Nearshoring in Mexico has become a more common alternative than operating a manufacturing facility in China due to the benefits that come with it. These include better logistics, a highly-skilled workforce, and more cost-effective labor and operations. In addition, travels to China from the U.S. take at least half a day, whereas, Mexico could take mere hours for many.
The cost to ship from China also takes longer and is more expensive.
These are only a few of the main advantages of foreign companies operating in Mexico, which is why many industries have started to shift their manufacturing sites. There is an array of products manufactured in Mexico, but the top trending industries include the following:
Companies have begun to shift manufacturing operations to Mexico due to cost savings and a higher quality of work compared with China. As a result, Mexico is a primary hub for nearshoring and continues to expand due to the favorable trade relations between the U.S and Mexico. It allows U.S. businesses to stay competitive by maintaining their operations and growth. Here are a few examples of companies who have benefited over the years.
Ford has been a longstanding participant in Mexico’s IMMEX (formerly maquiladora) program. They began to expand their manufacturing to Mexico in the early 1920s and have continued expansion throughout the decades. In 2016, Ford announced they’d be moving all small-car production to Mexico over the next few years to help them compete with other small vehicle car manufacturers.
Global food and drink company, Nestle, has also expanded its operations to Mexico. In 2014, they announced a $1B investment in two more manufacturing factories in Mexico over the span of five years to meet the demands of the growing markets of infant nutrition and pet food.
Sabritas, a subsidiary brand of PepsiCo that produces Frito-Lay snacks like Doritos, Cheetos, and Tostitos, made a $5B investment in Mexico to further operations and production. This is in addition to the $3B PepsiCo has invested since 2009, much of which is primarily for the Mexico market.
As markets continue to expand, companies realize they need to keep up with the demand of consumers. As a result, they want a less expensive option that still allows them full control over their operations and delivers a consistently quality product. This goal is achieved when U.S. companies employ a Mexico shelter service company to set up manufacturing south of the border.
The migration of manufacturing facilities from China to Mexico has been slowly growing over the past few years, as labor rates in China have been increased. However, interest has spiked recently due to the tariffs imposed on certain imports from China last year. More and more companies are looking to move their manufacturing from China to Mexico and seeing benefits beyond reduced tariffs.
Although trying to get around tariffs and duties is probably the biggest reason companies decide to move their manufacturing to Mexico, there are other benefits:
Manufacturing in China used to be a fairly easy decision for many companies because labor was so inexpensive. However, labor rates in China have been rising steadily, and surpassed those in Mexico about ten years ago, while rates in Mexico have stayed fairly stable.
Additionally, manufacturing in Mexico, or nearshoring, means more efficient and cost-effective logistics, since it’s so much faster to ship products from Mexico to the United States. Companies also like that it’s easier to communicate with their facilities in Mexico, since the plants are at most four hours behind or ahead of the corporate offices. Trips to their Mexican facilities are faster and less expensive as well—an executive can drive from Los Angeles to Tijuana in just a few hours, compared to a 12-hour flight to China.
Mexico holds ten free trade agreements (FTAs) with 45 countries and 32 Reciprocal Investment Promotion and Protection Agreements with 33 countries. Although the bulk of Mexico’s maquiladora export to the United States and Canada, many companies also use Mexico to reach developing global markets.
Simply put, Mexico’s IP protection laws are far superior to those in China. They exceed the standards set first by NAFTA and now by the USMCA. Mexico’s legal framework offers protection of industry secrets, imposes heavy piracy penalties, and allows companies to patent pharmaceuticals.
Thanks to Mexico’s IMMEX/maquiladora and shelter programs, moving your manufacturing operations from China to Mexico is relatively straightforward. It’s best to work with a shelter provider that has experience helping companies making this move. Here are the basic steps most companies follow:
Working with a shelter provider is usually the fastest and easiest way to establish your operations in Mexico. It also means your company is protected from legal exposure and liability. Once your manufacturing facility is up and running, the shelter provider continues to provide administrative support (HR, accounting, trade compliance, etc.).
