In my last post I discussed why multinational investment has started to split between China and other destinations, including Mexico, in recent years. But wages are a shrinking fraction of overall production cost—across many manufacturing sectors wages are a tenth to a quarter of overall production costs. Why?
Automation makes wages less of an issue, but a skilled workforce is needed to avail the technology, a trend that is likely to skew manufacturing investment into Mexico as opposed to low wage, low skill countries like Bangladesh. Also, transportation costs account for a larger share of overall production costs than in, say, the 1990s. Here Mexico’s rapid access to the United States will save money for firms looking to sell in the Americas. When it comes to transiting goods to America, Mexico is five times speedier than China.
A third, often overlooked comes into play—supply chains. In All the Tea in China, consultant Jeremy Haft advises Western manufacturers to add layers to their supply chains in order to minimize theft of intellectual property. Put simply, you can’t steal the Colonel’s secret recipe if you only make half the batter. The advice is well founded; China is notorious for its lax enforcement of intellectual property. In 2009 several honest-to-God counterfeit malls opened in the cities of Nanjing and Shenzhen, and today i-phoney stores can be found in many Chinese cities.
Piracy certainly exists everywhere, and it has gradations: city commuters hassled by street vendors are one thing, but fake drugs pose a serious threat. Since 2008, Chinese factories have peddled aircraft equipment, cell phones, laptops and medicine into the United States, in addition to more mundane offerings like knock-off Rolex’s and Ralph Lauren. Within its border, 20 percent of Chinese goods are thought to be knock-offs. In Mexico, a recent survey by the American Chamber of Commerce found that more than half of the pirated goods were music CDs—such IP-related concerns are small potatoes compared to China. NAFTA regulation on intellectual property mandates a baseline of enforcement. And there aren’t any credible instances of proprietary secrets leaking out of a Mexican factory.
In sum, a stable manufacturing environment matters more now than wage-based production does.
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