Why U.S. Companies Are Leaving China for Mexico — Not Home

It’s been a while since Mexico has caught the attention of U.S. manufacturers attempting to shrink their costs. However, this is quickly changing.

The main reason is that wages have almost quadrupled in China in the last 5 years, while Mexico did not see a significant hike. Also, since Americans are the main consumers of these companies, it is cheaper to transport products from Mexico.

So why did these companies not leave China and return to the U.S.? Some manufacturers, such as General Electric and Caterpillar, have returned home. However, according to a Boston Consulting Group survey, Mexico has gained more competitiveness than the U.S. in recent years.

According to the survey, electricity costs rose 66 percent in China, which is more than double the increase in the United States (30%). The start of large-scale U.S. shale gas production in 2005 has helped contain electricity bills in the United States and neighboring Canada and Mexico. However, Mexico has other advantages like cheap labor.

The survey also concluded that three major exporters outpaced the U.S. in improving cost efficiency: Mexico, India, and the Netherlands.

At the same time, the following countries can manufacturer products cheaper than the United States: Indonesia, India, China, Thailand, Taiwan, Russia, and — you guessed it — Mexico. The trend, however, is that China will no longer be cheaper soon and Mexico no longer relies solely on low-skill manufacturing.

Tijuana became an ideal location for high-tech manufacturing companies based in San Diego. One example is 3D Robotics, a company that makes drones and electronic parts for American consumers.

Last year, direct foreign investment in Mexico reached a record $35 billion. Rampant bureaucracy and government inefficiency may give some American investors a headache. Yet, there are market-oriented reforms taken by Mexican President Enrique Peña Nieto that may get a positive reaction from major enterprises.