Mexico vs. China. Which is the Better Plant Location?

The question of whether Mexico is a better place to manufacture a product versus China seems to come up frequently.  A recent Los Angeles Times article combined with my experiences in closing a USA plant and building a new plant in Shanghai are the sources for the following:

Since 2000, the 3,700 Mexican Maquiladoras have declined to 3,200 with a loss of over 250,000 jobs.  Most have relocated to China.  These include operations of Hasbro, Sanyo Electric and Canon.

One reason is hourly labor costs:

China $0.45 base rate to $0.75 including benefits.

Mexico $1.47 base rate to $3.25 including benefits.

California $16.60 average.

Additional hourly employee costs found in Mexico that are not included in Mexico’s labor costs in the above and not incurred in China include:

(1) Attendance Bonus,

(2) Punctuality Bonus,

(3) Life Insurance,

(4) Medical Insurance,

(5) Hiring Bonus,

(6) Productivity Bonus,

(7) Child Care.

Other intangibles not available in Mexico became important as we evaluated the feasibility of moving the plant to China which resulted in lower overhead costs:

Productivity: Chinese hourly employees work hard and efficiently.  They are interested in the company being successful.  They are educated, are bright and learn fast.  Foremen grew out of the initial group of hourly employees we hired.  This is not the case with managing Mexican facilities.  Through-put is clearly better in China than in Mexico.  Attendance, punctuality and productivity bonuses are not needed.

Infrastructure: China has invested heavily in roads, power, water, ports and education. This is obvious whether you are in a major city or miles into the country.  Cheap land is available in economic development zones organized to smooth the purchase of the land, construction of a building and the attendant support services.  (Land is leased for 50 years although a purchase price is paid.)

A China negative is locating a plant in a remote city.  We picked Shanghai because of the quality of managers available.  It is hard to attract top quality managers to a remote location which requires an annual location bonus.

Management: We hired a top flight, hands-on General Manager and Chief Engineer both with BSME and MSME degrees.  Both are in their mid to late thirties fluent in English with at least ten years experience as plant manager or engineering manager with a major USA manufacturer like Johnson & Johnson.  Annual salaries are $35,000 and $18,000 respectively.

NAFTA has eroded Mexico’s advantage.  Imports from non-NAFTA countries lost their duty free status.  This has been particularly costly for Maquiladoras that depend on raw materials from Asia.

Vietnam has been mentioned as an alternative to China.  The negatives compared to China are the small labor pool, absence of infrastructure and quality managers.

The next low-cost country to consider is India.  While hourly labor costs will be low, does India have the three intangibles?  Perhaps not for manufacturing, but India is best for low cost telephone order entry and customer service outsourcing.

When we decided to move Springfield Precision Instrument’s USA manufacturing plant to China, Springfield was incurring operating losses and deficit free cash flow.

Just one year later, Springfield became cash positive and highly profitable.  In looking back, it was relatively easy task to accomplish.  One caution is to retain a high quality China law firm staffed only with Chinese natives.  It paid dividends for us.

The other caution is to set an operation up in China so that no one in China has access to cash.  All invoices are paid via wire from the USA operation.  Employees are given a payroll card with which they can obtain their wages directly from the bank.

While lower product cost is a major advantage of a China manufacturing facility, product development is another positive.  Coordination with USA product engineering and marketing has led to greater success in the channel segment with lower tooling costs.

 

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