The advantages of nearshoring have benefited U.S. manufacturers for decades. Some of the largest global corporations have relied on Mexico to expand their operations in a cost-effective and efficient way. As the industry continues to evolve, especially now amidst the Covid-19 pandemic, the value of having a nearshore or manufacturing operation in Mexico is becoming all the more prominent.
Whether it’s an immediate decision or part of a long-term strategy, nearshoring opens up opportunities for companies that want to keep or move their facilities closer to home. As businesses begin to define what the new normal looks like in 2020 and beyond, it’s smart to review the advantages of setting up operations in Mexico. These include:
To build an operational setup that is structurally sound and can be customized to adapt to the ever-changing climate, it’s best to partner with a full-service shelter company like IVEMSA. Through its decades of experience and expertise, in addition to a built-in network of resources, IVEMSA serves as an all-inclusive solution to meet all nearshoring demands.
Although China is a top international competitor of Mexico’s, U.S. manufacturers are beginning to reconsider their future plans and lean toward diversifying their portfolios by assessing the advantages of nearshoring operations across the border. Currently, the limitations and concerns for exposure to Covid-19 regarding air travel make it challenging to conduct operations in Asia.
On March 28, 2020, the People’s Republic of China (PRC) suspended entry into the country. Since then, there have also been reduced or suspended routes for commercial air carriers to and from the PRC. As of August 18, 2020, China is still categorized as a Level 4: Do Not Travel zone due to continued Covid-19 travel and quarantine restrictions, per the U.S. Department of State – Bureau of Consular Affairs.
Conversely, the U.S./Mexico border has remained open for trade and is much closer in proximity. This helps minimize shipping costs and timelines and makes it easier for traveling to and from manufacturing sites as needed. In addition, IVEMSA has found, on average, that businesses see a 40-50 percent savings in labor costs in Mexico (compared to the U.S.). Whereas, China labor costs are not what they once were. Manufacturing labor costs have continued to rise by 15.6 percent per year over the past decade, and in 2018, they were estimated to be $5.51 USD per hour compared to an estimated $4.45 USD per hour in Mexico, per Statista data.
Navigating the new normal when manufacturing in Mexico maintains the same advantages as before, with adjustments in place to adapt to safety and sanitation protocols. Although the pandemic is unprecedented, the need to quickly pivot is not, and shelter companies continue to be a valuable partner to foreign manufacturers as they move forward.
In addition to challenges with proximity, the U.S. and China continue to be enmeshed in trade conflicts and political tension, which create an uncertain future with regards to intellectual property protection, increased tariffs, and delayed shipments. The most recent conflict regarding TikTok and the perceived national security risks it carries doesn’t affect the manufacturing sector, but it does perpetuate the bad business relations between the two countries.
This combined with the ongoing trade war that began in 2018 is yet another reason why many manufacturers want to at least put a secondary plan in place to enact if and when necessary. In a time where it seems like there aren’t a lot of options, the importance of nearshore manufacturing operations remains, allowing companies to expand and thrive.
Unlike with China, U.S. manufacturers have long depended on nearshore manufacturing operations to Mexico because of the cost-effectiveness, convenience, and agreeable trade relations set forth first by the North American Free Trade Agreement and now replaced by the United States-Mexico-Canada Agreement. Having measures in place that protect trade relations instills a greater sense of safety and security, which proves even more beneficial when dealing with a pandemic.
Manufacturers that are considering moving facilities from China to Mexico, expanding their current U.S. operations or managing sites in more than one country can follow a blueprint of those that have come before them. There is a long history of success among complex industries, such as medical device manufacturing in Mexico, as well as the electronics, aerospace, and automotive sectors. Ford, Toyota, Samsung, and LG are a few of the many powerhouse companies that have benefited for the past several years.
One of the unique advantages is working with a shelter company and Mexico’s IMMEX maquiladora program. IVEMSA covers all aspects of what it takes to set up and sustain manufacturing in Mexico, while minimizing the risk and liability burden placed on U.S. companies. In addition to the advantages of nearshoring to Mexico with regards to logistics, cost-effectiveness, highly-skilled labor, and support from the USMCA, IVEMSA also offers the benefits of 3PL logistics, freight forwarding, and the Section 321 program as well.
By partnering with its sister 3PL logistics company, the inventory and shipping process is expedited and streamlined to meet ongoing demand. Additionally, as an all-inclusive organization, IVEMSA coordinates and manages compliance for shipping materials from Mexico to the U.S. and vice-versa as part of the customized solutions for each manufacturer. Finally, with freight forwarding as part of day-to-day operations, full traceability follows items as they leave the warehouse until they arrive at their final destination.
Nearshoring as part of the new normal focuses on improving current protocols and procedures that have been successful for decades while leaving room for both agility and adaptability for U.S. manufacturers thinking about making the move to Mexico In the next few years.
