Manufacturers are already well-versed in the ever-changing economic landscape and the complexities of maintaining stability among a global supply chain. 2020 highlighted a growing problem regarding the U.S. reliance on China for manufacturing as supply chains came to a halt. The pandemic created a greater sense of urgency for many manufacturers to diversify their facilities and move operations to Mexico as part of their strategy in 2021 and beyond, with the quest for stability on everyone’s mind.
At the same time, the final enactment of the newly drafted USMCA went into effect July 1, 2020, making manufacturing in Mexico the favored option for U.S. companies wanting to securely expand their global footprint. Among the many new provisions, the USMCA requires original content, particularly in the automotive industry, be made in North American regions. In addition, there are built-in protections to the trade agreement that protects companies against intellectual property theft, copyright infringement, and other ownership challenges previously faced by U.S. companies when operating in China.
With slow-moving trade negotiations between the U.S. and China, it makes distribution plans unsteady. Furthermore, international travel concerns and supply chain limitations remain in play in a post-pandemic world. The USMCA provides greater incentive for U.S. manufacturers to move operations to Mexico as a way to promote economic stability for the future.
Read more: The rise of nearshoring to Mexico.
Although many companies have included manufacturing in Mexico as part of a strategic solution toward economic stability, it’s a complex process that requires many moving parts to complete successfully. By partnering with a Mexico shelter company, like IVEMSA, foreign manufacturers can benefit from their decades of experience and expertise.
By shouldering the administrative responsibilities required for operational setup, such as HR, accounting, tax and customs compliance, and securing permits and licenses, it allows manufacturers to focus solely on production. It also reduces the learning curve when it comes to navigating international trade and reaping the full benefits of the USMCA and other unique programs, such as the IMMEX maquiladora program and the Section 321 program.
Mexico’s IMMEX maquiladora program is a cost-saving benefit for foreign manufacturers. It exempts the 16 percent value-added tax when temporarily importing goods, materials, and equipment.
Manufacturers can take advantage of this immediately when working under a Mexico shelter company. Additionally, U.S. manufacturers can rely on the supply chain and Mexico shelter service models already in place to manage and meet operational requirements and goals.
Read more: The IMMEX program – a brief overview for manufacturers.
There’s also an added advantage for U.S. manufacturers moving goods from facilities in China to Mexico. The Section 321 Program reduces costs and duties on international goods. The statute refers to de minimis, which “provides admission of articles free of duty and any tax imposed on or by reason of importation, but the aggregate fair retail value in the country of shipment of articles imported by one person on one day and exempted from the payment of duty shall not exceed $800.”
For example, shipping inventory directly from China to Mexico prior to importing it into the U.S. eliminates 100 percent of the duty costs without affecting shipment accuracy or delivery windows. A Mexico shelter company can guide you through the process and ensure you’re in compliance with the regulations set forth by the USMCA and receiving as many of the cost-savings benefits as possible when setting up a new operation.
Source:
https://www.cbp.gov/trade/trade-enforcement/tftea/section-321-programs
Ally shoring has become a significant part of the manufacturing conversation in recent months following the realities the global pandemic has brought to light. Namely, a shift from the historical U.S. reliance on China for foreign trade. For years, the U.S. has relied heavily on manufacturing in China due to its low-cost labor and production. However, trade conflicts, international travel delays, and halts to supply chains have all led many U.S. manufacturers to consider moving operations closer to home.
Ally shoring refers to the process of shifting supply chains and sourcing essential goods and services to trusted allies. The focus is on creating a strong foundation and business relationship to improve economic and national security. Over the past several decades, companies have found manufacturing in Mexico also meets the demand for cost-effective labor and production, plus the added security of supply chain management through an ally bound by the USMCA.
The USMCA offers protections for intellectual property and trademarks in trade relations between the U.S., Mexico, and Canada. It also enacts provisions to protect original content, particularly within the automotive industry, which requires the majority of production to take place in North America.
There are a number of other unique benefits that make ally shoring between the U.S. and Mexico a favorable option compared to China. Proximity and predictability are two key characteristics that stand out when securing and maintaining successful foreign trade operations.
With the majority of U.S. manufacturing facilities so close to the U.S./Mexico border, there’s no question the risk of transit delays is reduced significantly when compared to overseas shipments to and from China. The close proximity also gives U.S. manufacturers greater oversight for quality assurance of their operations, as well as allows them to better respond to demand fluctuations.
As demand for customization from consumers increases, it requires manufacturers to reduce shipping time through multiple warehousing locations and swift delivery times, which makes ally shoring with Mexico another competitive advantage for the U.S. Being geographically closer often means same-day shipping and delivery with less of an environmental footprint required due to lower transportation costs.
Read more: Five benefits of nearshoring to Mexico.
