« Insights > Maquiladora

Mexico Continues to be Top Choice for Manufacturing 'Near-Shoring'

Admin | 07.06.2012

Even as the U.S. Advances Significantly in Attractiveness

Even as the U.S. Advances Significantly in Attractiveness

Reflecting continued rising labor and other manufacturing costs for imports from faraway places like China, "near-shoring" continues to be seen as an opportunity to serve U.S. demand by about half of C-level and other senior executives of manufacturing-oriented companies, and while 35% of that number view manufacturing inside the U.S. as the most attractive choice for such re-sourcing, up from 21% in a similar survey a year ago, 50% view last year's top choice, Mexico, as the No. 1 choice again this year. That's according to a survey of C-level and other senior executives in manufacturing-oriented companies that sell into the U.S. market released today by AlixPartners, the global business advisory firm.

Results from the survey also suggest that rising domestic demand in developing countries such as China may encourage even more near-shoring and "re-shoring" in the West in the future, as companies in China and other developing markets redirect their capacity toward local consumption rather than export. More than a third of the executives surveyed -- 34% -- predicted that would be the case.

"A lot has been written of late about America's manufacturing rebound, and there certainly has been a very impressive rebound; however, Mexico still remains the near-shoring locale of choice for companies looking to overcome the higher costs of doing business today in places like China," said Foster Finley, managing director at AlixPartners and co-lead of the firm's Transportation Practice. "As manufacturing costs have increased in China and elsewhere in Asia, the cost and time factors involved in shipping goods across vast distances are magnified and, whether it's in Mexico or the U.S., any company that's not at least considering alternative manufacturing sources closer to their home market is certainly missing an opportunity."

As in last year's survey, lower freight costs and improved speed-to-market were the two most-cited advantages expected from the decision to near-shore. Thirty-seven percent of executives cited hoped-for lower freight costs, up from 34% in the 2011 survey, and 31% pointed to speed-to-market, up from 28% a year ago. Significantly, and perhaps hand-in-hand with both of those, 26% cited lower inventory costs as the biggest expected advantage, up from 20% last year.

"While total cost parity certainly doesn't exist today, the gap between manufacturing in North America and in places like China has narrowed dramatically, especially when shipping and inventory carrying costs are factored into the equation," said Russ Dillion, a director at AlixPartners. "Company leaders, at an increasing rate, are realizing that customers don't have the patience to wait three to four weeks for their products to cross the ocean. Today's speed of business usually won't allow for that."

The outlook for the security and safety situation in Mexico, an important factor in any decision to relocate manufacturing there, was essentially unchanged in this year's survey. About half of those surveyed each year -- 45% last year and 43% this year -- said they expect modest improvement in the security and safety situation, while 13% said they think it will "worsen somewhat," vs. 14% in last year's survey. Only 4% predicted the situation will be "spiraling out of control," down from 7% who thought that a year.

"While security and safety should remain an issue for any company doing business in Mexico, the perception of the situation today is generally better than it was a couple of years ago," said Chas Spence, a director at AlixPartners. "As with doing business in Brazil or, for that matter, parts of Asia, caution should always be top of mind; but on the other hand, with the aid of the right kinds of advisors many companies today are employing Mexico as an attractive alternative source of production."

The AlixPartners survey also asked senior executives in this election year about the U.S. government's role in promoting the re-shoring of manufacturing jobs to America. While a majority said there are useful actions the government can take (including cutting corporate tax rates), a sizeable number -- 31% -- said there is nothing at all the government can do, and only 3% say that lower healthcare costs -- a big part of this year's political debate -- would lead to more re-shoring

Source: finance.yahoo.com

Insights