Sources: https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/china-travel-advisory.html; https://www.businessinsider.com/donald-trump-tiktok-ban-us-china-explained-in-30-seconds-2020-8; https://www.bcg.com/en-us/publications/2018/china-next-leap-in-manufacturing; https://www.statista.com/statistics/744071/manufacturing-labor-costs-per-hour-china-vietnam-mexico/
Thanks to the North American Free Trade Agreement (NAFTA), the U.S. and Mexico have held a longstanding, favorable trade relationship, especially when compared to China. Now that NAFTA has been sunsetted in place of the updated U.S.-Mexico-Canada Agreement (USMCA), it only strengthens the connection between these North American countries and puts Mexico further ahead of China as competition for trade relations.
The USMCA has been created and approved by all North American leaders to benefit each economy, further protect intellectual property, and create greater opportunities for employment and commerce.
One prime example of the changes made to the USMCA is the rule of origin provisions. This directly affects where parts come from, particularly in the automotive industry. The threshold for vehicle content has been increased to 75 percent without incurring tariffs to ensure more automobiles will be made largely in North America.
Another major inclusion in the new trade agreement is the labor value content (LVC) rule. The general concept is that 40-45 percent of the components that make up an automobile must be made by laborers earning at least $16 USD per hour. This is in addition to the labor reform Mexico has put into place which allows for collective bargaining and registering union and impartial labor courts for its workforce.
Since the USMCA has only officially been in effect since July 1, 2020, time will tell how countries will benefit and what challenges they may face. To guide U.S. manufacturers through these changes in a successful way, it’s best to work with a Mexico shelter company to expedite operational setup time and streamline the manufacturing process in compliance with the USMCA.
Manufacturers must constantly adapt to industry changes and trade flow. Working with a Mexico shelter company remains the best way to get operations up and running in a timely and efficient manner. For decades, many of the world’s top manufacturers have chosen nearshoring to Mexico versus operating in China to benefit from a closer proximity to the U.S., lower shipping costs, and access to a highly-skilled, cost-effective workforce, among other trade advantages.
Prior to the enforcement of the USMCA, U.S. manufacturers were already considering their international trade options. Rising retaliatory trade implications between the U.S. and China have furthered discussions of moving operations from China to Mexico or at least diversifying facilities.
Additionally, with the effects of Covid-19, being prepared as best as possible and agile enough to pivot quickly is invaluable. For U.S. manufacturers considering a move to Mexico, customs have remained open during the pandemic for commercial business. Permits, licenses, and other certifications are handled online or over the phone, limiting physical business that needs to take place.
Shelter companies like IVEMSA have been working with manufacturers to prepare in advance for the USMCA changes to keep everything moving smoothly and effectively. The benefits of shelter services in Mexico are that they’re faster, cost less, and fall under the IMMEX certification requirements. Mexico’s IMMEX program eliminates value-added tax from temporarily imported goods and materials under the provision that they are then exported as finished products.
Site selection analysis, HR and accounting setup, employee recruiting and retainment, and securing permits and licenses are also part of the extensive list of services available to ensure a quicker setup. Furthermore, implementing accurate inventory systems that follow the new provisions of the USMCA are more important now than ever. Any discrepancies can delay or halt operations altogether. Adding Mexico shelter services as part of an operational setup and strategy helps to ensure correct product listing, transporting, and delivery to keep operations running successfully once setup is in place.
Sources: https://www.forbes.com/sites/taxnotes/2020/01/22/nafta-versus-usmca-taxes-tariffs-and-trade-in-north-america/#4e6aa22b4a13; https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/modernizing;
After over a year of negotiations between the U.S., Mexico, and Canada, significant changes and revisions were made in September 2018 to the 25-year-old NAFTA agreement. The updated trade agreement, enforceable as of July 1, 2020, is aptly named the United States-Mexico-Canada Agreement (USMCA) and introduces new opportunities for the manufacturing industry.
NAFTA was introduced in 1994 in an effort to improve economic growth among all three countries by increasing jobs, eliminating trade tariffs, and mitigating the trade deficit. It allowed finished goods and materials to be transported into and out of all three countries tariff-free. Updates found in the USMCA include topics, such as rules of origin procedures, labor wages, and intellectual property protection, among the 30-plus sections that make up the trade documentation.
One of the greatest advantages of working with an experienced Mexico shelter company like IVEMSA is having a skilled and experienced resource to help your company navigate through any USMCA changes that apply to your sector and maintain operations without interruption as best as possible.
A notable USMCA change specifically affects the automotive industry. The new agreement requires that a 75 percent threshold of auto content must be made in North America by 2023. Currently, automobile manufacturers must meet the minimum 66 percent threshold in order to receive duty-free treatment.
