Strategic Evaluation Electronic Manufacturing Services Provider Market China Versus Mexico   Frost & Sullivan March 3, 2004

North American electronics manufacturing service (EMS) providers and other electronics assemblers that have production facilities in Mexico are reevaluating the viability of their operations in that region as a result of rising business costs. With declining profit margins, many EMS providers are increasingly finding it difficult to compete with electronics companies that have manufacturing facilities in relatively inexpensive regions such as Asia and eastern Europe. Particularly, the emergence of China as the most preferred low-cost manufacturing destination has compelled many North American EMS providers to seriously contemplate relocation of production facilities.

This research assesses the potential opportunities for North American EMS providers in the Mexican and Chinese markets. The study compares and contrasts both these regions through an in-depth examination of drivers, restraints, government regulations, and prevailing economic conditions. This is likely to enable companies to adopt a proactive approach in evaluating and choosing their manufacturing locations as well as target markets.

Huge Savings Potential and Skilled Workforce Lure Manufacturers to China

Manufacturing costs in China are lower than in the United States and low-cost destinations such as Mexico and eastern Europe. The average wage of a semi-skilled employee in China is $0.50 per hour whereas it ranges from $2.00 to $2.50 in Mexico. Similarly, the tariff for utilities is also lower. For instance, electricity costs $0.03 per kWh in China whereas it costs $0.06 in the United States and $0.08 in Mexico.

Additionally, a vast pool of well educated and highly skilled workforce, relatively high quality of products, rapid development of infrastructural facilities, and untapped domestic market are tilting the scales in favor of China. "China's large population still has a limited income and it is unlikely that the cost of living will increase dramatically in the next five years. This makes China the prominent low-cost destination for manufacturers across the world," says the analyst. Mexico's long list of advantages such as proximity to the United States, stable political relationship, reliable and faster shipping, favorable regulations, and tax incentives simply fade in comparison to the overwhelming benefits offered by China.

Booming Chinese Telecommunications Industry Opens a Floodgate of Opportunities

The prolific growth of the Chinese telecommunications industry is likely to increase the demand for electronics components, and in turn, offer more opportunities for North American EMS providers. In fact, the Chinese telecom boom is proving to be a blessing in disguise for several wireless handset manufacturers that were facing flat demand in other regions. "Interestingly, the total installed base for wireless handsets in China is expected to cross the 300 million mark in 2004 whereas it will be merely 229.7 million handsets for the whole of North America," notes the analyst.

"While the economic downturn has crippled some markets across the world, China has helped a few electronics companies to remain afloat during tough market conditions," adds the analyst. Apart from telecommunications, the burgeoning computing industry - an outcome of increased access to the Internet - and the domestic consumer electronics segment are also brightening the market prospects for EMS providers targeting China.