For almost any business, long-term strategies or goals are centered around producing better products while keeping costs low. Many methodologies, including Six Sigma, Lean manufacturing, and more aim to achieve this through the pursuit of continuous improvement. Companies seek to constantly look at small ways to incrementally improve their processes and work more efficiently so they can reduce costs without sacrificing quality.
In many companies, especially in manufacturing industries, seeking “continuous improvement” in this way eventually leads them to explore offshoring—often as they start to expand and find that scaling their business in the US is not cost-effective. However, there are many options when expanding, each with pros and cons:
Faced with these choices, many manufacturers instead choose to nearshore and establish operations in Mexico. Manufacturing in Mexico allows companies to pursue continuous improvement because it offers lower operations costs and skilled labor so quality does not need to be sacrificed.
Continuous improvement demands that companies are always looking at the whole picture—seeing the entire process by which they bring products to market—so they understand how tweaking one part (the supply chain for one component, for example)—affects other aspects. It can be easy for executives to just focus on one aspect of the manufacturing process, or the end product, and try to make changes without realizing the effects on the rest of the process.
Before moving manufacturing to Mexico, for example, you’ll want to examine how it will affect your supply chain—what kinds of supplies, equipment, or raw materials will you importing into Mexico? You can also look into customs regulations and trade compliance—will the labor savings offset those potential costs? (Most likely, yes, but it’s always good to get the full picture before making the move.)
Read our tips to build a seamless supply chain when nearshoring.
Once you start manufacturing in Mexico, you can further the process of continuous improvement. One strategy is the Lean manufacturing principle of sorting, which requires companies to review their workflows and look for components of the manufacturing process that can be sacrificed without sacrificing quality. This can lead to more efficient, productive workflows.
Companies can also seek to standardize the production process, which means locking in the step-by-step actions required to complete each product.
We often see companies look to Mexico nearshoring as an option once they have made their fabrication and assembly products as lean as possible. They reach a point where they see diminishing returns or would start to sacrifice quality. At this point, they need ways to lean their labor and supply chains and setting up operations in Mexico is an attractive way to do that.
Once operations are running in Mexico, the money saved in labor costs can then be directed to research and development on new products or innovations or even further continuous improvement efforts.
Mexico is an attractive option for just about any manufacturing or industrial business, including electronics, furniture, textiles, IT, and more. However, three industries are largely responsible for Mexico’s growth in manufacturing: automotive, aerospace, and medical devices. Both foreign direct investment in these industries and the Mexican government’s response have created an environment in which almost any manufacturing industry can thrive.
Here, we’ll take a closer look at these three key industries to understand their success with manufacturing in Mexico:
The automotive manufacturing industry is one of the oldest in Mexico—Buick was the first producer to establish in Mexico in 1921, and the Ford Motor Company followed in 1925. Although the industry declined from the 1960s through the early 1990s, the country’s economic growth and the adoption of NAFTA stimulated auto sales within the country and the export market.
There has been significant growth in the 21st century. Mexico is currently the seventh largest passenger vehicle producer and fourth-largest exporter. There are estimates that vehicle production levels could reach five million units by 2020—a 56% increase from 2014 production levels.
One of the main reasons why Mexico is attractive to automotive manufacturers is the low cost of labor. However, its location—near major US markets and with ports that allows access to Australia, New Zealand, and countries in Asia—and Free Trade Agreements (FTAs) are also significant. Mexico has a network of FTAs and Reciprocal Investment Promotion and Protection Agreements (RIPPAs), allowing manufacturers to export supplies and goods to dozens of countries.
As OEMs and Tier 1 suppliers move or expand to Mexico, the Mexican government has sought to improve infrastructure within the country so companies can more easily manage supply chains and logistical needs. Additionally, Tier 2 and Tier 3 suppliers often follow the OEMs and Tier 1 suppliers, creating a robust supply chain network throughout the country.
The aerospace industry in Mexico is relatively young, with the earliest companies setting up manufacturing operations in Mexico in the 1970s. It has grown in recent decades thanks in large part to NAFTA (now USMCA) and the maquiladora program, which allows businesses to exempt the VAT tax on temporary imports when importing raw goods, materials and equipment. This is key for an industry with expensive components and complex processes.
