China vs. Mexico

Is Mexico or China a better investment when it comes to lower-cost auto production?

That depends on the objective, industry experts say at a recent conference on doing business in the two countries sponsored by MexicoNow magazine.

When it comes to exporting, Mexico logistically holds the upper hand for North American-based auto makers and parts suppliers due to its proximity to the U.S. market, analysts say.

But the scales tip in favor of China if lower labor cost is the primary objective, says Bruce Belzowski, assistant research scientist-University of Michigan's Transportation Research Institute.

Currently, Mexican manufacturing workers average $2.50 per hour, while their Chinese counterparts earn $0.88 per hour, according to data from China-Mexico Solutions.

“If you're chasing inexpensive labor, China is the better deal,” Belzowski says. “But what you have to do when you talk about going to different countries is look at the total cost of doing business.

“If you're going to China to export around the world, you have the higher added cost of logistics and transportation than you have in Mexico,” he adds. “So U.S. companies have to look at total costs of transporting vehicles and components from there and China.

“If companies are just exporting back into the U.S., Mexico has the edge. Labor costs are higher (than in China). However, it's still tremendously less expensive than Canada or the U.S.”

In addition to the cost equation, which most companies take into account first and foremost, there are other, less obvious factors to consider — including culture.

Westerners sometimes have difficulty adapting to China, says Robert Stimson, director-Trend Technologies LLC.

“Make a point of knowing your Chinese hosts outside of business,” Stimson advises. “Chinese view contracts as more advisory than governing; relationships are much more important. Explain your concerns and negotiate everything you can.

“China is difficult for most other cultures,” he says. “It's tough, but you can do it.”

Do the research, advises Doreen Michelini, president-China-Mexico Solutions, in order to lessen chances for surprises. Even minute details, such as the culinary and cultural needs of a company's employee base should be taken into consideration, she says.

“In China, you have to make sure your people are compatible and their dietary needs are compatible,” Michelini says of workers who may hail from different regions of the country.

“In Mexico, we couldn't get workers to take training after work. They have a very strong family bond,” she says. “China is different. In China, they prefer to be entertained after working hours.”

In the case of vehicle manufacturers, China usually requires foreign auto makers to forge partnerships with local companies.

In Mexico, foreign manufacturers can operate as either a maquiladora or a Pitex corporation.

The maquiladora decree was issued by the Mexican government in 1965 to stimulate the economy and produce jobs. Initially only open to the border region, the maquiladora decree invited foreign companies to set up shop for export purposes, essentially allowing them to import materials to produce the export-bound goods duty free.

The program was a resounding success, but eventually Mexico-based companies began to complain the maquiladoras had an unfair advantage.

To appease Mexican manufacturers, the government launched the Pitex program in the early 1970s. Pitex provided companies with similar breaks as the maquiladora program, but because they were Mexican companies, they were allowed to export to the U.S. as well as sell their products within Mexico.

In the 1980s, U.S. maquiladoras found a way to get the best of both worlds. By registering with the Mexican government, U.S. maquiladora corporations officially became Mexican companies, and switched to Pitex status, which allowed them to export and import with the same benefits and sell their products domestically.

In 2000, the Mexican government began imposing taxes on maquiladoras, similar to those Mexico-based Pitex corporations were paying. The plan backfired and Mexico was faced with a mass exodus of businesses. In response, the government cut taxes on maquiladoras to half the Pitex rate, and over time restrictions on selling within Mexico also were dropped.

As a result, maquiladoras now are the best choice for foreign companies doing business in Mexico, says Jay Jessup, director-worldwide automotive group-Cushman & Wakefield.

“Many companies have changed from Pitex to maquiladora and most others should,” Jessup says. “Still, many auto suppliers are Pitex because they don't know they should change.”

In addition to government regulations, manufacturers should consider whether the country's infrastructure meets their needs, Jessup says.

“In China, there's such a strain on its electrical structure that you have a power outage one day a week and don't know what day it's going to be, so it's hard to plan for. In some places, you're seeing two days' shutdown,” he says.

Electricity delivery is more reliable in Mexico, but the infrastructure isn't always there, he says.

“In Mexico, the feds govern and own the electric system,” Jessup says. “Because of fast growth there, they haven't had time to build up infrastructure. Many times it's added as they go.”

One of the most disturbing aspects of doing business in China is the limited intellectual property rights protection.

“The idea of paying for an idea or thought is a foreign concept in China,” says Randall Sherman, president-New Venture Research.

Jessup also urges caution.

“China is the Wild West as far as intellectual property,” he says. “They're exceptional in reverse engineering. That's the way they're building their economy.”

The Chinese government is working to adopt intellectual property right laws, but often the central government doesn't have enough control over what happens in regions of the country, analysts say.

“So regionally (intellectual property theft) just happens. It's a fact of life there,” Jessup says.

To date, Mexico's auto industry has been more export oriented, while China's has been focused more on supplying the domestic market. But that is beginning to change, says George Magliano, director-automotive industry research for Global Insight.

“Obviously, China has huge internal potential and still does,” he says. “But pressure is more and more for China to export, because even with domestic demand it still has plenty of overcapacity.”