The ongoing trade conflict between the U.S. and China combined with the halt to supply chains and international travel due to the Covid-19 pandemic has left many manufacturers looking for a more secure solution for future strategies. When manufacturing in Mexico, there is greater predictability and reliability of supply chains and resources when compared to China.
Since Mexico is already well-equipped with the type of infrastructure, technology, and cost-effective industrial talent needed for growing manufacturing needs, it provides a strong foundation for manufacturing companies to set up new operations. Many global manufacturers have already invested in Mexico and continue to expand as innovation grows.
Read more: Why nearshoring to Mexico may be more cost-effective than offshoring to China.
Furthermore, with the unique opportunity presented through Mexico shelter services, U.S. manufacturers setting up new operations in Mexico can do so within three to four months versus the six or seven months it could take launching production as a standalone entity. A partnership with a Mexico shelter company minimizes the risk and liability of foreign operators by operating under the shelter’s established entity.
Another value of working under a shelter is that it allows U.S. manufacturers exemption from the 16 percent VAT for all temporarily imported goods and equipment and reduces costs on labor, permits, licensing fees, and infrastructure. In the meantime, manufacturers maintain complete control over production and property throughout the entire process.
The shift of manufacturing from China to Mexico is not a new concept, as companies decide to diversify their portfolios. Mexico simply offers more favorable benefits that China can’t provide.
Nearshoring has become a top strategy for U.S. manufacturers that want to relocate their facilities from China and bring their operations closer to home in Mexico. As with offshoring, the goal of nearshoring is to create a more cost-effective solution through lower labor and facility costs. However, nearshoring to Mexico provides far more benefits due to the close proximity to the U.S.
Here is a list of five benefits of nearshoring to Mexico that highlights why many U.S. manufacturers are considering making the operational move from China or expanding their operations internationally for the first time.
Mexico’s geographical location provides a significant advantage over offshoring to China. The close proximity to the U.S. creates the opportunity for faster delivery and less costly shipping. In many cases, if your operations are located in one of Mexico’s border cities, you can receive shipped goods on the same day at their final destination in the U.S. The same type of shipment can take two to three weeks when being sent from China.
Also, by working in similar time zones, it allows for more seamless communication and fewer interruptions in the day-to-day workflow. Whereas, offshoring production to China is challenged by a 16-hour time difference between America’s West Coast and China.
Read more: Why companies are switching from China to Mexico for manufacturing.
Another benefit of nearshoring to Mexico is it allows for more frequent visits from managers who want to oversee the process or come in and make changes. Travel to Mexico doesn’t require too much planning. For many, a round-trip from the U.S. to Mexico can be conducted in a single day versus the logistics that go into scheduling a trip to China.
When there is a decline in quality or new production is being introduced, the closer location allows problems to be fixed more quickly with regular site visits scheduled when necessary.
Read more: 3 things to consider when moving manufacturing from China to Mexico.
The ongoing trade conflict between the U.S. and China has been a turning point for many manufacturers who seek more stability for their operations. This involves tariff negotiations and intellectual property protection, areas where the U.S. has struggled in dealing with China. Fortunately, with the USMCA intact, there are provisions that protect manufacturers’ intellectual property, across the North American region, which makes nearshoring to Mexico a more secure solution.
One of the benefits unique to Mexico is the IMMEX maquiladora program. This program offers favorable tax benefits to foreign manufacturers operating in Mexico. Operators approved under the IMMEX maquiladora program are exempt from the 16 percent value-added tax when importing raw goods, equipment, and materials used for manufacturing.
This is a significant cost-savings when compared to retaliatory tariffs imposed by China. Furthermore, those that choose to work with a Mexico shelter services provider can operate with its maquiladora licenses and receive this tax exemption starting from day one.
Read more: Why nearshoring to Mexico is more beneficial now than ever.
Nearshoring to Mexico already provides benefits not applicable when offshoring to China due to location alone. However, there’s also the advantage for U.S. manufacturers to work with an experienced Mexico shelter company. The benefits of Mexico shelter services include but aren’t limited to: minimized legal risk and liability, reduced labor and infrastructure costs, and a reduced learning curve when establishing permits, recruiting and hiring employees, and maintaining the correct protocol culturally and legally.
In essence, partnering with a shelter service provider lifts the burden of handling all the administrative tasks associated with setting up a new operation. Plus, production launch is much quicker with a three- to four-month timeline versus the six to seven months or more, it can take when setting up a new standalone entity.
After decades of reliance on trade with China, primarily as a source of low-cost labor for U.S. manufacturing operations, the COVID-19 pandemic has been a strong push of motivation causing companies to rethink their strategies going forward. With the halt on supply chains and international travel, in addition to the ongoing trade conflicts between the U.S. and China, it’s resulted in the development of ally-shoring.