This requirement covers three key areas – principal parts, core parts, and complementary parts – for light trucks, heavy trucks, and passenger vehicles. Among the extensive list of parts are certain tires, rear-view mirrors, electronic brake systems, steering wheels, and engine parts, among others. With these new classification and percentage mandates in place, it’s crucial to implement and maintain an accurate inventory control system, a significant part of shelter services in Mexico.
A second key factor is the change to industry labor wages. The USMCA requires that 40-45 percent of automobile manufacturing must be made by workers who earn at least $16 USD per hour, according to the Office of the United States Trade Representative. This is aimed to support better jobs for U.S. producers and workers and ensure they are able to compete on an even playing field. Also, Mexico has agreed to legislative action that recognizes the right of collective bargaining and implements institutions for registering union and impartial labor courts for its workforce as well.
Mexico’s labor force is already competitive, with over 100,000 engineers graduating every year. It’s necessary to keep current with changes outlined in the USMCA and updates to labor reform in order to recruit and retain top industrial talent. Working with a Mexico shelter company allows U.S. manufacturers to benefit from cost-effective and steadier labor rates chosen from top-tier candidates.
Intellectual property has always been an important factor when considering international trade. Among the provisions updated or newly included in the USMCA are:
Mexico upholds a strong reputation for protecting intellectual property rights, especially in comparison to manufacturing in China, where counterfeit and intellectual property rights are slow to be enforced. Alignment under the USMCA further allows all three countries to maintain the same expectations and protocols across the board.
Sources: https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fa-0; https://crsreports.congress.gov/product/pdf; https://usmca.com/rules-of-origin-usmca/; https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/rebalancing; https://www.dol.gov/agencies/ilab/our-work/trade/labor-rights-usmca
The North American Free Trade Agreement (NAFTA) was in place for 26 years before being officially replaced by the United States-Mexico-Canada Agreement (USMCA) and enforced into law on July 1, 2020. This new trade agreement will be in effect until 2036 and subject to review and revisions every six years. During its time, NAFTA was responsible for the growth in the volume of Mexico’s imports and exports and positioned the country as one of the top global trading partners of the U.S.
As the start of the new agreement goes into effect, there have been significant changes to the flow of trade amid the global pandemic of Covid-19. Industries have had to remain agile, in addition to adapting to the new rules and regulations under the USMCA. In the midst of it all, the main concern of manufacturers is to maintain compliance and continue operations without delay.
One of the main areas affected by the USMCA is the automotive industry, as there are stringent content rules for product origin. As outlined in the agreement, 75 percent of automotive content must be made in North America by 2023. Proof of origin requires organization identification as an importer, exporter, or producer, description of originating goods to enable tariff classification, and document origins criteria.
Although the USMCA has not been officially enforced until this month, manufacturers and maquiladoras have already been implementing procedures and policies that will allow them to operate in accordance to the USMCA mandates. In preparation for these updated requirements, U.S. automobile manufacturers have turned to shelter services in Mexico for assistance in tracking and registration processes to ensure proper compliance.
Another area of conversation and concern is changes to labor requirements. According to the Office of the United States Trade Representative, the USMCA outlines that 40-45 percent of automobile manufacturing must be made by workers earning at least $16 USD per hour. This is in addition to Mexico’s new labor law which ensures workers can freely organize and unions are granted full collective bargaining rights.
U.S. manufacturers must uphold new labor law compliance, in addition to maintaining a competitive edge when recruiting top talent from Mexico’s thriving workforce. Working with a Mexico shelter company with a built-in network, such as IVEMSA, provides companies with necessary HR guidance and insight when recruiting and retaining employees.
Product classification and labor law regulations are only two of the many areas of compliance involved when manufacturing in Mexico. Partnering with a Mexico shelter company allows U.S. manufacturers to minimize their risk and liability. The shelter company serves as the legal representative and maintains responsibility for establishing IMMEX program registration, certifications, and other permits and licensing as required for operational setup. In return, manufacturers maintain full production control with regards to processes and intellectual property rights.
As economies push forward in 2020, the success of the USMCA lies within the goals of strengthening the rule of law to promote transparency and strengthen industrial competition, as well as promote public policies that encourage equitable and sustainable regional development. Maintaining compliance remains at the top of the priority list for manufacturers, and IVEMSA is ready to help streamline your operational setup.
This post has been updated from its original publish date of March 16, 2020.
COVID-19 continues to make an impact on a global level through travel restrictions, quarantines, and a heavy disruption to the economy. With limited resources, supply chains, and employees to carry the brunt of how this pandemic has affected the U.S., it makes sense for manufacturers to diversify their operations, even more than before.
Per a Forbes article published March 1, 2020, the managing director of China Beige Book (the largest private in-country data-collection network to track the Chinese marketplace) said “Chinese auto manufacturers and chemical plants have reported more closures than other sectors.” Between workers not returning back to their positions and shipping problems of supply chains, companies want to shift their operations and manufacturing in Mexico is at the top of the list.
