Implemented in 1994, the North American Free Trade Agreement (NAFTA) allows easy access for Mexican goods throughout the United States and Canada. NAFTA essentially changed Mexico from a closed economy to an export-oriented industrial economy. This also allowed for greater global expansion. Manufacturing in Mexico has become more desirable as tariffs on Chinese goods and imports have increased due to trade negotiations between the United States and China.
The new USMCA, created under the Trump administration but has yet to be ratified by congress, essentially aims to level the playing field in the automotive industry by requiring suppliers in Mexico to have a certain percentage of higher-wage personnel contributing to the manufacturing process. Alternatively, automotive OEMS can pay a 2.5% tariff on all U.S. imports. Other than the automotive industry, the USMCA does not significantly impact or change the current trade regulations under NAFTA.
There are various options for companies exploring ways to bring back their manufacturing from China to Mexico. While the fastest way is to identify a contract manufacturer in Mexico to produce one’s product, contract manufacturing in Mexico is far less prevalent than in China and there are issues with quality control and lead times.
One alternative that many companies use is the Mexico shelter model. This is when a foreign company operates under a Mexican entity that is already established, opposed to establishing their own Mexican affiliate corporation, making it faster and less expensive to expand to Mexico. Another benefit of operating under shelter is the limitation of liability and exposure in Mexico. The foreign company remains in full control of the manufacturing process, remains the owner of all the assets and maintains control of their intellectual property. While the employees are technically employed by the shelter company, they are directed and trained by the manufacturer and therefore feel a part of the foreign company. The shelter company provides 100% of the administration and compliance management of the facility, enabling the manufacturer to focus on production, quality control and growth.
The final option is for a foreign company to establish their own Mexican entity and hire local personnel to manage 100% of the operation. While this is a viable option when expanding to Mexico, the shelter model offers the same flexibility without a lot of the risk involved in doing it on one’s own.
Productivity in Mexico and China
Mexico’s manufacturing industry offers superior worker productivity. In 2014, the unit labor costs (which is equivalent to the wages adjusted for productivity) in China were equal to those in Mexico. By 2019, the manufacturing wages in certain industries were up to 20 percent lower in Mexico than they were in China, meaning greater efficiency at a lower price. While Chinese output remained marginally higher than in Mexico, the unit labor costs remain lower.
Shipping Costs to China are Higher
Due to both distance and fluctuating oil prices, shipping costs are exponentially higher when manufacturing in China. In 2018, shipping a 53-foot container from China to Los Angeles cost close to $5,000. The same container from the border of Mexico (Tijuana) to Los Angeles costs about $600.
Furthermore, thanks to NAFTA/USMCA and the IMMEX program, goods produced in Mexico can reach their U.S. and Canadian destinations quickly and efficiently. Along the border cities, such as Tijuana and Juarez, companies can offer 24- to 48-hour lead times on certain types of manufactured goods, such as consumer products. Shipping a product from China to the U.S. could take 3 weeks or more.
A long history of manufacturing in Mexico that spans over 60 years has led to a diverse, skilled, well-trained workforce that crosses over multiple generations and industries. Much of the working base comprises skilled and semi-skilled direct labor. This means that they have several years of experience and are at least partly bilingual.