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Manufacturing slowly returns to Mexico as cost dips below China's

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After a roughly decadelong exodus of manufacturing from Mexico, largely to China, some industries have slowly started to return in the past five years, and that pace is expected to quicken.

“What we’ve seen in the last five years is a shift in that dynamic, and Mexico becoming what it was before, 20 years ago,” said Enrique Esparza, chairman of the board of the Tijuana Economic Development Corporation.

“Beginning in 2000, we saw an exodus of companies from Mexico to Asia, and now we’re seeing that trickling back for a variety of reasons — a lot of politics behind it, the made-in-North America effort behind it and cost.

"We’re starting to see that shift with certain industries," Esparza said. "For example, the furniture manufacturers all went to China but are coming back, and electrical manufacturing went to China and some has come back.”

Esparza said now that China has established a middle class and consequentially increased its wages, the cost of manufacturing in Mexico is less than in China when transportation cost, quality, agility and other factors are taken into account. The current number from ProMexico, the country’s business intelligence unit, lists the per-hour cost of a blue-collar worker at $1.85 U.S. dollars, while the Bureau of Labor Statistics has the 2009 rate in China at $1.74, but set to increase rapidly.

“When you take into consideration the cost of transportation, say from Hong Kong or from Asia for that matter, take into consideration the ability to respond to market demands — so, say the supplier for Wal-Mart says they don’t need 5,000 widgets, they need 500,000, it would take four or five weeks and the considerable expense of paying shipping up front — when you take all those factors into consideration … the average wage rate in Asia turns into $3 or $2.75 or higher, depending on specifics,” Esparza said.

In addition to more affordable shipping costs, location at the border with a huge trading partner, faster travel time and more control over products, Esparza said, the quality in Mexico’s, and specifically Tijuana’s, maquiladoras is unbeatable. Intellectual property issues have also come into question in recent years, with tales of Asian manufacturers illegally using designs and plans to make cheaper knockoffs.

ProMexico lists the distance by sea from China to New York at 31 days, compared with six from Mexico; from China to Los Angeles is 17 days, and four from Mexico.

Another benefit that Mexico promotes is its trade agreements. ProMexico’s data from 2012 reports that Mexico has 12 free-trade deals with 44 countries, and China has 7 deals with 15 countries.

Esparza and Edwin Berry, vice president of sales and customer relations at Made in Mexico Inc., emphasized that not all sectors of manufacturing will return, or at least not to Tijuana. For example, menial-intensive companies probably won’t be reshored there soon.

“The first returning are the larger industries — Mexico is really doing a great job at taking care of medium-sized companies in larger industries, and the small-selling operations are not really their market anymore,” Berry said.

Esparza said plastics, furniture, toy and textile manufacturers were some of the largest industries to leave Tijuana in about 2000; of those, furniture has made the biggest comeback.

With the area’s large number of engineers and close ties between universities and industry, aerospace and pharmaceutical device manufacturing have also made a resurgence and even increased in number.

“If you were to have come down 10 or 15 years ago, you would have seen maybe, out of the 550 manufacturing operations we had in Tijuana, the bulk, say 98 percent, would have been assembly or packaging — simple processes, not high-tech manufacturing,” Esparza said.

“Now we have 165,000 employees in the manufacturing industry in Tijuana; we have a higher concentration of high-tech manufacturing happening in our region.”

Electrical manufacturing is returning as well, but Berry said not near the levels it was before the move to China.

Some sectors, such as textile manufacturing, have not returned at all.

“Textiles, for example, you’d have to go to the interior of Mexico to really find a healthy textile industry,” Esparza said. “Here along the border region, we have, I don’t know, maybe a 10th of the textile industry we had 10 to 15 years ago.”

Berry said it’s difficult to put numbers to the resurgence because the process of reshoring isn’t a quick one, but said Made in Mexico has experienced a surge of interest.

“There is a lot of interest of companies coming back,” Berry said. “They’re not coming into the market at the same speed as before, but definitely a lot more people calling with questions and interest and looking at available properties. The pipeline is starting to fill up at the front end, and I do see that continuing. So I think we’ll probably hit our stride here in two, three, four years, when there’s going to be a lot of new companies in northern Baja California.”

Similarly, Esparza said he has hosted more Asian delegations considering moving their businesses to Mexico in the past six months than in the previous three or four years — a function seeing the border area’s benefits, and feeling increasing manufacturing costs in Asia.

“That’s the shift were seeing, and we don’t see it slowing down. We see it becoming more pronounced, more aggressive,” Esparza said.

Esparza said there has also been increasing Chinese interest in mining precious metals in Mexico, and some interest in the energy sector. China has had a “low-key but significant presence” in the hotel and tourism industry in Mexico that is expected to increase.

While this is a competitive battle over which country has more assets to offer companies needing manufacturing facilities, Esparza said that reshoring to Mexico isn’t depriving Asian countries of products or revenue.

“The Chinese have developed their own infrastructure and their own construction base — it’s not that they’re doing without in Asia, it’s that we’re recouping the production we lost,” Esparza said.

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