Manufacturing In The U.S. vs. Mexico — Comparing Costs & Labor Force
In a 2020 Deloitte survey, 70% of businesses across the globe listed cost reduction as their primary reason for outsourcing.
When it comes to manufacturing businesses based in the United States, it’s easy to see why — the coveted “Made in the U.S.A.” label typically comes with a hefty price tag.
As such, when choosing to outsource, most American companies enlist Chinese or Southeast Asian contractors to manufacture their goods.
And while it may be efficient, outsourcing manufacturing to Asia comes with its own set of difficulties — from spotty quality control to complicated overseas logistics.
Fortunately, another outsourcing — or, rather, nearshoring — destination is available to U.S. manufacturers, and it is right around the corner. We are talking about neighboring Mexico, which has become the preferred manufacturing location for many U.S. businesses.
Here, we will compare the costs of manufacturing in the U.S. vs. Mexico and look at the labor forces of the two countries to determine what makes manufacturing in Mexico so appealing to U.S. businesses.
Why Are U.S. Businesses Outsourcing Manufacturing To Mexico?
The key reason U.S. manufacturers outsource to Mexico is exactly what the Deloitte survey showed — cost reduction.
As a developing market economy, Mexico has a lower cost of living than the U.S. and, consequently, lower wages. Energy, materials and transportation are also much more affordable in Mexico than in the U.S.
However, these are not the only reasons why U.S. companies choose to outsource their manufacturing to Mexico. Another important reason is Mexico’s proximity.
The northern and the central parts of the country where most of the manufacturing clusters are located are well-connected to the U.S. by rail, air and road — which makes transportation a matter of hours or days, depending on the exact location.
Finally, Mexico also has outsourcing advantages thanks to the United States–Mexico–Canada Agreement (USMCA), formerly known as the North American Free Trade Agreement (NAFTA). The agreement largely enables tariff-free trade between Mexico and the United States, which makes outsourcing to Mexico even more cost-efficient for U.S. businesses.
What Types of Manufacturing Do U.S. Companies Outsource To Mexico?
Both the scale and the scope of Mexico’s manufacturing capabilities are wide. As much as 24.1% of the country’s labor force are employed in several types of industrial manufacturing.
Nevertheless, some specific industries are more prominent than others and have become strongly associated with Mexican manufacturing:
- Automobiles and auto components: The automotive sector is, by far, the leading industry within the Mexican economy. As the sixth-largest car manufacturer in the world, Mexico produced over 4 million automobiles and exported over $121 billion worth of cars and car components in 2019. Renowned manufacturers such as Ford, General Motors, Stellantis, BMW and more all operate factories primarily located in the northern parts of Mexico, in states such as Baja California, Chihuahua and Coahuila. As much as 80% of their output is intended for export to the United States.
- Aerospace: Aerospace is another prominent sector of Mexico’s heavy manufacturing industry that has been expanding rapidly since mid-2000. Between 2004 and 2020, the number of aerospace-related companies in Mexico has grown by over 200% and now includes manufacturing facilities, maintenance-repair-overhaul (MRO) companies, research and development centers and more. Some of the prominent aerospace companies that have outsourced their activities to Mexico include General Electric, Rolls-Royce, Bombardier and Beechcraft.
- Textiles: The growth of the textile manufacturing sector in Mexico has been fueled to a considerable extent by the growth of Mexico’s automotive industry. Most Mexican divisions of the prominent car manufacturers have chosen to source fabrics for trim and upholstery locally. This has led the Mexican textile manufacturers to widen their product portfolios to reach even more customers. Now, the Mexican textile industry, primarily concentrated in the state of Puebla, accounts for as much as 3% of the country’s GDP.
- Medical devices: Partly bolstered by the COVID-19 pandemic, manufacturing of medical devices and other healthcare products is now one of the fastest-growing industries in Mexico and the largest in Latin America. Mexico’s exports of medical equipment amount to around $9.8 billion. Prominent international brands, such as Zeiss, Phillips, Johnson & Johnson and bioMérieux operate factories and research centers located primarily in the northern part of the country.
