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On paper, Mexico would seem to offer an attractive balance between low labor cost and proximity to U.S. markets. The latest survey of senior manufacturing executives by AlixPartners finds Mexico the top choice for re-sourcing of production that's fleeing the rising cost and complications of doing business in China. The U.S. garnered 35 percent of the vote, up from 21 percent in a survey taken last year, versus Mexico's hefty 50 percent.
"The U.S., China and Mexico wage differential has shrunk to competitive levels," said Michael Burns, chief commercial officer with Pacer Transportation Solutions, Inc. But let's not repeat the mistake that manufacturers made when they shifted production from the U.S. to China in the first place, and focus solely on labor cost. A number of other factors need to be taken into account. One is the skill level of the resident labor force. Mexico's is relatively high, Burns said during a panel discussion at the annual meeting of the National Industrial Transportation League in Anaheim, Calif. Other potential advantages of producing in Mexico, according to Burns: the position of the peso against the yuan, an intermodal and rail infrastructure that has "vastly improved" over the past decade, and "negligible" supply-chain disruptions arising from security issues. (Maybe. We'll get to that in a minute.)
Bridgestone Corp. is a big believer in Mexico as a place to manufacture for the North American market. In 1980, it opened a facility in Cuernavaca for the making of light-truck and passenger-vehicle tires. Expanded in 2007, the operation now turns out approximately 4,000 tires a day with a workforce of 240, said Dan Vits, general manager of transportation with Bridgestone Americas, Inc.. Between 60 and 70 percent of the plant's production is for the U.S. market.
Bridgestone doubled down on Mexico with the opening in 2007 of a plant in Monterrey. It averages around 8,000 high-performance tires a day, all of which are sold in the U.S.
Why Mexico? Cheap labor, naturally. Between 2003 and the end of 2011, Vits said, the cost of U.S. manufacturing labor increased from $34.50 to $39.32 an hour. During that same period, Mexican labor expense slid from $16.73 to $11.26. And China's rose from $6.90 to $11.83. Now add in the savings incurred by not having to ship finished goods across an ocean, or keep high levels of safety stock in the event of a supply-chain disruption thousands of miles away from end markets, and Mexico becomes an increasingly compelling source of production.
Bridgestone's cost of moving finished product averages $1.49 per mile from Mexican sources versus $1.90 from a port on the U.S. coast, Vits said. Moreover, the company can respond more quickly to changes in market demand, even to the point of supplying original equipment manufacturers and replacement-tire customers on a just-in-time basis.
Then there are the advantages of intermodal transport. Mexico's rail system saw an initial surge of development in double-stack trains some 20 years ago, and a new wave appears to be on the way. Trains generate lower fuel and operating costs than trucks, and experience fewer delays in border crossings and customs clearance, Vits said. In addition, there's an abundance of rail equipment on Mexico routes today, versus some shortages of reliable over-the-road equipment. New hours-of-service regulations imposed by the U.S. Federal Motor Carrier Safety Administration have eroded the one advantage that long-haul trucks have over rail: transit time.
Still, Mexico isn't an automatic choice for every company. Despite those factors burnishing the country's image as a global manufacturing paradise, Bridgestone is paying equal if not more attention to the U.S. The parent company is spending $1.2bn on boosting domestic production, including the construction of a plant in South Carolina for the making of tires for the mining industry. Meanwhile, the company's two Mexican operations stay at current levels of activity. Bridgestone hasn't actually shifted any production from China to Mexico since the early 2000s, Vits said.
The U.S. is Bridgestone's focus at the moment because American plants yield higher levels of productivity and quality for the company's OEM customers, according to Vits. "Were seeing less turnover in the U.S. workforce versus the Mexican labor force," he said, noting that Bridgestone is greatly expanding its use of non-union labor.
About that security issue. Mexico has long been a dicey place to move high-value cargo over long distances. Doubts over the safety of trucks are a major reason why the use of intermodal has grown in that country. (Although some of the more aggressive thieves will attack containers or trailers on the rails, even in transit.)
Vits said Mexican carriers offer almost no cargo liability. That's too bad, given the more than 10,000 truck hijackings that occurred in Mexico in 2011, according to Vits, causing an estimated $9bn in unrecovered losses. (More than 84 percent of the incidents took place in transit, he said.) The highest theft rates are in the central and northeastern states. And while intermodal involves less risk, freight is still vulnerable during the drayage portion of the trip. The recent surge of drug-cartel violence in Mexico has only served to make things worse.
"Cargo-security risks must be addressed," said Vits. Burns agreed, detailing some of Pacer's actions in that area: working closely with core providers to vet drivers, operating during certain hours of the day, and even considering police escorts of team drivers on some routes. "You try to manage around the edges," he said.
Clearly there are some major roadblocks to Mexico's attempt to become The Next China for U.S. manufacturers. Don't expect a wholesale migration of plant capacity anytime soon. Maybe companies have learned their lesson about making big sourcing decisions without considering all of the factors at hand.
Next: Two North American contenders for U.S. port business.
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Keywords: supply chain, supply chain management, manufacturing in Mexico, Mexico supply chain, international trade, inventory control, global logistics, transportation management, logistics management, supply chain planning, retail supply chain, sourcing solutions, supply chain risk management
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