- THE MAGAZINE
- INFO CENTER
At the start of 2008, the New York Times reported a sharp increase in the cost of goods produced by overseas factories, particularly those in China. This increase would directly affect American wholesalers that had come to rely on low overseas costs and had thus imported goods from these Chinese factories for the better part of the twenty-first century.
This increase in cost among Chinese factories could be traced back to four contributing factors: the rising costs of energy and raw materials worldwide; a weakening U.S. dollar; stricter regulatory policies; and the negative publicity (and subsequent consequences) garnered by Chinese factories due to several safety scandals. As a result, the prices of everything from toys to footwear to clothing entering the U.S. increased by as much as 10 percent.
Still, some transportation companies and market researchers have described this spike in Chinese costs as somewhat of a mixed blessing for both the American wholesaler and consumer.
Rising manufacturing costs in China are prompting jobs and goods to move ‘closer to home’ as major U.S. companies begin to establish (and, in some cases, re-establish) factories in Mexico-a reality that, given the recent economic downturn of both countries, might indeed come as good news.
Back in the spring of 2007, Mexico’s maquiladoras (factories that import goods on a tariff-free basis for manufacturing before re-exporting the assembled product, often times back to the original country) were hit especially hard as the American economy plunged to its lowest point in decades. Prior to this, the declining costs of overseas production, particularly in China, had long since caused many of these maquiladoras to severely cut their labor force, and in most cases close altogether.
Specifically, the downturn in U.S. auto sales hit suppliers within the Mexican city of Reynosa especially hard as orders for auto parts dried up. Maquiladoras in this city, located in the state of Tamaulipas, cut their labor force by more than 5 percent and in July 2007, Mexico reported an unemployment rate of 1.9 million. This, combined with the ever-declining costs of overseas exports, caused some analysts to speculate China as the new global “maquiladora.”
By January 2008, however, it was clear that China was no exception to the troubles of a struggling global economy. Starting with the rising costs of materials, due to higher oil and petroleum costs, certain types of plastic, a major component in China’s exports, rose by over 30 percent. In addition, the value of the U.S. dollar declined against China’s currency by nearly 8 percent, resulting in less U.S. purchasing power in China.
Within that same month, factory owners saw an additional increase in costs due to a new labor law that went into effect on January 1, 2008. This labor law only complicated the hiring process, increased the cost of labor, and in turn caused many labor strikes and other turmoil and Chinese factories.
Further to the problematic relationship between regulatory committees and Chinese factory owners, toy manufacturers continued to face even more regulatory scrutiny after a devastating wave of safety scandals the previous year. As a result, hundreds of Chinese toy manufacturers were unable to export goods on schedule due to lengthy quality inspection processes. In the meantime, other Chinese factories went bankrupt from the rising domestic costs as well as from pressure abroad to deliver a better product for a cheaper price.
With Chinese factories becoming more expensive and less reliable, many U.S. manufacturers began to shift operations back to Mexico last year, which, due to its proximity, was the logical choice. Companies making these new investments in Mexican manufacturing plants, or maquiladoras, include Whirlpool, South Korea’s LG Electronics, Samsung, and automotive giants Ford and GM.
Because of this shift, by the end of 2009 Mexico’s maquiladoras had added more than 35,000 jobs. Additionally, it was these maquiladoras that were responsible for supplying most of the parts for America’s popular “Cash for Clunkers” program. While market analysts continue to note that this spike in the Mexican maquiladora industry will soon plateau, thus rendering their unprecedented recovery back to a slow and perhaps more steady incline, American companies continue to shift production to factories in Reynosa, Tamaulipas in Mexico.
Scott Szwast, director of global freight services marketing for parcel carrier UPS, recently stated that while labor is still significantly cheaper in China than in the U.S. or Mexico, it is the added cost of labor, fuel, transportation, compliance, and modes of transportation that have forced companies to consider these near-shore alternatives as solutions to their sourcing problems. Therefore, it is these maquiladoras, including those in Reynosa, that have greatly benefited not only from China’s domestic troubles, but the global rise in fuel costs.
Even China, it seems, is taking the cueWhereas analysts once described China as the new global “maquiladora,” Mexico is in fact being described as the new China. According to corporate consultant AlixPartners, Mexico has recently surpassed China as the cheapest country in the world for companies looking to manufacture products for the U.S. market. Keith Fitz-Gerald, of the The Market Oracle, reports that Mexico’s costs have become so cheap that even Chinese companies are shifting their manufacturing plants to Mexico in order to be closer to their U.S. partners.
Recently, Chinese-based automakers Zhongxing Automobile Co., First Automotive Works, Geely Automotive Holdings, and ChangAn Automobile Group Co. Ltd. (the Chinese partner of Ford and Suzuki) have shifted their automaking factories to Mexico. At the start of 2010, HCP Packaging, a global supplier of custom cases for some of the world’s top cosmetic companies and a subsidiary of the China-based parent company, expects to open a 60,000-square-foot facility at the Villa Florida Industrial Park, adding an additional 130 jobs to Reynosa. wt
Steven Ramirez is a graduate of the Iowa Writer’s Workshop. His work has appeared in numerous literary journals. He currently teaches English and Literature in the Chicago area.