Since the beginning of this crisis, the U.S. has not had enough face masks, ventilators, or other medical equipment necessary to keep up with the spread of COVID-19 and care for patients properly. Mexico’s industrial workforce is working diligently to provide life-saving devices to the U.S. as a means to help with this effort. As reported by the Washington Post, Tijuana is one of the world’s most prolific hubs for medical equipment production. It has helped make Mexico the biggest exporter of medical devices to the U.S., which is what’s needed, especially now. The city has the highest concentration of Mexico’s medical device firms, 70 percent of which are American-owned.
While the U.S. and other countries are relying on this production from Mexico, it’s of high importance for all to keep employees safe. IVEMSA is working closely with medical device manufacturers and other essential industries to remain open and implement the highest possible level of health and safety during this time. This greater call-to-action from the U.S. to Mexico’s workforce only strengthens the ties between the two countries.
Historically, NAFTA and now the recently approved U.S.-Mexico-Canada (USMCA) trade agreement shows how well Mexico has worked with the U.S. and Canada in terms of trade agreements, respecting intellectual property, treating workers fairly, and providing good working conditions. Conversely, China’s relationship with the U.S. for business is often difficult to navigate. Most Chinese factories don’t follow U.S. rules and regulations with regards to IP protection, working conditions, labor, etc. and recent trade war issues already had U.S. manufacturers on alert.
As COVID-19 continues to create dire situations, especially among the health care community, turning to Mexico as an extension of support has greatly benefited the U.S. in more ways than one. Having an influx of life-saving equipment within such close proximity has never been more important. However, U.S. manufacturers had already begun moving their operations to Mexico or at least diversifying them so as to not rely on a sole country for its manufacturing needs prior to this pandemic.
The challenges U.S. manufacturers have faced over the recent few years have led to the decrease in companies relying on China as the main international powerhouse it once was. It’s certain that a majority of U.S. companies have turned to Mexico as its favorable trade partner, a country without these challenges that provides ample opportunity.
In fact, the 2020 International Trade and Trends in Mexico survey revealed a large majority of executives were already planning to move business to Mexico from China within the next one to five years. Eighty percent of them plan to make the move within two years. Due to the country’s cost-effectiveness through Mexican labor rates, the IMMEX maquiladora program, shipping costs, and free trade deal with the U.S., Mexico is the go-to option for many. The ongoing competition between China and Mexico had begun to swing heavily in Mexico’s favor over the past several years due to several reasons.
For instance, the proximity to Mexico is significantly closer for U.S. companies than China. To spend a day visiting facilities or working with operations managers on a regular basis is easier and more efficient when traveling across the border versus traveling across the globe. It’s also less costly. Shipping products from China costs and takes longer than receiving finished goods from Mexico to a U.S. destination. It’s more advantageous when managing supply and demand, as well as maintaining successful workflows, all of which deliver greater profitability to the manufacturer.
Additionally, Mexican labor costs are still lower than China’s wages with Mexico having a higher level of productivity. Statistics show manufacturing labor costs per hour in China are $5.80 compared to Mexico’s at $4.10. Mexico also offers steadier wage increases and changes that companies can predict and plan for in advance. Plus, there are protocols in place through the USMCA that protect workers’ health, safety, and wages.
Proximity, productivity, and cost-effectiveness, plus global issues, such as trade deals between the U.S., Mexico, and Canada and the effect of the coronavirus, have only added to the benefits of moving operations to Mexico. It’s amplified the end of an era for many where China is the main manufacturer as the U.S. continues to operate under changing circumstances and works toward establishing a new norm.
IVEMSA continues its partnership with manufacturers who need assistance navigating under new and/or temporary regulations due to COVID-19 and providing what’s needed for the health and safety of their employees while continuing to operate on a greater scale.
Sources: https://www.nytimes.com/2017/03/31/business/us-mexico-trade-medical-devices.html; https://www.forbes.com/sites/kenrapoza/2020/03/01/coronavirus-could-be-the-end-of-china-as-global-manufacturing-hub/#656a5a952988; https://www.statista.com/statistics/744071/manufacturing-labor-costs-per-hour-china-vietnam-mexico/
A growing number of U.S. manufacturers have already made the decision to move part or all of their operations to Mexico. Mexico is seen as a greater cost-effective and viable solution over China, which not too long ago was a powerhouse in the manufacturing world. The strategic decision to either move operations completely or at least diversify is profitable on many levels. Businesses with production facilities in Mexico benefit from the close proximity, in addition to a highly skilled workforce and favorable trade deals within North America.
As a way to maintain competitiveness, more manufacturers are viewing Mexico as a wise investment from a cost-benefit standpoint over China. These feelings and actions have increased amidst the recent trade war between the U.S. and China and the coronavirus outbreak that’s now affecting people on a global level. As the reasons continue to mount in favor of Mexico, it only makes sense that more manufacturers are seriously considering bringing business closer to home.
