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Spotlight on Mexico as Global Labor Costs Rise

The surge of labor costs in China has prompted talk of resurgence in Mexico’s electronics manufacturing service (EMS) industry in recent months, but the rise of contract manufacturing in the country actually reflects a longer-term phenomenon enabled by favorable business conditions south of the US border.

During the past few months, {complink 7427|iSuppli Corp.} interviews with numerous OEMs have confirmed a growing interest in increased outsourcing activity in Mexico. The most common reason OEMs give for looking to increase outsourcing activity in Mexico is the recent increase in China’s labor costs. During the past year, monthly direct labor rates in China’s coastal manufacturing centers have doubled for some EMS providers, climbing to 2,000 yuan renminbi (US$299.53), up from less than RMB1,000.

Beyond the allure of cheap labor, Mexico fills the need for high-quality, lower-cost manufacturing alternatives for North America. OEM customers now see a need for faster response and greater flexibility in North America for manufacturing a variety of electronic products, particularly devices with high mix and low-to-medium volume. OEMs also see the need to mitigate risk by avoiding the concentration of too much production in a single location.

While this may appear to be a near-term resurgence in activity, OEMs interviewed by iSuppli indicated that Mexico’s rise isn’t a new event solely driven by higher costs in China. Rather, they said this trend has been going on for years. A small sampling of the results provided by a few of the largest EMS providers interviewed by iSuppli bears this out.

Singapore-based {complink 2085|Flextronics Corp.} has grown its business in Mexico on an annual basis during the past three years, with its manufacturing revenue in the country amounting to $3.7 billion during the last 12 months, up from $1.2 billion in 2007. US-based {complink 2862|Jabil Circuit Inc.}’s revenue in Mexico is expected to increase to $3.4 billion in 2010, up 75 percent from 2007. Revenue in the country for {complink 987|Celestica Inc.} of Canada is set to rise to $1.5 billion in 2010, up more than 30 percent from 2007 — despite the fact that overall company sales fell by nearly $2 billion during the same period.

The outlook for opportunities in Mexico is relatively robust. In iSuppli’s view, this is due, not only to the US border proximity factor, but also because of Mexico’s relatively stable political climate, its workforce capability and education, as well as the very well established supply chain network already in the country. In iSuppli’s view, this should lead to continued growth for the region. iSuppli predicts in its latest forecast that EMS in the Americas region should expand by nearly 9 percent from 2009 to 2014, with significantly faster growth taking place in Mexico.

For more information on the contract manufacturing market, see my new report for iSuppli, entitled “EMS ODM Revenue Growth Remains Healthy as Market Continues to Improve.”

3 comments on “Spotlight on Mexico as Global Labor Costs Rise

  1. Barbara Jorgensen
    November 2, 2010

    Great article, Tom! Not only has electronics manufacturing been in Mexico for a long time, but the quality probelms that are plaguing some products out of Asia were solved In Mexico more than a decade ago. Mexico hasn't been high profile for a long time–which is a good thing for the companies that conduct business thre. As you say, stability goes a long way.

  2. Ashu001
    November 6, 2010

    Thomas,

    All these chip/electronics manufacturers you talk about are putting huge investments into Mexico to expand their production.This is inspite of Drug realted Violence as well as lower availability of Skilled professionals there(compared to the USA).

    My question to you is,if they can operate South of the Border,why can't they operate here in America?

    We need those jobs badly here in America for our millions of unemployed citizens.

    What do you think needs to be done to attract those manufacturers to open foundries/factories here in America?

    Would an import duty tax(not possible under NAFTA,I realise that) work?

    What about export incentives?

    What about a 5 year Tax holiday for all investments?

    What do you think will work?

    Regards

    Ashish.

  3. hwong
    November 7, 2010

    It will be really hard to push those jobs back to US. Our workers' salary and compensation are just too much compared to those in Mexico. Plus, the US corporations should have been getting some sort of tax discount and the promised market share for their business over there. It will be tough to resist deals like that.

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