Offshore. Nearshore. Not sure.
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When it comes to manufacturing, is China the only option?
China and offshore manufacturing are now almost synonymous. But is China the leading choice for every situation? Here’s the debate.
Explore all sides below by clicking on each button:
|Offshoring to China is a no-brainer.
China has become the default choice for saving money through offshoring of production. In fact, many businesses don’t even bother looking at alternatives.
|China’s popularity is a double-edged sword.
Labor costs in China are rising fast and government policies are becoming less friendly to foreign businesses. When you consider supply chain costs and other factors, it now might actually be cheaper to “nearshore” in Mexico – or even in the U.S – than to offshore halfway around the world. Plus, all else being equal, closer is better.
|Mexico is too risky.
Major news stories about drug wars and homicides in Mexico are constantly in the headlines. It doesn’t seem like a safe place to live – much less to do business.
|Mexico may be less risky than China.
The most sensational stories about Mexico tend to revolve around northern border cities. Major U.S. companies have been operating safely in other parts of Mexico for years – and continue to do so. Meanwhile, Mexico’s close proximity to the U.S. makes it easier to maintain control over suppliers and can significantly reduce supply chain risks such as rising fuel prices. Intellectual property risk remains a key concern in China, while Mexico, by most accounts, does a credible job protecting IP.
|China’s labor base and infrastructure are key selling points.
China is known for its abundant skilled labor. Also, the country has developed a robust business and technology infrastructure – including a massive supplier base and leading transportation capabilities in many of the coastal regions.
|Other countries offer their own distinct advantages.
The workforce and infrastructure in nearshore locations such as Mexico are more advanced than many people realize. Also, many alternate locations are hungrier than China and are willing to offer tax breaks and other incentives to attract new business.
Josh Timberlake, Senior Manager, Deloitte Consulting LLP
Although offshoring production to China might be viewed as the safe choice, it is by no means the only choice. Today there are many other viable options to consider, including nearshoring in Mexico or other nearby countries; offshoring to up-and-coming markets such as Malaysia, Vietnam and Indonesia; or even moving operations to more affordable regions of the U.S. To make a smart choice, you should carefully examine the different requirements of your business -- and separate myth from reality.
For example, many business leaders assume everything is more expensive in the U.S., which is just not true. Although U.S. labor costs tend to be higher, other costs such as electricity are often significantly lower. What’s more, U.S. state and local governments are often very generous with tax breaks and other incentives designed to attract business to their regions.
Similarly, some business leaders may dismiss Mexico as unsophisticated and unsafe. Yet recently, aerospace giants Bombardier and Eurocopter (the helicopter division of EADS) have deployed major investments in Queretaro, establishing the central-region state as the focal point of Mexico’s growing aerospace sector. Each company has announced plans to grow to over $500M in capital investment and create thousands of new jobs in the region.
Nearshoring can reduce risk by shortening supply lines and saves money by avoiding the cost of transporting products across thousands of miles of ocean. It also offers greater convenience and hands-on control than trying to manage operations in opposite time zones on the other side of the planet.
When developing a global operating strategy, it’s important to look beyond labor costs – and to realize that different approaches might be needed for different parts of your business. A cross-functional team that includes specialists in manufacturing, supply chain, HR and tax can help you navigate the complexity and make a smart, fully-informed decision.
As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.