However, this shift has not taken place overnight. For decades, major industrial leaders have taken advantage of the business opportunities available in Mexico. Over the past several years, there have been successful areas that have secured it as a solid growth opportunity. These include cost-effectiveness and value, Mexico’s IMMEX maquiladora program, and beneficial trade agreements between the U.S. and Mexico, all of which is either lacking or unavailable when manufacturing in China.
Manufacturing in Mexico offers both cost-effectiveness and value. From a cost standpoint, the proximity from the U.S. to Mexico saves on shipping, storage, and other transportation expenses. Additionally, due to the proximity to the U.S., it makes it easier for communication between facilities. It also reduces turnaround times and creates a flexible opportunity to manage quality control over the supply chain. Lastly, travel costs for routine checks are easier to schedule, which helps to prevent costly problems and maintain everything is running smoothly and without delay.
Another advantage is the cost of labor. Mexico’s labor rates have remained steadier over the years when compared to China. Current statistics show Mexico’s manufacturing labor costs are $4.82 per hour, while China’s are $6.50 per hour. Mexico has also proven its dedication to the technical industry. The country has invested in its educational programs, graduating tens of thousands of skilled laborers every year. The location is better, the talent is competitive, and all of it comes at a better cost.
A maquiladora in Mexico allows the special status of temporary importations for components and equipment to be assembled within the country without having to pay Mexico’s VAT or value-added tax as long as the final products are exported. By working under IVEMSA’s established maquiladora licenses, it provides U.S. manufacturers other unique advantages as well, such as:
Additionally, Mexico has free-trade agreements with over 49 counties, including the U.S. and Canada. The three countries have recently updated and agreed to the revised version of NAFTA. What has now emerged as the USMCA solidifies positive trade relations and provides protection in areas important within the manufacturing industry, including, but not limited to intellectual property.
Manufacturing in Mexico is nothing new to many major companies. However, with China becoming less of a benefit to U.S. trade and production, manufacturers are taking swift action to either split their operations between China and Mexico or go all in with their investment in Mexico due to the proven advantages.
Source: https://www.statista.com/statistics/744071/manufacturing-labor-costs-per-hour-china-vietnam-mexico/
NAFTA was established in 1994 and served as a trade agreement between the U.S., Canada, and Mexico to eliminate most tariffs on trade between the three countries. One of the goals of NAFTA was to boost economic growth in all three countries while creating new jobs. Different chapters of NAFTA included protection of intellectual property rights, dispute settlement procedures, rules of origin, and customs procedures. Some examples of its success included:
One of the key industries that reaped the benefits of this trade deal was the automotive sector. After NAFTA took effect, global companies such as Ford, GM, and Chrysler, among others began manufacturing in Mexico. Mexico’s light vehicle production more than tripled from 1.1 million units to 3.5 million units over two decades (1994 to 2016).
As of May 2019, 16% of all auto parts used by U.S. assembly plants come from Mexico, per estimates from the Center for Automotive Research, and $59.4 billion in parts were imported from Mexico last year. The success of these trade relations has led to increased investment in Mexico from the U.S. and other countries, which has resulted in an increase in Mexico’s exports and thousands of manufacturing jobs to help boost Mexico’s economy.
Fast forward nearly 25 years, in 2018, when NAFTA was replaced with the USMCA or the United States-Mexico-Canada Agreement as a continued, modernized way to maintain solid trade relations. Per the Office of the United States Trade Representative, this 21st century agreement will “support mutually beneficial trading leading to freer markets, fairer trade, and robust economic growth in North America.”
The success of the IMMEX maquiladora operation in Mexico has also benefited the country’s economy and the level of production for the U.S. When a U.S. company with a manufacturing site in Mexico imports goods and raw materials with the intention of exporting the finished products during a certain timeframe, these companies are exempt from VAT payments at Mexican customs when operating under the IMMEX maquiladora program.
The solid trade agreements and the rise of the maquiladora model only add to the benefit of the skilled labor force in Mexico and the close proximity from Mexico to the U.S. Additionally, U.S. manufacturers that choose to operate under a shelter have access to an already established maquiladora license. This investment also provides other tax benefits, permit and license compliance, reduced risk of legal liabilities, and savings versus setting up as a standalone entity.
For companies that wish to operate as a standalone entity, there’ still value in partnering with a shelter company for consultative services. Either way, the cost-effectiveness and convenience works well for the U.S. and other foreign countries interested in manufacturing in Mexico. And, it continues to allow Mexico’s economic status to thrive with job creation and investments from foreign companies.
The lift that NAFTA provided to Mexico’s economy in the mid-90s was the jumping off point to the competitive force the country is today. In recent years, more manufacturers have begun to shift operations to Mexico as other previously viable opportunities have dwindled, particularly in China. As of 2018, U.S. goods and services trade with Mexico estimated a total of $671.1 billion with machinery, electrical machinery, and vehicles as part of the top five export categories.