In essence, ally-shoring is exactly how it sounds, a program of sourcing services, goods, and materials with allies, while disengaging from trade relations with China and other countries that don’t favor American interests. While many have already prospered from manufacturing in Mexico, many other U.S. manufacturers are also bringing their operations closer to home.
Ally-shoring makes sense both from a logistical and fiscal standpoint while adhering to new protocols set forth by the USMCA. This free trade agreement between the U.S., Mexico, and Canada focuses on strengthening regional supply chains across several industries, with particular emphasis on automotive.
USMCA provisions include increased domestic content, enhanced IP protection, and improved U.S. patents in Mexico. These changes strengthen the business relationship between the two countries and incentivize new investments being made in Mexico.
Read more: Mexico vs China Manufacturing
In a case for ally-shoring presented by the U.S. – Mexico Foundation, it states several goals and mutual economic benefits between the countries, including:
Ally-shoring yields additional benefits, such as predictability, cost-effectiveness, and transparency, all areas of concern for foreign companies wanting to expand their operations. When it comes to predictability, Mexico has been a top trading partner with the U.S. over the past few decades. The country has proven to be a reliable economic partner, thanks to a strong supply chain, favorable geographical positioning, and experience in advanced manufacturing for everything from automotive to aerospace and medical devices to electronics.
Secondly, Mexico’s cost-effectiveness is competitive with China, and has recently emerged as a more cost-effective option over recent years. Mexico offers U.S. manufacturers lower labor wages for higher-skilled employees who work longer workweeks.
Additionally, ally-shoring with Mexico provides a higher sense of transparency than operations in China or other foreign countries. Manufacturing in Mexico is more easily monitored than in many other countries and follows the same provisions set forth by the USMCA with regards to intellectual property and trademarks.
Ally-shoring as a strategy is made easier when partnering with a shelter services operation. The shelter setup is unique to Mexico and provides U.S. and other foreign manufacturers a way to ramp up operations within a few months with reduced legal and financial risk. All administrative responsibilities are taken care of, including HR and accounting, legal and trade compliance, among others, to free up time and resources for manufacturers to focus on production.
Sources:
https://usmexicofound.org/images/programas/documentos/1614490856AllyShoring.pdf
The rise of nearshoring to Mexico has been steadily increasing over the past decade for several reasons. First, ongoing trade conflicts between the U.S. and China have caused uncertainty when it comes to the cost and quality of production, in addition to concerns regarding intellectual property protection.
Second, following a year after the world was shut down due to the Covid-19 pandemic, it illustrated just how risky it was to have such a heavy reliance on a weakening supply chain. And third, more North American manufacturers are taking a regionalized approach to their strategies due to the provisions outlined in the USMCA, which was officially effective on July 1, 2020.
When compared to offshoring, which relocates factories from costly countries to lower-cost regions to produce goods or services, nearshoring allows operations to be in closer proximity to where the goods or services will ultimately be sold.
According to Kearney’s 2019 Reshoring Index, Mexico increased exports to the U.S. by $28 billion in 2018, which equaled a 10 percent growth rate over the year previous and was documented as the fastest growth experienced in the past seven years. This occurred at the same time manufacturing imports from China registered a sharp decline, as a result of the major disruption caused by the U.S./China trade conflict.
Starting in 2016, Kearney research also shows that over half of U.S. companies manufacturing in Mexico had moved production there from other countries, including China, to specifically focus on and serve the U.S. market. As more companies are re-evaluating their options, nearshoring is becoming the preferred choice.
With the uncertainty in China that companies have experienced over the past several years, manufacturing in Mexico has emerged as the top strategy. With this decision comes cost benefits that are similar, or in some cases, more cost-effective than the cheap labor force China has long been known for providing.
However, lower wages don’t minimize the level of education, skills, and training Mexico’s industrial workforce offers. For years, Mexico has invested in the manufacturing sector by graduating over 110,000 engineers yearly and providing specialized training programs qualifying more people to work in advanced, technical industries.
In addition to the cost-effective labor force, shipping is less expensive with quicker delivery times due simply to the closer proximity. For many manufacturers, they can ship goods from Mexico and receive them in the U.S. on the same day. Although, perhaps one of the greatest advantages of manufacturing in Mexico is the option of working with a shelter services provider.
Under a shelter operation, foreign manufacturers work with the licenses and permits already in place. This includes maquiladora program certification, which exempts the 16 percent VAT tax on all temporarily imported goods, as long as they are eventually exported.
Shelter services also provide companies full administrative support to get a new operation up and running in a smooth, efficient manner. These shelter services include site selection, recruiting and hiring employees, securing permits and trade compliance, among a range of other responsibilities necessary to operate in Mexico.
