To conclude our series on why sourcing metal castings from Mexico over China may make more sense (here’s the most recent part in the series), the difference in comparing the shipping costs between Mexico and China has become worse in recent years due to the rise in oil prices.
Due to factors such as distance, customs, and importation, the time difference in transit from Mexico to the US and China to the US can be about 3 weeks. The North American Free Trade Agreement (NAFTA) allows castings produced in Mexico to flow north across the US border quickly and efficiently.
Changes to China’s VAT system from August 2013 have increased the overall burden on international air and sea transportation providers, their agents based in China, freight forwarders and other logistics service providers.
This further adds a disadvantage for China’s export of castings to US. For a 40-foot container to travel from Mexico to the US by sea freight, it costs US $1,600 with transportation time being a week at the maximum. To do the same with China costs US $3,500 with transportation time being 3–4 weeks.
What about TCO?
Comparative Total Cost of Ownership
China holds the advantage on having a larger supply base and a demanding domestic market. It is the largest castings-producing nation, contributing 40% of global castings production. The hidden costs of doing business offshore continue to confound US-based manufacturers, and in many cases become the tipping point for seeking alternatives.
When it comes to logistics costs, Mexico, which obviously shares its borders with the US, holds the advantage over China. Logistics costs possess a vital role in the total cost of castings when considering China as a company’s sourcing region. As the labor wages increase in China, the cost of casting is expected to reach beyond the cost-equivalent to Mexico’s cost of casting by 2015.
Considering the total cost of ownership, in 2016 the cost of casting with China would be 10–12% higher than the cost of casting with Mexico.
What’s the Takeaway for Metal Buyers?
Mexico has developed a national expertise in certain industries, attracting companies to locate or expand plants there, one being the metal castings industry, which overcomes the hidden costs for US companies sourcing metal castings.
Because Mexico is a major auto parts manufacturer, it claims a sweet spot for the US compared to China with respect to the procurement of metal castings. For the short term, the total cost of ownership for US manufacturers favors Mexico as it provides about a 5–6% profitable scenario to the metal castings end use industry players. The same is expected to reach 10–12% in long-term scenarios.
Action plans such as design assistance and technical improvements will further support the procurement of metal castings for sustained supply and in meeting the demands in years to come.
Begin the series with Part One here.
MetalMiner welcomes guest contributor Suriya Anjumohan, senior research analyst with Beroe Inc., specializing in metal castings, forgings & stampings. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.