Sources: https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement; https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/archives/2004/july/nafta-decade-success; https://www.chicagofed.org/publications/economic-perspectives/2017/6; https://www.cnn.com/2019/05/31/business/mexico-tariffs-auto-industry/index.html; https://www.cfr.org/backgrounder/nafta-and-usmca-weighing-impact-north-american-trade; https://ustr.gov/countries-regions/americas/mexico
Talks about ratifying the USMCA trade agreement have been ongoing for over a year. As of December 2019, all three countries have signed the agreement and issued a revised version, which is expected to be enacted this year. While specifics are still being finalized, including changes to labor standards, there will be a greater understanding about the impact of the updated trade deal once the timeline is established.
Once officially passed, there will be time allowed to adjust to the new requirements (an earlier version of the agreement indicated a three-year rollout), after which all parties must fully adhere by the outlined and agreed upon trade policies. From the date the USMCA goes into effect, it’s valid for 16 years, although a review is already set for 2026.
Knowing the scope of what is expected to be approved with finality in 2020 helps manufacturers and other businesses better prepare for any changes that may affect them directly. Highlights of the agreement include changes within the categories of labor provisions, intellectual property protection, and automotive production.
Provisions included in the USMCA updated text outline several labor rights including:
Each country must be in compliance with labor laws through appropriate government action, including, but not limited to:
A press released by Labor Federation President Richard Trumka noted, “For the first time, there truly will be enforceable labor standards—including a process that allows for the inspections of factories and facilities that are not living up to their obligations.” These updates promote better working conditions and a fair wage for factory workers, which in turn, helps to boost productivity and performance in the workplace.
Updates to the intellectual property rights of the USCMA focus on areas including internet service providers (ISPs), trademarks, trade secrets, and enforcement as follows:
Strict and enforceable intellectual property protection is one of the many factors companies consider when exploring Mexico manufacturing solutions. Having these provisions applicable to digital property brings the updates into the modern era.
Read more: An introduction to customs clearance in Mexico.
Per the revisions to the USMCA, the percentage of automobiles and automotive component products in North America has increased to 75% and 60%-70% respectively. Additionally, 40% of automobiles must be made in factories that pay labor wages of at least $16/hour. This helps to perpetuate an already competitive workforce in Mexico and further emphasizes the subject of labor law reform.
With rising trade conflicts between the U.S. and China over the past two years, manufacturers have already begun to explore alternatives. Under the provisions set forth by the USMCA, it gives companies an increased incentive to expand or move their operations from China to Mexico. Many of these protections have already been in place as part of NAFTA, but have now been updated and improved under the ratified trade deal.
In addition to being logistically closer and more cost-effective, labor reform, modernization to intellectual property protection, and retaining the majority of automotive production in North American further tips the scales in Mexico’s favor.
* The information provided in this blog is reflective of the text version of the USMCA dated 12/13/19.
Sources: Office of the United States Trade Representative; PBS; AFL-CIO
2019 has marked a year of significant change for U.S. manufacturers. From the trade war with China to the updated trade agreement between the U.S., Mexico, and Canada, it’s been a year that has shifted how companies have strategized for 2020. Many are considering their options to either shift international operations from China to Mexico or expand for the first time.
As 2019 comes to an end, it’s important to reflect on how far the industry has come and where it’s headed in the near future, particularly with regards to manufacturing in Mexico. While there’s a learning curve to adapt to, Mexico remains a competitive market for industrial activity with shelter services as prominent as ever.
With a change in government leadership last summer, new Mexico laws will take effect in 2020. One of the most notable is the process of obtaining permits for U.S. (and other foreign) companies that want to start manufacturing in Mexico. The Ministry of Economy personnel formerly held responsibility for the IMMEX program inspections for approval and would conduct site visits to production facilities to ensure compliance prior to the start of a project. This process typically lasted two or three weeks before a manufacturer was approved or received an IMMEX program extension.
However, under the new administration, these physical inspections are now handled by local notaries who do not maintain the experience and expertise in manufacturing and are responsible for submitting their reports to the Ministry of Economy. Their job is to document under oath and in good faith that the company seeking to join the IMMEX program exists and meets the required standards.
The mandate has affected the approval process, which is now stretched beyond the typical two weeks to possibly 30 days or longer, depending on the Ministry of Economy workload and its criteria. If everything is in accordance, your IMMEX program will be approved; if something doesn’t match, then you need to resubmit your application and the clock starts again.
This is one example of more complex rules that companies must abide by, if they wish to manufacture in Mexico. A procedural change such as this further magnifies the value of working with a shelter services company. Starting a production facility in Mexico as a standalone entity is challenging on its own. Navigating changing government regulations adds a degree of difficulty to the mix.