Source:
https://www.kearney.com/operations-performance-transformation/us-reshoring-index/full-report
When it comes to considering costs for nearshoring to Mexico, there are many advantages that come into play. Cost-effective wages, reduced shipping expenses, and competitive pricing and availability of industrial real estate are all reasons why U.S. manufacturers choose to expand their operations to Mexico.
Meanwhile, there are hidden cost savings accompanying these hard costs that provide an equal or, in some cases, greater value. These include convenience, reliability, and security in different areas, particularly when working under a shelter model.
The shelter model is unique to Mexico and provides a convenience that also reduces the risk and liability of operating in a foreign country. One of the built-in advantages of working with a shelter service provider is having all of the proper certifications and licenses ready to go.
Application and approval can take weeks, if not months, for U.S. manufacturers seeking to set up an entity on their own. Bypassing this process helps get an operation up and running in as little as three months. Working with a shelter also offers the convenience of having all managed services available in one place, including tax and accounting, human resources and recruiting, and legal, trade, and government compliance.
Although U.S. manufacturers have historically chosen China for its cheap labor, China is not as reliable for the North American market as it once was. Wages have begun to increase more quickly and unpredictably than Mexico. Plus, the distance, time zone differences, and changing regulations are complex compared to what nearshoring to Mexico has to offer.
When nearshoring to Mexico, there are no travel restrictions or retaliatory tariffs to face. In fact, working with a shelter service provider allows you to benefit from a 16 percent value-added tax (VAT) exemption from day one on all your temporary imports. In order to receive this advantage, you need to operate utilizing the IMMEX program with a valid VAT certification. This reliability allows operations to run smoother without delays or unforeseen challenges.
Mexico’s IMMEX program also allows U.S. and other foreign manufacturers to temporarily import goods, equipment, and machinery without paying Mexico’s VAT tax. Again, this benefit only applies when you’ve secured valid VAT certification. Additionally, with the recently updated USMCA in effect, U.S. trade with Mexico takes precedence over trade with China or other Asian countries. The USMCA focuses on increased intellectual property protection and promotes original content production and favorable trade between the U.S., Mexico, and Canada.
Whereas, countries like Thailand, Vietnam, and India, which have all been regions for offshore manufacturing in the past, are currently less alluring. These countries are all part of their own free trade agreement and are becoming oversaturated, which has caused industrial wages to increase and opportunities to decline.
In addition to the stability and savings of hidden costs when nearshoring to Mexico, the hard costs make it a valuable choice. When compared with China, Mexico has lower labor, logistics, and real estate expenses to consider.
One of the advantages of nearshoring to Mexico is the accessibility to a skilled, competitive workforce at a cost-effective rate. The general average wages for a fully-burdened, non-skilled operator for a manufacturing position is $860 USD per month, considering a work shift of 48 hours per week, which increases as the skills required for the role increases.
This is far less expensive than wages for similar roles in the U.S. and represents a much steadier increase than the recent rise of wages in China. Additionally, the close proximity between the U.S. and Mexico allows for better oversight and quality assurance than China, where traveling or issues abroad can be expensive and difficult to manage.
Download our Mexican manufacturing cost sheet to learn more about labor rates.
Closer proximity also means your finished goods can be delivered to the U.S. on the same day they were shipped from your Mexico plant. Shipping from Asia can take several weeks versus a few days or less when shipping from Mexico. Logistically speaking, the trade relations between the U.S. and Mexico also make it far easier to import and export goods when compared to China’s unreliable tariffs and regulations.
Furthermore, customization when nearshoring to Mexico is made it easier to meet each manufacturing company’s specific goals. IVEMSA can create a site selection analysis that compares viable regions in Mexico and compare costs and features required for your project. Building rates and regions, in addition to labor costs, utilities, and other operational expenses are outlined and have been updated through our Mexican Manufacturing Costs guide.
Both the hidden and hard costs place intrinsic value on nearshore manufacturing in Mexico. Though it’s most common to compare line-item benefits that have dollar amounts attached, the hidden cost savings can also result in monetary returns long-term.
Many U.S. manufacturers are reconsidering their previous investment in offshore manufacturing to China and bringing it closer to home and nearshoring to Mexico instead.
While most companies would agree keeping their production domestically based is most beneficial, the cost-effectiveness of offshoring to China has been a strategic way to reduce labor costs and expand operations in the past. However, recent years have highlighted how China is no longer the most viable option, due to increased labor wages, ongoing trade conflicts with the U.S., and the most recent challenges caused by the coronavirus pandemic.
With production set up in China, there’s also the disadvantage of shipping distance, cultural and language barriers, as well as time zones that don’t align with U.S. business hours. As a result, a growing number of companies are considering nearshoring to Mexico to save on costs but with less risk and greater advantages.
