'Rising China wages cut advantage over Mexico'

China’s rising wages are cutting the country’s cost advantage over other manufacturing centres such as Mexico, according to Flextronics International Ltd, the world’s second-largest custom electronics maker.

“As China moves up, up and up and up, for five straight years, it’s been moving up heading towards Mexican pricing,” Mike McNamara, Chief Executive Officer of Singapore-based Flextronics, said in an interview. “Mexico’s been the same labour cost for the past five years, it hasn’t moved up at all.”

Flextronics, which supplies to Hewlett-Packard Co and Cisco Systems Inc, has been forced to increase wages in China in line with government regulations and growing affluence in the fastest-growing major economy. Larger rival Foxconn Technology Group said this month it will move production away from China’s coastal regions after announcing a doubling of wages at its largest production bases in the south east.

The failure of Flextronics to make its components business profitable means the company will “probably not” achieve its operating-margin target of 3.5 per cent this fiscal year which ends in March, McNamara said, without giving a goal timeline. Components account for about 10 per cent of sales, he said. Operating income as a percentage of revenue is a key measure of profitability.

Mexico’s appeal
Mexico, where Flextronics makes televisions for LG Electronics Inc, contributed 15 per cent of the manufacturer’s sales in the fiscal year to March, compared with 11 per cent a year earlier, its annual report showed. China provided 33 per cent of the company’s revenue.

Former Mexican Economy Minister Gerardo Ruiz Mateos said in a June 29 interview that the nation will create 750,000 formal jobs this year as the economy rebounds from a recession and FDI rises.