Following several years of uncertainty due to the strained US-China trade relationship and other geopolitical developments worldwide, many companies in Asia had already been considering if they should start up business in Mexico due to several advantages it offers investors. Some of the main ones include drastic reductions in lead times and cost savings in logistics, lower labor costs and greater productivity of workers, and the stability and benefits offered through recent trade agreements and government programs to attract companies, especially in manufacturing Mexico.
Then, last year many companies faced severe supply chain disruptions and had the fragility of their systems and business models revealed. These disruptions have further highlighted the value of Mexico’s well-developed infrastructure, supply chains, and broad manufacturing base for many companies, including those looking to engage in nearshore or offshore manufacturing in Mexico. In the search to become more agile and to increase stability by decreasing dependency on China, Mexico and its strong regional trade block and mature supply chain is becoming more competitive and attractive to investors. By strengthening the North American trade block that serves the largest market in the world, the USA, manufacturers can ensure long-term success.
In recent years, Mexico has focused on entering into trade agreements, such as the recently enacted USMCA, and enhancing benefits and tax incentives it offers to international companies in Mexico through programs like IMMEX, and even actively seeking out large companies, like Ford, to relocate there. Mexico sees the relocation of companies in the manufacturing sector from China to the US as a win-win situation for both countries, treating it as a strategic ally by looking to strengthen collaboration by participating in international organizations such as the WTO, G20, and Asia Pacific Forum. Considering the adverse situations in 2020, trade between Mexico and China reached US 80 billion in 2020, only 10 billion less than 2019.
The number of international companies in Mexico is reflected in the US 1.3 billion of foreign direct investment made from Mexico to China between 1999 and September 2020, 47% of which was in the manufacturing sector. This is primarily due to the significant cost savings and ease of logistics for reaching US markets Mexico offers compared to China. Shipments that can take up to three weeks to arrive from China can be shipped from Mexico in as little as 24 hours with a cost savings of up to 80%.
Specific Chinese manufacturers relocating to Mexico include auto parts makers, followed by the furniture industry, electronics manufacturers, and those producing packaging materials. Other sectors that are also finding Mexico increasingly attractive include home appliance manufacturers, especially those specializing in televisions and refrigerators, along with their components, as well as the quickly-expanding photovoltaic industry.
In addition to its advantages compared to China with logistics, Mexico also offers a host of advantages in labor. Not only are labor costs in Mexico manufacturing per hour less than in China (US 4.82/hour compared to US 6.50/hour), but Mexico also offers greater productivity, with up to 20% lower unit labor costs than China. Labor unit costs adjust wages for productivity, and Mexico has a 48-hour workweek before overtime applies. Also, the well-developed industry sectors and clusters ensure a vast pool of trained and partially bilingual labor. The triple helix model implemented in many of the countries’ major industrial centers, with cooperation between government, academia, and industry, has allowed for the training of workers with the specific skills required by industry and with the government funding.
Overall, Mexico’s broad manufacturing base, especially in the manufacturing, automotive and aeronautic industries, ensures companies can not only lower costs but ensure quality and the stability and versatility of supply chains. Relocating operations is a huge decision requiring a very high degree of industry specialization, broad network, and expertise. By working with American Industries, which focuses on providing shelter services specifically for manufacturing companies, businesses can fully leverage all the advantages and incentives the country offers to reduce costs and expand sustainably. Having a specialized partner in your corner, rather than just a generalist consulting company, goes a long way in ensuring success.
By Adán Gomez | Business Development Director | American Industries Group®
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