In the 2000s, the Mexican government recognized the opportunity the aerospace industry offered and created the ProAéreo 2012-2020, which includes strategies and policies to put Mexico in the top ten aerospace industries in the world. Its goals include increasing exports in the industry to $12 billion and employing 110,000 individuals (30-35% with advanced degrees) by 2020.
To do this, the government has launched business incentives, introduced workforce training programs, and opened universities to ensure that the Mexican workforce can meet the demands of the industry.
The medical device manufacturing industry has benefited from the same factors as the automotive and aerospace industries. Mexico’s proximity to the United States (especially, in the case of Tijuana and the rest of Baja California, proximity to the life sciences technology hub in San Diego) mean importing/exporting and other logistics needs are relatively easy. Additionally, the increased investments in training and education mean there are more engineering graduates and workers with highly developed technical skills. Mexico also has strong protections for intellectual property.
All these benefits also come with Mexico’s lower labor costs. It’s no surprise that well-known manufacturers including Medtronic, BD Medical, Philips, Flex, Welch Allyn, Ossur, DJ Orthopedics, Carl Zeiss, and more have established manufacturing operations in Mexico. In 2014, Mexico’s medical device exports totaled $7.7 billion, and it is expected to reach $15.5 billion in exports in 2020. Mexico is the leading medical device supplier to the US and leading exporter to Latin America.
In addition to Baja California, there are industry clusters in Mexico City, Estado de Mexico, Jalisco, Nuevo Leon, and Chihuahua. All of these regions have facilities that are FDA, CE, and ISO 13485 certified and have clean rooms from class 100 to 100,000. They are suitable for producing FDA Class I, II, and III products.
Although foreign investment and government programs or incentives may be targeted at the automotive, aerospace, and medical device manufacturing industries, all manufacturers can see benefits when setting up operations in Mexico. The low cost of labor, geography, free trade agreements, skilled workforce, and more are attractive to any manufacturer.
The electronics manufacturing services (EMS) industry in Mexico is strong and diverse. Across the country, you’ll find everything from Tier 3 suppliers to OEMs manufacturing a diverse range of products, from specialized machinery to consumer goods.
In 2016, Mexico was the sixth-largest producer of electronics worldwide and third-largest producer of computers. Worldwide machinery exports, including components and accessories, totaled $145 billion, according to the Observatory of Economic Complexity.
In 2016 (the most recent year for which data is currently available), the top exports for Mexico’s electronics manufacturing industry included:
This list highlights the diversity of the EMS sector in Mexico.
The US was the top destination for Mexico’s electronics manufacturing exports (only China exports more electronics to the US) in 2016. The other major electronics markets for Mexico include Canada, China, Germany, and Japan.
While you can find electronics manufacturers operating throughout Mexico, certain regions have established strong reputations in the industry.
Tijuana specializes in TVs, radios, and other appliances. The industry here is driven by a well-established supply chain and the proximity to the US/Mexico border. Baja California overall hosts over 200 electronics manufacturers.
Guadalajara has become known as the “Silicon Valley of Mexico.” The city received an estimated $120 million invested in hi-tech startups over a recent four-year span and has several well-regarded public and private universities that specialize in science, technology, engineering, and math (STEM) programs.
Forbes reported that between Mexico’s electronics exports increased by 73% from 2002 to 2012. One of the biggest factors in the growth of Mexico’s EMS sector is the low labor and overall operations costs. KPMG’s Competitive Alternatives report, released in 2016, stated that Mexico offered 11.9% cost savings on manufacturing electronics equipment and components compared to the US.
Electronics manufacturers are also attracted to the skilled labor force Mexico offers. At least 114,000 engineers graduate from Mexico’s universities and technical schools each year.
Mexico also offers strong intellectual property protections, access to global markets through various free trade agreements, and proximity to major established and emerging markets in North, Central, and South America. Experts expect that Mexico will maintain its competitive advantage in electronics manufacturing.
For the last year, businesses through North America and the world have been watching the NAFTA renegotiations that took place between the US, Mexico, and Canada. Now that a new agreement—the United States-Mexico-Canada Agreement, or USMCA—has been signed, we finally have some answers for companies wondering how their nearshore operations will be affected.