It’s beneficial to work with an experienced shelter service provider like IVEMSA that’s already familiar with the process and maintains the relationships and connections necessary to minimize risk and increase efficiency. Shelter services have always been an important part of Mexico manufacturing, but have now been amplified in the wake of the regulations being rolled out in 2020.
Read more: Understanding Intellectual Property Protection in Mexico.
In addition to helping manufacturers navigate compliance when starting operations in Mexico, one of the initial steps of working with a shelter company is site selection. Although Tijuana has an active market due to its border proximity, there’s a low vacancy rate and building costs have begun to rise.
Alternatively, Mexicali and central Mexico have building rates that aren’t as expensive, but each area is different and prices are determined by demand. Each region is known for a specialized field where skilled labor is already established, as other global companies have already put down roots. With regards to the main areas associated with Mexico manufacturing, here are the cities where they’re most prominent:
A shelter services company can propose regions and facilities that maintain a higher level of cost stability and are conducive to a particular industry.
Read more: Benefits of the IMMEX Program for U.S. Companies.
For decades, China was known for its low labor costs, which attracted U.S. manufacturers to expand its operations overseas. However, salaries in China in the last decade have grown exponentially. Factory wages hit a spike in 2016, which was a 64% increase since 2011, with average hourly wages equaling $3.60 per hour. They continued to increase and are now $4.95 per hour on average as the country also faces its lowest working-age population in a decade.
Mexico offers stability in terms of labor costs, growing at a similar pace as inflation at 4%-5%, with a current average hourly wage equaling $4.00 per hour. Additionally, it upholds a competitive workforce skilled to handle the influx of industrial roles required for emerging technological advances. This helps to meet the demand for technically proficient laborers that are on the decline in the U.S. as well.
Manufacturing opportunities continue to rise in Mexico as companies search for ways to keep operational costs lower and production quality high.
The recent tariff increase on imports from China has caused several U.S. manufacturers to examine alternative routes to handle their operations at the most cost-effective rate. With new tariffs on the horizon, affecting products such as laptops, cell phones, and tablets, many are contemplating or have already taken action to start nearshoring to Mexico.
Logistically, it makes sense. Plus, labor costs in China ($4.95 per hour USD) continue to surpass labor costs in Mexico ($4.00 per hour USD); yet another reason why manufacturers are shifting strategies to either diversify their production or move facilities from China altogether.
Although the ongoing trade war between the U.S. and China has caused companies to heavily consider Mexico as an option, many global manufacturers have been nearshoring to Mexico for decades with great success. Thanks to Mexico’s IMMEX program, U.S. manufacturers receive favorable tax benefits, in addition to other unique advantages including:
Additionally, manufacturers have the benefit of working with a shelter services provider in Mexico to help initiate faster startup times, increase productivity, and reduce costs. Rather than navigating the manufacturing industry in a foreign country alone, shelter services benefit companies by ensuring compliance and efficiency with minimized risk and liability.
The benefits of manufacturing in Mexico vs. China are apparent, but the idea of switching locations may initially seem overwhelming. With the help of a shelter services provider, the process is straightforward, yet flexible enough to accommodate a manufacturer’s changing needs.
First comes the decision of whether to move all or part of operations from China to Mexico. Second, the shelter aids in site selection, employee recruiting, and other HR, accounting, and administrative matters. This is addition to scheduling the transportation of equipment and technology to Mexico from China. The goal is to make the transition as smooth as possible and alleviate the burden from the manufacturer.
Starting a new operational base is less time-consuming and costly when working with a shelter versus being a standalone entity. Additionally, by working under a shelter, companies can defer taxes as part of the IMMEX program when importing raw goods, equipment, and materials as part of their manufacturing process and pay lower or no tariffs when exporting the finished goods back to the U.S.
Part of the shelter services also includes securing all permits and licenses, ensuring customs compliance, and helping to manage operations to run smoothly and efficiently. Expanding operations closer to home allows manufacturers to more easily maintain quality control and visit facilities on a regular basis when necessary. As companies search for cost-effective ways to maintain their production levels, Mexico is quickly becoming the leading alternative to China.
Source: https://www.cnn.com/2019/12/03/politics/tariffs-iphones-cheese-trump/index.html
In 2019, Mexico surpassed China as a top trading partner with the U.S. In the first four months of the year, imports and exports between the U.S. and Mexico totaled over $203 billion, followed by trade with Canada at $198.6 billion, and in third place, China, which came in at $174.6 billion of total trade. The U.S. and Mexico have had positive trade relations in the past, as a result of NAFTA, but Mexico also advanced in the market share, partly as a result of America’s ongoing trade war with China.
There have been prior concerns regarding trade policies regarding the ownership of intellectual property and the transfer of technology between U.S. and China. The current administration imposed a tariff increase that affected $250 billion of Chinese products. In response, China issued its own taxes on $100 billion on U.S.-made imports.
