Out with Old, In with the New: Why Mexico Represents the Future of Manufacturing Over China
12.29.21
For decades, China has been the chosen industrial location for U.S. and other foreign manufacturers largely due to its cheap labor costs, which were once low enough to offset the expenses of shipping goods overseas. However, there are numerous factors leading U.S. manufacturers to bring their operations closer to home in Mexico as their preferred way of doing business.
For many global manufacturers, Mexico manufacturing is not a new strategy and increased foreign direct investment has always been the trend. However, for others, it’s become a point of renewed consideration in more recent years due to the changing landscape of global manufacturing. A Kearney survey of U.S. manufacturing executives found many planned to reshore at least some of their manufacturing operations from China within the next three years.
Other challenges like the trade war between the U.S. and China and the Covid-19 pandemic have also shifted U.S. reliance on China as its sole foreign supplier. Whether manufacturers decide to move operations from China to Mexico altogether or diversify their portfolio, here are a few key reasons why Mexico represents the future of manufacturing over China.
Lower Transportation Costs and More Predictable Timelines
Labor costs in China aren’t as low as they once were, especially not enough to offset the delayed timeline and increased costs of fuel and transportation to ship from Asia to the U.S. With the current rate at nearly $80 USD a barrel, it’s harder for U.S. manufacturers to justify the cost of shipping from China when there’s a much closer option across the border in Mexico. This close proximity helps save on transportation costs and also secures a more reliable supply chain.
One of the biggest setbacks manufacturers have faced in recent months is delayed shipments from China. During the height of summer, transit time from China to the U.S. increased to upwards of 70 days or more. With goods being held up at ports and causing shipping costs to skyrocket, it has disrupted the production flow of many global manufacturers.
Industrial Workforce Availability and Continued Investment
In addition to the geographic proximity, the cost-effective workforce availability in Mexico is another key benefit U.S. manufacturers are taking into account when making their next move. As with the U.S., China is also facing a shortage of industrial workers due to the old generation retiring and the new generation seeking employment opportunities elsewhere.
Reports show China expects this shortage to only worsen over time as the discrepancy between jobs needing to be fulfilled and the skills and education available continues. Whereas, Mexico maintains its investment in industrial training and education and graduates tens of thousands of engineers every year.
Predictable Tariffs and Tax Savings Through the IMMEX Program
Lastly, the trade war between the U.S. and China beginning in 2018 weighed heavily on manufacturers with instances of retaliatory tariffs affecting manufacturing costs. However, with the implementation of the USMCA in 2020, it further solidified the strong relationship between the U.S. and Mexico and eliminated the fear of unpredictable tariffs.
New provisions under the USMCA support trade between the U.S., Mexico, and Canada and maintain duty-free treatment for originating goods. Furthermore, U.S. and other foreign manufacturers also have the benefit of exemption from the 16% VAT in Mexico as part of the GGettingIMMEX maquiladora program. When operating under a shelter, manufacturers can implement this tax advantage beginning on day one.
Compared to earlier years, the cost advantages and comfortability of manufacturing in China have changed. Additionally, the pandemic has caused manufacturers to consider diversifying their operations to prevent relying solely on China as their main foreign operator. Whatever the reasons may be for a shift to the new, when comparing the benefits of manufacturing in Mexico to manufacturing in China, Mexico simply has more to offer.
To learn more about how IVEMSA can support your company when manufacturing in Mexico, contact us today.
Sources:
https://www.kearney.com/operations-performance-transformation/us-reshoring-index
https://www.statista.com/statistics/326017/weekly-crude-oil-prices/
https://www.weforum.org/agenda/2021/11/major-delays-china-united-states-shipping/