The biggest changes, and the ones most pertinent to many companies that have moved manufacturing to Mexico, apply to the automotive industry. There are other significant changes that we feel will affect ecommerce and digital companies. Read on to learn more about these changes and how you can plan to adjust your Mexico operations if needed.
Automotive manufacturers that have moved manufacturing to Mexico especially need to pay attention to the new requirements on regional content. Currently, passenger vehicles and light trucks must be manufactured with 62.5% North American content in order to qualify as “originating” and export vehicles to the US duty-free. Beginning in 2020, that regional content requirement will rise to 66%. It will continue to increase over the next few years until it reaches 75% in 2023. There are also new requirements for steel and aluminum vehicle components.
The goal is to incentivize automotive manufacturers to source more materials and parts from North American suppliers, but before you make dramatic changes to your supply chain, IVEMSA recommends you submit your Bill of Materials for a cost-impact analysis. The duty rate for autos is 2.5%, so it may be more cost-effective to pay the duty fees rather than adjust your suppliers. However, the duty rate for trucks is 25%, so it may be more likely that manufacturers will need to find new suppliers for those vehicles.
Another new provision mandates that 40% of autos must be made by workers earning at least $16/hour. Again, IVEMSA can provide a comprehensive cost-impact analysis for our customers to determine what adjustments they should make to their Mexico manufacturing operations. To complete this cost-impact analysis, we need a complete description of the materials and components, HTS code, origin and unit cost.
Some of the new chapters in the USMCA address ecommerce regulations, digital trade and intellectual property. These were needed because when NAFTA was originally negotiated and signed in 1994, ecommerce wasn’t the industry it is today. New, stronger IP and trade secrets protections will apply to nearly all industries.
Additionally, there are new measures meant to facilitate digital transactions while protecting consumer privacy. With the USMCA, Mexico and Canada are raising their de minimis shipment value levels to USD$50 (Mexico) and C$40 (Canada). Duty-free shipment values will increase to USD$117 for Mexico and C$150 for Canada. This will make it easier for digital and ecommerce brands, especially small and medium-sized businesses, to reach new markets in Mexico and Canada. We also think that digital and ecommerce brands may find new opportunities to scale their business in Mexico by taking advantage of the lower labor rates.
After the seventh round of NAFTA renegotiation talks concluded, US Trade Representative Robert Lighthizer said in a statement, “All three countries agree that NAFTA is outdated, and I believe we should be able to reach agreement on new issues like digital trade, labor, and environment, intellectual property, and much more.”
One of the reasons these talks haven’t made much progress is because several of the US demands—such as doing away with NAFTA’s dispute-resolution panels or making changes to how much North American content a car must have to be duty-free—are non-starters for Mexico and Canada.
Rather than get stuck debating these points, we at IVEMSA feel the talks would make more progress if they focused on other issues. Here are a few ways we think NAFTA can be updated that would benefit all three nations.
When NAFTA was adopted in 1994, e-commerce was barely a blip in the economy. Now, it’s a multi-billion dollar segment that continues to grow rapidly. The NAFTA renegotiations present an opportunity to codify e-commerce regulations to reduce barriers to entry and consumer purchases, such as:
NAFTA’s de minimis rule exempts imports from customs duties if they are valued at or below a certain threshold. One of the biggest changes that could be made is to harmonize these de minimis values to equalize the transaction cost of selling to Mexican and Canadian customers. Currently, imports valued at or below $800 can enter the US without duty payments, but those values are $50 for Mexico and $15 for Canada.
Mexico and Canada have historically resisted raising those values because they argue that doing so would threaten their local retailers. Their concerns can be mitigated if the higher values only apply to goods manufactured in North America—not those that are just packaged and shipped from one of the three countries.
Download: Mexican Manufacturing Cost Fact Sheet
Earlier this year, US and Mexican unions made a formal complaint to the US Department of Labor, claiming that Mexico is in violation of NAFTA’s labor standards. Their goal was to push the US representatives in the NAFTA renegotiation talks to argue for stronger labor rules.