For U.S. manufacturers that want to benefit from both domestic operations and nearshoring services, comparing Mexico with China shows how working closer to the U.S. border makes the most sense on all levels. From hourly rates of workers to intellectual property protection, it shows nearshoring to Mexico is likely the most cost-effective and convenient opportunity.
The cheap cost of manufacturing in China is what led many U.S. companies to expand production there for years. However, hourly wages have quickly risen at an unpredictable rate and are often higher than industrial wages in Mexico. This is partly due to the decline of China’s minimum wage working population and increased number of retirees for what’s been deemed as a “negative population growth,” an imbalance in the ratio of young and old. China’s once young and cheap industrial labor force is now looking for alternative employment at higher wages.
Whereas, Mexico has allotted lower wage increases at a rate that’s proved beneficial for budgeting and forecasting future foreign investments. Additionally, Mexico retains a competitive workforce of skilled workers by graduating tens of thousands of engineers every year.
The trade war between the U.S. and China has caused concern for many manufacturers due to the uncertainty and rising costs of shipping products. Under the USCMA, there are no duties, taxes, or other charges on exports of any goods between the U.S., Mexico, or Canada when the origin of those goods is from the USMCA region (unless these are also applied to the same good when used for domestic consumption). Furthermore, when working with a shelter service provider, U.S. manufacturers are exempt from the 16 percent value-added tax from day one.
Due to the proximity of each country to the U.S., it’s logical that shipping items from China takes much longer than shipping items from Mexico. It often takes several weeks to transport goods by boat or carried by plane, which comes at a hefty transportation price and higher risk of damaged or lost goods during transport. Conversely, in many cases, the time it takes to package and ship goods from Mexico is the same as what it takes for cities stateside.
Proximity is also important when it comes to oversight and quality assurance. Offshoring operations to Asia requires complex planning when taking into account time zone conflicts and travel barriers. Mexico, on the other hand, is a quick drive or flight that makes it inexpensive and convenient to make regular visits to maintain quality assurance and oversee operations as needed.
Intellectual property rights have always been a challenge when operating in China. Although there have been improvements in providing greater intellectual property protection, it’s been reported approximately forty percent of online products in China are counterfeit. With nearshore manufacturing in Mexico, the USMCA has made notable changes to previous NAFTA provisions that support intellectual property rights for both physical and digital objects. These include regulations for patents, trademarks, and industrial designs, among others.
With these factors in mind, nearshoring to Mexico emerges as the more cost-effective option, as well as a secure and stable selection when compared with China. And fortunately, due to the historical success of U.S. manufacturers that have been operating in Mexico for decades, there’s a blueprint to follow, which can be customized to the specific needs of your company.
For those considering expanding to Mexico or relocating production from China, the guidance of an experienced shelter service provider is key. A shelter allows manufacturers to focus on production and product development without assuming legal risk or setup responsibilities. IVEMSA offers companies support at every stage of the process. This includes a full suite of managed services, including site selection, recruitment and hiring, taxes and accounting, as well as customs compliance and other administrative support. IVEMSA also has the proper permits and certifications in place to get an operation up and running in a few short months.
Sources:
https://time.com/5523805/china-aging-population-working-age/
https://www.cnbc.com/2012/10/24/chinas-aging-population-threatens-its-manufacturing-might.html
The trend of reshoring manufacturing to Mexico is a strategy U.S. companies are considering as a way to stabilize their supply chains and protect future manufacturing investments and opportunities. According to a 2020 survey of professionals in the industrial sector, 64 percent say they are likely to bring their production back to North America.
Although Mexico manufacturing is not a new concept, it’s drawing the attention of a growing number of businesses, due to the uncertainty that lingers regarding trade security between the U.S. and China. Furthermore, challenges resulting from the coronavirus pandemic have also been a contributing factor regarding increased reshoring production. Shipping delays and trade restrictions, in addition to travel and health safety issues in China have caused disruption and feelings of instability.
Manufacturers had already been considering the inherent benefits of reshoring manufacturing to Mexico or at least, diversifying their portfolios in order to maximize gains. However, the significant and abrupt changes in 2020 have led many to speed up the decision-making process as they move their strategies forward.
Despite the volatility of trade relations between the U.S. and China, and the general economic ebb and flow over the past few years, Mexico has remained resilient as a favorable long-term solution for foreign manufacturers. There are several advantages of operating in Mexico, such as favorable U.S. trade relations and optimal cost-effectiveness.
With regards to trade, provisions under the USMCA focus on the value of product origination in North America. This favors manufacturing in Mexico versus operating in China or other overseas locations. These rules and regulations also help secure intellectual property, which has been notoriously problematic for U.S. manufacturers with facilities in Asia. Although, even prior to the USMCA enforcement, many were already considering moving operations due to Mexico’s competitive workforce.
