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.
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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.
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