Originally, NAFTA included only a supplemental agreement that allowed each country to enforce its own labor standards. Since its inception, union leaders and human rights organizations have argued that a labor clause should be the central part of the agreement. This is a chance for the three countries to come to agreements on minimum wage, benefits, unionization, and health and safety standards in each country. They should also create mechanisms to investigate complaints and punish violations.
Earlier in the NAFTA talks, Canadian Prime Minister Justin Trudeau called for the Mexican government to brings its labor laws in compliance with international labor standards, arguing that this will increase wages for workers in the US and Canada as well.
Similar to e-commerce, protecting intellectual property has become a bigger issue over the years, and each government has dealt with it in different ways. The NAFTA renegotiation should be an opportunity to codify these protections. It’s important for each country to agree on how to protect companies’ intellectual property, technology, and content, as well as consumer rights and privacy.
Read: Why Mexico Manufacturing Improves the US Economy
In any trade agreement, member countries need to protect the intellectual property of other member countries. These protections are critical to a number of industries, including technology, biopharmaceutical, hospital/medical devices, aerospace, and others. NAFTA’s Chapter 17 addresses this, but it should be strengthened to protect patents and regulatory data and provide speedy mechanisms to investigate and resolve disputes.
Mexico’s IP protection laws, in particular, have been evolving, but more can be done—and in doing so, Mexico may become a more viable option for biopharmaceutical companies.
Find out if moving your manufacturing to Mexico is right for your business.
At this point, it’s tough to predict the outcome of the NAFTA renegotiation talks. Our team at IVEMSA is following each round of talks closely (along with everything that happens in between) so we can support our clients and help them prepare for various possible outcomes. No matter what happens when the negotiations finally conclude, we will be prepared to help our clients stay competitive.
Interested in moving your manufacturing to Mexico? IVEMSA can help. Request a consultation with us today.
To say it’s been challenging to keep up with what’s happening with NAFTA over the past year is an understatement. Since last August, representatives from the US, Mexico, and Canada have officially met seven times now to renegotiate the agreement. As the latest round of NAFTA talks has just ended, we thought it would be a good time to review where things stand with NAFTA.
The North American Free Trade Agreement, or NAFTA, is the first of its kind and, when it was ratified in 1993, created the world’s biggest free trade area between the US, Mexico, and Canada.
NAFTA has been controversial from the start, with opponents in the US saying it would result in jobs leaving the country and supporters claiming it would make goods less expensive and boost the economy. Since 1994, both have happened, but it’s hard to pinpoint to what degree NAFTA is directly responsible. US manufacturers have also set up plants in countries outside of Mexico and Canada (including those with which the US has no free trade agreements), and a large number of manufacturing jobs have been lost due to other factors, such as automation.
However, President Trump made NAFTA a central part of his 2016 presidential campaign, calling it a “total disaster” and “the worst trade deal maybe ever signed anywhere.” Trump claimed that American manufacturing jobs have been lost primarily due to NAFTA and promised to enact protectionist, “America first” policies in office.
This is why representatives from the US, Mexico, and Canada first met in August 2017 to renegotiate NAFTA.
Read: 6 Reasons Why Manufacturing in Mexico Remains Attractive for US Businesses
The A seventh round of these talks ended in early March. At that time, US Trade Representative Robert Lighthizer said he wants to see a deal completed within four to six weeks, but it’s unclear whether or not that will happen.
In May 2017, the Trump administration officially notified Mexico and Canada that it intended to renegotiate NAFTA. Two months later, the administration released a list of goals for renegotiating NAFTA. It included objectives like:
Although the last rounds of NAFTA talks have seen limited progress on certain sections of the agreement, one of the main sticking points involves the automotive industry. Currently, vehicles that have at least 62.5% North American content can travel duty-free between NAFTA countries, and that content can come from any of the three countries. The US wants to change that minimum to 85%, as well as mandate that 50% of the content comes from the US.
The US is also insisting on a “sunset clause,” where NAFTA must be renegotiated every five years or it will expire. Mexico and Canada don’t agree with this, and it brings the possibility of too much uncertainty for businesses.