Among the many benefits of setting up operations in Mexico, foreign manufacturers can rely on a technically-skilled, stable workforce at a more cost-effective rate. Labor costs in China have continued to outpace wages in Mexico over the past several years. This combined with China’s higher transportation and shipping costs and lengthier timelines have made it appear increasingly practical to move production to Mexico.
Many global manufacturing companies have successfully operated in Mexico for decades and have optimized their investments over time. For those newer to the Mexico manufacturing landscape, working with a shelter company is the most efficient and cost-effective way to get a new operation up and running. Choosing this production route minimizes risk while allowing manufacturers to maintain complete operational control.
Manufacturers can operate under a shelter’s existing entity and utilize the certifications and permits already in place, which creates a smoother transition and faster startup time. There is also a comprehensive list of shelter services involved, which can be customized based on each company’s unique needs. These include site selection, HR and recruiting, tax, legal, and customs compliance, as well as other administrative responsibilities.
Source:
https://business.thomasnet.com/press-room/news-highlights/supply-chain-dive-mfg-reshoring-is-likely
Finding the most cost-effective manufacturing option has always been a factor when deciding where to expand operations. It’s been a growing topic of conversation over the past few years as many U.S. manufacturers are considering a move from China to Mexico.
China emerged as the front runner for low-cost manufacturing in the early ‘90s, but has since lost its stronghold due to ongoing challenges, including wage inflation and trade conflicts. According to a recent Deloitte report, manufacturing executives in 2021 are looking for proximity to existing customers, talent availability, and infrastructure quality among their key location drivers, all areas where Mexico excels over China.
Sharing a border with the U.S. provides a more convenient and cost-effective solution than the freight shipping costs and timelines when waiting for goods from China. When manufacturing in Mexico, companies have access to same-day delivery versus weeks it may take to receive a shipment from China. Longer shipment times often lead to delays, damage to goods in transport, and other logistical challenges that ultimately lead to extra cost to manufacturers.
Mexico’s labor rates have held steady compared with the rise of wages in China. Plus, there’s the added benefit of having access to a highly-skilled technical workforce to choose from, thanks to Mexico’s investment in higher education and training in industrial fields. Furthermore, there’s been a slowing of maintaining top, cost-friendly talent in China as the population and subsequently, the labor pool has begun to decline. Whereas, in Mexico, more than 110,000 engineers enter the workforce every year.
As for trade relations, Mexico is part of the USMCA, as well as numerous other trade agreements with other countries around the world. This creates a favorable relationship between the U.S. and Mexico and focuses on keeping manufacturing closer to home. When compared to the war on tariffs, problems with protecting intellectual property, and other trade conflicts between the U.S. and China over the past several years, the security of operating in Mexico is becoming the main location trend for many manufacturers.
For those considering moving manufacturing to Mexico or at least expanding their portfolio, seeking the help of a shelter services provider saves on both time and money to get a project up and running in an efficient manner.
In addition to the built-in location advantages of moving manufacturing from China to Mexico, U.S. manufacturers also have the unique advantage of working with a shelter services provider. Although companies that have operated in China for years have built partnerships through contract manufacturing, establishing strong connections in Mexico is made easier when working under the guidance of a shelter. This model allows companies to maintain complete control of operations while expediting production setup and saving on costs.
The main example of this is Mexico’s IMMEX maquiladora program, which provides manufacturers an exemption from the 16 percent value-added tax when temporarily importing goods, materials, and equipment. Working with a shelter allows manufacturers to work under their established permits. Alternatively, applying for a new IMMEX program can take months as a standalone entity. Manufacturers also minimize their risk when operating since a shelter shoulders legal, tax, and customs compliance responsibilities.
Manufacturers also have the option of partnering with a shelter as a consultative resource for certain areas of the operation rather than relying on the full suite of services offered. Either way, taking advantage of the experience and expertise of a shelter services provider makes the transition and setup time run more smoothly and efficiently.
Sources:
2020 was a year like no other, causing all industries, including manufacturing, to pivot and adapt to a new normal. As companies continue to rebuild, reconfigure, and expand their operations, the reliance of manufacturing in Mexico is increasingly advantageous due to the evolution of what’s been built and strengthened over the last several decades.
The U.S. has experienced a recent shift in presidential power with a new administration but is still experiencing ongoing trade conflicts with China and challenges caused by Covid-19. Although these changes lend their fair share of disruption to the economy, there are positive days ahead. Policies under the new Biden presidency promise investments in new technologies, an improved focus on favorable economic partnerships, and securing the history of success of manufacturing in Mexico.
Thus, 2021 will shine a light on keeping production close to home, enhancing economic growth through ally-shoring, and gaining access to an influx of skilled, cost-effective labor.