U.S. vs. Mexico Manufacturing Costs
As mentioned, the primary reason U.S. business outsource their manufacturing to Mexico is cost reduction.
However, is manufacturing in Mexico more affordable than in the U.S. by default? And if so, how much more affordable is it? Let’s take a look.
The affordability of Mexico-based manufacturing comes from the low wages across the different industries as compared to the U.S.
- In Mexico, the average wage in manufacturing was $2.80 per hour as of November 2021, while the general average wage is estimated at roughly $21 per day. Typically, the northern regions of Mexico close to the U.S. border and the industrial clusters have higher average labor costs. And yet, they are not as high as in the U.S.
- In the United States, by comparison, the average wage in manufacturing was $24.55 per hour as of January 2022 — almost 10 times higher than in Mexico. Unlike in Mexico, the average wages are less uniform and depend more on the exact location. In some states, the wages are much higher than in others. For example, an average manufacturing worker in Alaska commands an hourly wage of $26.27 per hour, and in some parts of California the average wage exceeds $30 per hour.
Unlike labor, energy in Mexico is more expensive than in the U.S. by a considerable margin — especially for businesses.
This trend is likely to continue with more intensity in the near future, thanks to the October 2021 energy reform proposal from the Mexican government, that would increase the government’s share in the energy market to lower the electricity costs for households.
- In Mexico, the price of one megawatt-hour (MWh) of electricity on the wholesale market ranges between $73 and $170 depending on the location and the distribution system. The average retail rate for businesses is estimated at $0.158 per kilowatt-hour (kWh).
- In the United States, the wholesale price of one MWh has reached a historic low of $21. Similarly, the average industrial rates have declined since 2018, reaching $0.066 per kWh.
Comparing shipping costs in Mexico vs. the U.S. is difficult due to the variety of factors that affect them, including:
- The shipping provider’s rates
- The origin and destination of the shipment
- The cargo size, value, nature and so on
- The mode of transportation
Hypothetically, shipping a standard 4′ × 4′ pallet of durable cargo that weighs 500 pounds and is worth $10,000 from San Luis Potosi, Mexico to Houston, Texas by land would set you back around $500.
U.S. vs. Mexico Labor Force
Since the onset of the COVID-19 pandemic, a worrying trend has taken shape within the U.S. labor market — a persistent, intensifying labor shortage across industries, especially in manufacturing.
At a glance, the manufacturing workforce in the U.S. is as strong as ever. 19.91% of the total U.S. labor force or 32.5 million are employed in manufacturing, and the unemployment rate reached a low of 3.9% in December 2021.
The demand for workers in the U.S. is similarly strong, recovering almost completely from the effects of the COVID-19 pandemic as of December 2021.
However, the same cannot be said about the demand — or desire — for jobs across American workers.
Since May 2020, the number of people actively looking for work has stagnated, and the current trends indicate that the demand for workers may soon overtake the supply.
This trend led to a record number of resignations and retirements in the U.S. labor force in 2021, with every fourth person quitting their job and 1.5 million more people retiring than estimated.
By comparison, the Mexican labor force has seen a more positive dynamic. The total size of the workforce has nearly doubled since 1990, reaching 58.3 million. Around 25% of Mexican workers (or 13.9 million) are employed in manufacturing, and unemployment remains low at 3.51%.
More importantly, both the supply of and the demand for workers — especially skilled, educated workers — has remained strong in Mexico’s manufacturing industry. As a result, manufacturing in Mexico can be not only more affordable, but also more reliable and timelier for growing businesses.
Looking back at the data we have explored, we can arrive at several conclusions about what makes outsourcing manufacturing to Mexico so appealing for U.S. businesses:
- Broad manufacturing capabilities and competencies, with many clusters of different industries throughout the country
- Considerably lower labor costs that make up for the slightly higher energy costs
- The ability to ship cargo quickly and affordably across the border into the U.S.
- A growing labor force with a large representation in the key primary and secondary industries and a low unemployment rate
All these factors — and more — make Mexico an attractive destination for U.S. manufacturers that wish to expand their production and lower their costs without sacrificing the quality of their products.