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Is Mexico the new China?

Skyrocketing fuel costs may lure manufacturing firms back to Mexico.

By Rafael RiveroContributor to The Christian Science Monitor, Staff writer of The Christian Science Monitor / September 11, 2008

More manufacturing jobs? Seamstress Raquel Martinez (l.) looks on as co-workers at a factory in Guadalajara, Mexico, sew clothing destined for Wal-Mart and Sam's Club.

Guillermo Arias/AP

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Mexico City

Just as Mexico was becoming the rising star of global manufacturing in the 1990s, China's even cheaper wages turned that country into the world's factory.

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But now, with skyrocketing oil prices, escalating labor costs in China, and an appreciating currency there, companies targeting the US market are doing the math and giving Mexico another look. So-called "nearshoring" could generate a reverse globalization that brings manufacturing back to Mexico.

"China was like a recent graduate, hitting the job market for the first time and willing to work for next to nothing," says German Dominguez, who advises companies that are considering producing in Mexico from his base in Ciudad Juárez. Now, China's experiencing the "perfect storm," he says. "It's making Mexico, a country that had been the ugly duckling when it came to costs, look a lot better." The driving factor of nearshoring is high oil prices, which is raising the price of shipping. "In a world of triple-digit oil prices, distance costs money," states a recent report by Canadian investment bank CIBC World Markets. "And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder."

Producers of heavy or bulky items, such as refrigerators or cars, are being hit hardest by the spike in freight costs. According to the CIBC report, when oil sold for $30 per barrel in 2000, it cost American importers 90 percent more to ship their goods from East Asia than to transport them from Mexico. At May's prices of about $130 per barrel it cost 150 percent more.

Many companies targeting the US market wonder whether outsourcing in Asia is still worth it.

Mark Stephens, the director of logistics for the consumer products company Faultless Starch/Bon Ami in Kansas City, Mo., says his company is actively pursuing partners closer to the US.

For example, he says, the company is looking to manufacture some garden tools currently being produced in China and resold in the US. "It's to shrink the supply chain," he says.

Some have already made the move. The printing company Lexmark, for example, relocated its molding operations for printer cartridges back to Mexico from China, with new facilities in Reynosa and Ciudad Juarez, according to Gulf Shipper, a weekly industry publication. Lexmark could not be reached for comment.

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