C&B Notes

China’s Diminishing Labor Cost Advantage

China’s labor cost advantage continues to deteriorate against other more-developed, low-cost production regions like Mexico:

“ ‘Singapore-based Flextronics International Ltd., which manufactures mobile phones, auto parts and medical products for other companies, is looking more at Mexico as the wage gap with China closes,’ says Chief Executive Officer Michael McNamara.”

Average Chinese manufacturing wages at just under $2 an hour are only 14 percent less than Mexican salaries as of this year, according to estimates by Mexico’s Finance Ministry. Salaries south of the border were more than three times higher in 2002.

As the wage gap narrows, other factors become more relevant in the procurement and plant location decision-making process for manufacturing-driven businesses:

“U.S. manufacturers like the proximity of Mexico and the fact that the country has few labor strikes, shares time zones with the U.S. and has cultural similarities with the rest of North America, with most Mexican executives and middle managers able to speak English.”

This gap doesn’t have to close completely between the lowest-cost regions and other slightly more expensive regions for there to be a shift in the conclusions drawn by these decision makers.

This evolution of the world economy, particularly in China, is interesting and also relevant to follow as we look for places to invest across the globe that have beneficial tailwinds.  This particular trend helps us in multiple ways, including: (1) it identifies attractive places in which we can look for great businesses (and also places to avoid), and (2) it continues to challenge our thinking about the competitive forces that can impact what we already own.

China’s loss of this comparative advantage will undoubtedly make sustaining the growth they have enjoyed over the last two decades more difficult to sustain.

Of course, we remain — and will always remain — focused on finding individual companies that have competitive moats, are led by capable managers, and are trading at discounts to our estimation of their intrinsic values.

>> Read the full story on Bloomberg