Trump threw another wrench in the NAFTA talks when he announced the US would impose tariffs on steel aluminum—but later said he would exempt Mexico and Canada from those tariffs if they came to an agreement on NAFTA.
Download: Mexican Manufacturing Cost Fact Sheet
At this point, whether or not the US, Mexico, and Canada will come to an agreement is a coin flip. If Mexico and Canada don’t give in to US demands, or the countries can’t work out a compromise, Trump could simply pull the US out of NAFTA (Article 2205 allows any country to withdraw with six months’ notice). Lighthizer raised the possibility of negotiating separate bilateral deals with Mexico and Canada, but Mexico is not interested in doing so.
Most experts believe that keeping NAFTA is in the best interests of all three countries. NAFTA has helped the three economies become incredibly interdependent, and if one country pulls out, or NAFTA goes away, there would be consequences across many industries. And it’s unlikely that manufacturing jobs would move back to the US in great numbers. It’s more likely that companies would stay in Mexico or move to countries in Asia, since labor and other manufacturing costs would still be lower in those countries.
Although there are no deadlines or timelines imposed by NAFTA itself, the Trump administration has pushed for a speedy resolution. After the seventh round of NAFTA talks, Lighthizer said “Now our time is running very short” and alluded to upcoming political events that could prolong or drastically change negotiations: Mexico’s presidential election is in July, Canada’s provincial elections start in June and run through the end of 2018, and the US has midterm elections in November.
What we do know is that no matter what happens with NAFTA, trade between the US, Mexico, and Canada will not stop. The three economies are too intertwined. Some sectors actually wouldn’t be affected at all (or very minimally): the aerospace and medical/hospital supply industries, for example, have a zero percent duty rate under the WTO (World Trade Organization), whose rules would apply without NAFTA.
Even if tariffs change, the Mexican government has regulations for companies to minimize the duties paid at the border. Our team at IVEMSA is constantly reviewing every change and possible outcome so we can help our clients make the best plans and decisions. We work with each client to perform a duty analysis and overall cost analysis to compare labor rates with tariffs and duty rates, as well as adjust for potential supply chain changes. We are staying on top of both the news about the NAFTA talks and what’s happening within Mexico for maquiladoras to ensure our clients can stay competitive.
Interested in moving your manufacturing to Mexico? IVEMSA can help. Request a consultation with us today.
Many companies come to us using the terms “offshoring” and “nearshoring” interchangeably, if they refer to “nearshoring” at all. Usually, they’re simply asking, “Is it cheaper to do business in Mexico than China or Europe?”
Usually, the answer is yes.
In most cases, nearshoring, or outsourcing your manufacturing operations to a nearby country, is more cost-effective than offshoring, which is outsourcing operations to another country in an entirely different part of the world. For most U.S. companies, offshoring would mean setting up a manufacturing facility in China or India, while nearshoring would mean setting up that facility in Mexico or another country in Latin America.
Here are some of the key differences between nearshoring and offshoring:
For years, the labor costs in Asia were so cheap, it offset other costs associated with offshoring. Now, wages in those countries have risen, while wages in Mexico have remained relatively stable. In 2013, average wages for manufacturing workers in China started to earn more than those in Mexico, and wages for China are still trending upward (source). Other production costs, like energy and other utilities, have risen in China as well.
Mexico’s maquiladora program also lowers costs. Maquiladora licenses allow foreign companies to operate in Mexico and offers favorable tax benefits—namely, you wouldn’t have to pay corporate taxes for the first four years of operation, and you can export products to the U.S. at a lower tariff.
Imagine planning a team visit to a production facility in China. Flights from the US could take between 12-20 hours, depending on your location. The team will be jet-lagged during the visit, the flights may cost thousands of dollars, and even a brief visit will likely take at least two or three full days.
Now, imagine planning that visit to a facility in Mexico. Flights are cheaper, there are most likely more flight options, and in many cases, the team can fly in the morning, meet with the plant manager, tour the facility, or do whatever is needed, and fly home that evening. If you’re located close to the border, you could just drive over, saving even more on transportation costs.
And for basic day-to-day communication, you’d be at most three hours ahead or behind your production facility—so you don’t have to jump on middle-of-the-night conference calls or worry about coordinating differing time schedules. In addition, it’s easier for team members in the U.S. or Mexico to address any issues as soon as they arise.
