Chapter 7. Mexico: The New China

7.1 section

Chapter 7 HEADLINE: Mexico: The New China

Some American companies have found it advantageous to establish production activities closer to the United States, such as in Mexico, in what is called quicksourcing.

In November I quit my job as the editor of Wired to run 3D Robotics, the San Diego–based drone company I started with a partner as a side project three years ago. We make autopilot technology and small aircraft—both planes and multirotor copters—that can fly by themselves. The drones, which sell for a few hundred bucks, are for civilians: they don’t shoot anything but photographs and videos. And they’re incredibly fun to build (which we do with the ample help of robots). It wasn’t a hard decision to give up publishing for this.

But my company, like many manufacturers, is faced with a familiar challenge: its main competitors are Chinese companies that have the dual advantages of cheap labor and top-notch engineering. So, naturally, when we were raising a round of investment financing last year, venture capitalists demanded a plausible explanation for how our little startup could beat its Chinese rivals. The answer was as much a surprise to the investors as it had been to me a few years earlier: Mexico. In particular, Tijuana.

The notion that Mexico offers only cheap labor is just plain off the mark. … That’s because [Tijuana] isn’t so much about outsourcing as it is quicksourcing. And that’s also the way to create thousands of good jobs in the United States. . . . First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. . . . Second, there’s less risk. If we make an error in a design, we’ve wasted at most a few days’ worth of production. If there’s something wrong in the production process itself, we can spot it fast. We control the component inventory, so we can see what’s going into our goods … Third, it’s simply faster. … Finally, a short supply chain is an incentive to innovate. . . . when you’re doing just-in-time manufacturing, you can change the product every day if you want—whether to take advantage of some better or cheaper component or to improve the design. . . .

Whether factors like these are enough to turn American businesses from outsourcers to quicksourcers remains an open question. But I’m betting my money that they will.

Source: Chris Anderson, “Mexico: The New China,” The New York Times, September 27, 2013, p. 7.

Question 1

Question

What does “quicksourcing” suggest about the trends in outsourcing?

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Quicksourcing suggests that there are other relevant costs to production besides labor costs. Outsourcing traditionally has allowed firms to minimize costs by moving assembly and other routine operations abroad. But there are still distance and language barriers to contend with. Quicksourcing may minimize these other costs to such an extent for some firms that the benefits to relatively lower labor costs may be offset by opportunities to customize or adapt. Firms move production closer to home.

Question 2

Question

When might goods be quicksourced rather than outsourced?

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Quicksourcing would more likely occur in industries that are dynamic. These are industries where there are often changes in design or production and the cost of reworking production, that is fixing problems with finished goods, is particularly expensive. Examples might include high technology goods or goods with relatively short production runs.

Question 3

Question

Under what circumstances might outsourcing have an advantage over quicksourcing?

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Outsourcing will typically be optimal where the need for R&D teams in the immediate production process is minimal. Clothing, shoes, or other designer goods would not benefit from quicksourcing as the expertise to manufacture, rather than design, is located in the country of production. The more mature in production a good industry is in the country of production, the more likely it is to be outsourced rather than quicksourced.

Question 4

Question

What could possibly cause a change towards outsourcing from quicksourcing?

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As technology develops, countries that were formerly high cost in terms of R&D might become lower cost, shifting the terms of trade away from the R&D country to the production country. This might make the ability to quickly make production changes less relevant to the process, eroding the quicksourcing countries’ comparative advantage.