The Biden administration promises a $300 billion investment in research and development (R&D) and breakthrough technologies. This includes electric vehicle technology, 5G, and artificial intelligence, all of which will create jobs in America and a greater opportunity for manufacturing in Mexico. While R&D has largely remained stateside, the advantage of nearshoring to Mexico helps companies get their products to market in an efficient and cost-effective way. This is primarily due to the quality of talent and less expensive cost of labor Mexico offers.
Read more: Mexican Manufacturing Cost Sheet.
Another commitment under the Biden administration is to tighten domestic content rules for the U.S., as well as honor the enforceable rules of origins and origin procedures under the United States-Mexico-Canada Agreement (USMCA). These focus on increasing regional value content, including a provision requiring 75 percent of auto content be made in North America. Keeping production efforts close to home also aligns with confronting foreign governments, particularly China, with regards to intellectual property theft and trade conflict. Over the years, China has increased tariffs, increased labor costs, and has battled with U.S. companies regarding intellectual property, cybersecurity, and other factors that put trade and political relations at risk. These issues have been ongoing, causing uncertainty, and leading many manufacturers to reconsider where they set up operational facilities.
Additionally, with the travel and business restrictions in place due to the pandemic, it’s devaluing the relationship between the U.S. and China even further. Meanwhile, Mexico is already the number one trading partner over China and remains a key player headed into the new year.
The idea of ally-shoring, which favors economic partnerships between countries that share values and strategic interests, is how many market analysts and businesses are hoping to strengthen economic national security in the U.S. following the strain of the pandemic. Though there are other viable foreign trade options, one of the many benefits of implementing manufacturing in Mexico as part of your strategy is the close proximity between Mexico and the U.S., which provides access to same-day delivery.
With the distribution of Covid-19 vaccinations underway, travel and in-person restrictions may soon be lifted, particularly across the border before other international exchanges, such as travel to and from China. Furthermore, U.S. manufacturers that want to set up operations in Mexico have the unique advantage of partnering with shelter service operators. Many find it challenging to navigate the protocols and legalities required to begin and expand manufacturing. Shelter service operators streamline the setup and shoulder the legal and financial responsibility that covers all areas of operation.
Alternatively, manufacturers that choose to work as a standalone entity face a difficult learning curve and a prolonged timeline, which can push a project out months from the initial goal. The benefits of working with a shelter services provider result in savings of time and money with the experience and expertise of those who have established relationships in Mexico. These are valuable when it comes to ensuring customs compliance, permit acquisition, and other necessary requirements needed to operate in Mexico.
Another key advantage of implementing manufacturing in Mexico is the access to technically proficient labor. Unfortunately, Covid-19 caused job loss across the U.S. and Mexico, with small businesses and contractors taking the biggest hit. However, the adaptability of Mexico’s workforce has resulted in even greater access to skilled and experienced manufacturing employees who have now joined the formal economy of full-time workers. This is in addition to the tens of thousands of technical graduates already emerging every year and stability in terms of Mexico labor rates.
Furthermore, Mexico already has existing factories and a history of success in helping U.S. and other foreign manufacturers expand globally. In the midst of ongoing change, it’s beneficial to have foundational solutions in place. The advantages of the high-quality, lower cost of labor Mexico delivers, favorable trade agreements, and the proximity between the two countries have always been in place and join the new opportunities for growth expected under a Biden administration.
By partnering with a shelter services company, manufacturers can evaluate and decide which is the best route for them regarding manufacturing in Mexico.
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The cost savings on labor remains a top benefit of Mexico manufacturing. However, more recent years have spotlighted additional reasons companies have decided to expand their operations to Mexico. An ability to meet regional demand through favorable trade relations and close proximity to the U.S. are key factors high on the list.
Steady foreign direct investment (FDI), plus regions in Mexico already equipped with spacious facilities and supported by a competitive workforce also motivate manufacturers to consider nearshore manufacturing as a strategic option. All of these factors combined continue to provide viable options for manufacturers who want to diversify their portfolio or consider expansion for the first time.
North American countries finalized agreements through the United States-Mexico-Canada Agreement (USMCA), which became officially effective July 1, 2020. Among the many benefits of these trade relations include strong and effective protection of intellectual property, new labor value, and updated rules of origin and origin procedures to increase regional economic growth, among other provisions.
Conversely, this comes at a time when trade between the U.S. and China has been contentious with imposed tariffs and a slowdown and uncertainty among manufacturers. Combined with the ongoing challenges surrounding the COVID-19 pandemic, U.S. companies operating in China have faced delays and cancelations regarding travel, shipping times, and other operational necessities over the past several months.
Nearshore manufacturing in Mexico provides viable options for companies that want to save on costs without a supply chain interruption to continue meeting global demand. They benefit from shipping costs and timelines similar to the U.S., plus easier oversight of regional facilities due to the close proximity. When facilities are housed across the globe, maintaining quality assurance is more difficult to achieve.