Is it important that your products reach your customers quickly? We have clients who are able to produce, package, and export products in one day. In the worst case, goods produced on Mexico’s West Coast would take approximately five days to reach the U.S. East Coast. By contrast, it would take a product from China at least 20 days to reach its destination.
There are also fewer language and cultural barriers when operating in Mexico. It’s a western culture, and many workers are bilingual, so communication tends to be smoother. Many of the workers you’d hire in Mexico would have experience working for U.S. companies, so they’d already be familiar with U.S. business practices and company culture.
You’re probably very aware of NAFTA and how it makes manufacturing in Mexico a favorable option for U.S. companies—but NAFTA is just one of 10 free trade agreements Mexico has with 45 different countries. Mexico is one of the most open countries for international trade, with 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). It’s also a member of TPP.
This means you’ll see significant benefits on savings both when you import raw materials into Mexico and when you export the finished goods—no matter where in the world they’re going.
If you’re using proprietary processes or developing state-of-the-art products, you want to protect that information. China historically doesn’t have a great reputation when it comes to protecting the intellectual property of foreign companies. Although the country is improving and implementing new protections and rights, China’s courts have been slow to enforce these.
By contrast, Mexico has more protections in place, and as part of NAFTA and other trade agreements, it’s required to protect data copyright, trademarks, patents, industrial designs and more. We’ve found that companies with valuable intellectual property feel more comfortable operating in Mexico.
While every business is different, nearshoring is the better option for more and more businesses. Mexico is the first choice for many companies in the automotive, aerospace, electronics, medical device, and IT industries for its lower costs and relative ease of doing business, compared to offshoring to countries like China.
With a trusted partner like IVEMSA, you’ll get the full picture of exactly what nearshoring will cost—not just in labor and production, but all the other “hidden costs” you don’t realize come with offshoring. We’ll make sure you get the full picture of costs and benefits so you can make the best decision for your operations.
Contact us today to learn how we can help make your nearshoring operations successful.
Companies have long known the benefits of manufacturing in Mexico, but over the past decade, the advantages have grown more compelling. Mexico offers a strategic advantage for those that want to reduce production costs while maintaining quality. It boasts low labor rates and a skilled workforce, plus a pro-business environment and participation in multiple international trade agreements, including the USMCA.
Meanwhile, Mexico invests heavily in its manufacturing industries, with programs designed to entice U.S. and other foreign businesses (IMMEX/maquiladora) and to educate and train its workforce in engineering disciplines and technical trades. And through the country’s unique shelter manufacturing program, IVEMSA can help companies maximize cost savings of manufacturing in Mexico while reducing their legal risk and liability.
Throughout the years, Mexico manufacturing has increasingly become the favored trade partner over China due to incomparable benefits such as better logistics, closer proximity to the North American market, lower costs, greater labor availability, and multiple free trade agreements.
Each of these competitive advantages, in addition to advancements in technology and supply chain has increased the amount of foreign direct investment into Mexico and the level of growth achieved by today’s leading global manufacturers.
Mexico’s established infrastructure has instilled confidence in U.S. and other foreign manufacturers, remaining largely operable and intact even during economic downturns, including the COVID-19 pandemic.
The close proximity between the U.S. and Mexico makes it easier for manufacturers to reach their North American audiences faster and more conveniently compared to Asia.
Industrial leaders benefit from reduced costs on labor, transportation, and building leases when manufacturing in Mexico without compromising operational capabilities, production quality, or delivery time.
Mexico has avoided the industrial labor shortage experienced by the U.S., China, and other trade countries and continues to support a robust, highly skilled workforce.
The enactment of the USMCA further incentivizes trade among the U.S., Mexico, and Canada due to favorable provisions regarding original automotive content and intellectual property
A $35 million dollar investment has Silicon Valley paying attention to the potential of Mexico’s tech industry. Kueski, the recipient of the mega influx, is a Guadalajara based online lending startup. Kueski co-founder and CEO Adalberto Flores said, “This is the biggest capital infusion any Mexican fin-tech startup has ever received.” Sources say that investment amount could jump, climbing as high as $100 million.