President Trump then ordered an increase of tariffs to 25% on nearly all of the $300 billion remaining goods imported to the U.S. from China, with certain exemptions, such as pharmaceuticals, select medical products, and rare earth materials. China then imposed its own tariffs of 10-20% on over 5,000 products with U.S. origin that valued an estimated $60 billion(Source).
To avoid tariffs and potential production delays, manufacturers have begun to seek diversified options and look to Mexico as a steadier alternative for their operations.
Although earlier this year, the Trump administration threatened an imposed tax increase on all Mexican goods, an agreement was quickly made days later, which indefinitely halted any action from taking place. The proposed tax increase would have negatively impacted U.S. manufacturers in the automotive, medical device, aerospace, and electronics industries, to name a few.
Instead, Mexico continues to be viewed as an alluring solution for companies that wish to expand their operations and save on costs while maintaining quality. According to trade data, Mexico still ranked number one in trade value as of September 2019 with a total of $464.34 billion. Motor vehicle parts, computers, and electrical supplies were all listed in the top ten of imports and exports.
There are several competitive advantages of manufacturing in Mexico versus China. In addition to more favorable trade relations between the two countries, there is also a closer proximity to the U.S. and a more cost-effective and skilled labor force to choose from.
As a neighboring country, U.S. manufacturers can oversee quality control in Mexico more easily when it comes to planning travel and navigating time zones. Plus, Mexico’s increasing population and higher education and specialized training in the manufacturing industry has made it a competitive area when considering expansion.
Manufacturers also have the advantage of working with a shelter services company when operating in Mexico. A shelter partnership helps companies to achieve a setup in 3-4 months versus 6-7 months as a standalone entity. Shelter services include all legal, HR, and operational processes that goes into starting a new facility. This includes, but isn’t limited to, obtaining certifications and permits, recruiting and training employees, and working with customs to ensure an efficient and hassle-free process.
Another benefit of the shelter program is that income tax is waived for the first four years. Additionally, under Mexico’s IMMEX program with VAT Certification, VAT is waived on temporary imports, the products companies transform into finished goods. As more companies are weighing their options when manufacturing outside of the U.S., factors such as these continues to elevate Mexico as a top contender for trade.
U.S. businesses have reaped the benefits of manufacturing in Mexico for years. Currently, Mexico is the third largest trade partner and second largest export market to the U.S. An increasing number of companies have recognized the success and have moved part of their operations to Mexico or plan to do so in the near future. Among the benefits of this economic relationship are lower costs, closer factory proximity, and access to a workforce that is specially educated and trained for this level of work.
The Mexican government has prioritized its investment in education and training. There are higher education institutions where trade skills, design programs, and hands-on experience are part of the curriculum. On average, Mexico graduates 115,000 engineers annually. These skilled workers follow a 48-hour work week, which helps increase production while still delivering top quality. And, many companies automatically save up to 30% when moving operations to Mexico on labor alone due to the difference in hourly wages.
Companies that had previously relied on manufacturing in China to handle part of its operational needs now turn to Mexico due to the more favorable geographical proximity to the U.S. It’s far easier to travel to facilities south of the border versus a flight that requires nearly a full day of travel.
Time differences are also more conducive to business when manufacturing in Mexico versus China. For example, when it’s 8:00 AM in Detroit, MI, it’s 8:00 PM in Shanghai. That means any urgent communication must take place outside of regular business hours or wait until the next day. Typically, U.S. companies communicate with their Mexico factories on the same or similar work schedule.
One of the main industries that manufacture in Mexico is electronics companies, including Samsung and LG. Since the process often contains highly sensitive materials, it’s important for companies to know their intellectual property, such as trademarks, are protected. The country’s IP laws are similar to those enforced by the U.S. and Canada. Whereas, Chinese entities are responsible for between $225-$600 billion annually on intellectual property theft experienced by U.S. companies.
Read more: Understanding Intellectual Property Protection in Mexico
Manufacturing in Mexico means little to no risk, especially when under the guidance of a shelter company. Shelter services include maintaining all permits, licenses and ensuring a company is compliant with Mexican laws. This allows U.S. businesses to “set up shop” without the need to create a Mexican entity. Companies still maintain control of the business in Mexico and oversee factory production. The shelter company does the rest such as site selection, provide a legal presence, and handle all administrative tasks.
Mexico manufacturing is known for the production of high-quality goods in several technical industries, such as automotive, aerospace, and medical devices. Large corporations continue to invest millions of dollars into their facilities to stay competitive with their supply chain. It’s far easier to check on the quality of production first-hand since Mexico is closer than China. As an example, finished goods from a Mexico border city could take 4 to 8 hours to reach the U.S. after leaving your plant in Mexico; from China, it could take nearly three weeks to arrive.
U.S. companies reap benefits in multiple ways when manufacturing in Mexico. This is secured when they partner with a shelter company with decades of experience that knows the ins and outs of what it takes to efficiently and effectively start operations for foreign companies.