chief executives in the U.S.
Education — Mexico boasts a strong university system with an emphasis on engineering degrees to support manufacturing. Currently, Mexico graduates more engineers as a percentage of its population than the United States.
Cost —Mexico possesses a very favorable labor cost for manufacturing and other disciplines.
Complexity in Dealing with Mexico
The advantages listed above suggest that Mexico would be a great and easy alternative to China. However, the differences between China and Mexico are huge.
US companies have been spoiled by the ease of doing business in China. The primary example is that for finished goods, Chinese factories provide a turn-key solution. They will build out the supply chain, and there is a high level of vertical integration. Many U.S. companies that moved to China many years ago have outsourced many manufacturing capabilities to China and no longer have engineers capable of full product design because the Chinese factories provide that service.
In fact, for many companies, sourcing is now in marketing, which means there is little knowledge in the discipline of manufacturing and product engineering. Marketing has design input in functionality and aesthetics, but not in how a product is physically made. In many cases, product selection is done at a large trade show such as the Canton Fair or the Shanghai Hardware Show. Minor changes are directed by marketing, and the product is launched in the United States with minimal design except for packaging designed for the retail shelf. Additionally, the Chinese now believe that they own the intellectual property, the design, the drawings and many times, the tooling that was paid for by the U.S. company.
The Mexican manufacturing ecosystem is tied closely to the production of intermediate goods and aligned with the U.S. automobile industry. As such, many manufacturers are not vertically integrated. Their suppliers are sometimes pre-determined by the U.S. importer. Their product designs are more industrial and less consumer-oriented. Many of them strictly quote from drawings, not samples. The obstacle that needs to be overcome is that the U.S. company has samples and sometimes assembly drawings. Oftentimes, they do not have, nor will the Chinese company share with them, the detailed-parts drawings of fully costed bills of materials as the Chinese company considers them their propriety. Therefore, these need to be created for many Mexican manufacturing companies.
The implications of these limitations are that some things need to be bridged in order to receive a competitive cost. First, a competitive bidding process conducted by Mexican project managers is mandatory, or a company will receive what I inappropriately term “the Gringo Price,” which is slightly under the U.S. price and not competitive with China.
Second, key cost factors must be challenged, such as the cost of raw materials. The manufacturers typically have a base of existing suppliers; however, they may not be globally competitive. The scale of volume with China has typically been substantially higher than that to which the Mexican factory has become accustomed.
Third, value engineering needs to occur to reduce the cost due to over-engineering, or to introduce more competitive methods of production. Furthermore, these Mexican companies need to be provided with drawings and many times with a packaging supplier of high-level printing quality as they are not accustomed to the requirements required by U.S. marketers.
Shoreview Management Advisors Announcing the Mexico Strategic Sourcing Alliance
Having built multi-billion-dollar supply chains in China and having built and operated manufacturing plants in Mexico for major U.S. marketing and distribution companies, Shoreview Management Advisors is uniquely positioned to bridge this divide culturally and close the gap in capabilities and execution.
We are excited to announce that along with several of our partners, we have formed a new group: the Mexico Strategic Sourcing Alliance.
- We have assembled a strategic alliance of companies that provide an engineering-based approach to sourcing, backed by more than 20 years of transferring products competitively to Mexico.
- We develop a thorough understanding with the client of the specifications and required performance of the product.
- We perform market research in Mexico to add to our list of highly qualified manufacturers. If necessary, we will reverse engineer the detailed product design from samples and create detailed bills of materials.
- We work with Mexican manufacturing companies in multiple ways to reduce client costs and achieve competitive pricing. As part of this, the Alliance can provide a full analysis of Total Cost of Ownership, as well as Net Operating Working Capital (NOWC). If necessary, we source components from Asia and import them into Mexico as part of the total supply chain.
- We can handle customs and duties, as well as, delivery of the product to the customer warehouse in the United States. In short, we provide a complete sourcing alternative to China which nearly always results in a lower delivered cost to your distribution centers.