According to the Americas Society Council of the Americas (ASCOA), Mexico has received continuous FDI over the past several years. In 2018, it received $31.6 billion USD in FDI, with the bulk of it stemming from the U.S. and allocated to the manufacturing sector. This confidence in the country has encouraged companies to continue developing operations throughout Mexico.
Automotive manufacturer Motorcar Parts of America Inc. (MPA) is a company that has previously achieved success with Mexico manufacturing and decided to expand. When launching its brake caliper product line, the company decided to further expand its operations to total approximately 370,000 square feet at its distribution facility in Tijuana, Mexico.
Another recent example is the investment from Stant Corporation, a world leader in the production of automotive components, for customers including Ford, GM, Chrysler, and Volvo. It was announced in August 2020, Stant Corporation invested over $15 million USD toward a second facility in San Miguel de Allende. This operation is expected to generate 500 jobs during the next five years.
MPA and Stant Corporation are only two of hundreds of manufacturers that have decided to establish a larger footprint throughout the years. As more companies include Mexico manufacturing as part of their short- and long-term strategic planning, it paves the way for increased economic growth throughout North America with a continued focus on quality, efficiency, and cost-effectiveness.
To establish a successful setup of new operations when nearshore manufacturing, IVEMSA guides companies through the complexities of Mexico’s unique IMMEX/maquiladora program, compliance requirements, hiring and retention of top employees, among other areas involved in the process.
Sources: https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/rebalancing; https://www.as-coa.org/articles/chart-breakdown-foreign-direct-investment-mexico; https://motorcarparts.com/news/motorcar-parts-of-america-launches-brake-caliper-product-line/; https://mexico-now.com/stant-invests-more-than-us15-million-for-expansion-in-guanajuato/;
U.S. companies have benefited from manufacturing in Mexico for decades. Advantages such as lower labor and warehouse costs have made it a top trade competitor with China with its popularity increasing over the years.
In 2020, U.S. manufacturers are continuing to set their sights closer to home due to more favorable trade relations with Mexico and a proximity that’s proven even more valuable amidst the pandemic. Additionally, Mexico shelter companies are helping businesses use these advantages to adapt, thrive, and prepare for the future.
One of the main advantages of manufacturing in Mexico has been favorable trade relations across North America, thanks to NAFTA. As its replacement, the newly enforced USMCA further entices U.S. manufacturers to rely on nearshoring to Mexico by including provisions, such as labor and intellectual property protection.
This comes at a time when an increase in tariffs and continuing conflicts between the U.S. and China have caused many manufacturers to diversify their portfolios or completely move their operations elsewhere. According to the Kearney 2020 Reshoring Index, manufacturing imports from China to the U.S. between 2018 and 2019 declined by 17 percent, equaling approximately $90 billion. Comparatively, manufacturing imports from Mexico rose $13 billion in the same time period.
The proximity to the U.S. has always been a key advantage of manufacturing in Mexico. Let’s use the city of Tijuana as an example to highlight proximity benefits. First, many foreign manufactures find border locations such as Tijuana to be the best option for their manufacturing needs since you can be at the border just minutes away from the U.S.
Second, according to the most recent Tijuana Industrial Market Overview presented by Cushman & Wakefield, the city is one of the top industrial markets in Mexico in terms of rent stability, diversity of industrial sectors, and high value-added manufacturing. The demand for industrial space in this area has historically kept vacancy levels at below three percent.
Third, in a border location like Tijuana, you’ll be able to export your finished goods and receive them in the U.S. on the same day. You’ll also have access to many talented workforces and a wide range of local suppliers. Lastly, an additional benefit of a border location like Tijuana is that depending on what you prefer, you and/or your executives can live in the U.S. and work in Mexico.
The proximity advantage has been amplified in 2020 as unforeseen challenges were introduced due to the global pandemic. As a result of Covid-19 restrictions, there have been shipping and travel delays and complications in China. Whereas, the U.S./Mexico border has remained open for commercial shipping and business operations. These problems have only added to the contentious relationship between the U.S. and China, which has made manufacturers take note of where their facilities will be most stable and profitable. Many are looking to Mexico as their top option when considering future growth for their companies.
In addition to the short distance between the U.S. and Mexico, especially when compared to China, there’s the unique advantage of working with a shelter operator. Mexico shelter companies perform due diligence when it comes to compliance and legal requirements and take on the majority of setup to help expedite the process. This includes human resources and recruiting, accounting, trade compliance, and project management support during the setup process, among other services.
In terms of current precautionary measures, virtual tours and online communication allow businesses to review and narrow down their site selection and weigh in on project details without having to travel more than necessary. Companies already doing business in Mexico are continuing to grow in the region by expanding their operations and upgrading their lease options.