“There is a new breed of young, aggressive people who have traveled the world and now want to launch startups in Mexico,” Flores continued.
Dan Restrepo, who spent six years as the principal advisor to President Barack Obama on issues related to Latin America, the Caribbean, and Canada holds vast on how industry within the country operates said, “Mexico is starting to make that transition from just being a place that people build things to a place where people design and build things.”
Restrepo underscored the importance of the shift by adding, “That’s the move that South Korea pulled off. That’s the move that Japan pulled off. That’s the move of the economies that have truly emerged — that is what they do. They go from just being a platform for people to come do stuff more cheaply to a place where there is also significant intellectual value added.”
According to the Washington Post, there are nearly 300 start-ups in Guadalajara alone and much of the $120 million invested has come from venture capital in the United States. Mexico’s innovation ministry reported that Jalisco has several thousand start-ups and nationally recognized companies alike. Exporting nearly $21 billion in tech products and services annually, those companies include Intel, IBM, Oracle, HP, Dell, and many more.
“All the products made in Jalisco can be delivered anywhere in the U.S. in less than 24 hours,” says Jalisco’s governor, Aristóteles Sandoval.
“We have a port two hours away; the time zone is almost the same.” In Sandoval’s opinion this makes Mexico more cost-effective than India, what, for decades, has been know as the “go-to” for IT outsourcing.
Sitting atop a hill on 25 acres overlooking Jalisco, is Intel’s $220 million 220,000 square foot headquarters. Jesus Palmomino, the general manager of the company’s only research lab in Latin America, proudly reports, “Twenty five patents made here in 12 months! This is where the future is being built.”
Palomino, originally from Puebla, arrived in Guadalajara 26 years ago to spearhead a project between IBM and the Mexican government to set up a PC design center.
What has emerged, he says, is a result of the groundwork that partnership helped lay.
“Doing business here is almost like doing business in the U.S.,” says Anurag Kumar, chief executive and co-founder of iTexico, a Texas software development company with more than 100 of its 121 employees based in Guadalajara.
At $5 million a year in revenue, iTexico was named one of Inc’s fastest-growing companies in 2015 and received an entrepreneurship award from the Mexican government. The company’s roster has more than 100 global players including McDonalds and IBM and partnerships with Microsoft and Appcelerator.
“I’ve seen this movie before, I know how it ends,” Kumar says. “I saw it in Delhi, in Bangalore. There’s no reason there can’t be larger companies in Mexico. Mexico has advantages we haven’t found anywhere else. You don’t get the feeling of optimism in India that you find here. I see it in Mexico. I really do.”
The cost increases in labor, transportation and inventory management over the last several years have meant that offshoring manufacturing to Asia is no longer the default option. Today the trend is “Right- Shoring” which takes into account the cost/benefit of one, or a combination of, offshoring, nearshoring and reshoring to best achieve corporate goals.
In addition to reducing transportation costs, which is not insignificant with today’s cost of oil, right-shoring is about maximizing efficiency of the supply chain through closer proximity to demand. It allows for not only greater flexibility and a shortened timeline to design and fabrication changes, but follows through with a whole host of benefits:
While there certainly are companies for whom offshoring is still a good option, right-shoring is by far the better option for a great many industries. Products that benefit the most have one or a combination of the following characteristics: complexity, short lead times, variable demand, large product size/weight, and concerns about protection of intellectual property.
Another important factor is the total landed cost calculation. In addition to labor rates, transportation and customs duties, total landed cost takes into consideration indirect influences such as regional issues, product quality concerns, people and talent, logistics visibility, inventory costs, border-crossing complexities and more. All of these need to be considered in the total cost of operations.
Finally, there is a one-time cost involved with cost/benefit and risk analysis. This is the due diligence, including visits to potential locations, that will cost upfront, but save money in the long run.
Having been involved in helping companies conduct successful right-shore/nearshore manufacturing operations in Mexico for over 30 years, we at IVEMSA are intimately familiar with all of the details outlined above. If we can assist with a cost/benefit analysis, please contact us any time.