The past decade has ushered in an era of unprecedented economic growth and development within Mexico. Viewed as an emerging market, particularly in the commodities and manufacturing sectors, it now has the 15th largest economy in the world with a 2018 GDP of $2.6 trillion. Economists suggest that the recent growth within the manufacturing sector has been spurred on by changes in foreign markets and trade policy. In response, U.S. companies have begun to forgo conducting their business in China in favor of Mexico. Now with the changing landscape of Mexico’s manufacturing industry, it’s easy to see why so many US companies are making the switch over from Asian countries.
The reasons why companies are departing China for Mexico are complex and varied, but can be best summed up by discussing the number of benefits underlying such a move. Below, our Mexico manufacturing specialists will discuss the pros and cons of doing business in Mexico.
Benefits of Manufacturing in Mexico
Before we dive into the general benefits expanding business to Mexico, it’s important to talk specifically about the jewel of the Mexican economy, its manufacturing industry. By the numbers, Mexico is a top 15 global manufacturing economy by gross value added. Manufacturing output is $175 Billion annually, which accounts for 19% of the total national output. They specialize in:
- Medical devices – Mexico is now the 2rd largest medical device market in Latin America, only behind Brazil. According to recent studies by NAPS, there are more manufacturing companies concentrated in Baja California than anywhere else in North America. In addition, Mexico offers a cost advantage of 20% to the U.S. market.
- Automobiles – The country is a top 5 auto producer in the world. Plants already in Mexico include:
- Ford Motor
- Aeronautics – Compared to the U.S., the aerospace industry is 16% more competitive in costs when viewed side by side.
- Electronics – Mexico exports more than $70 billion annually, making it the 6th largest tech sector in the world. On top of that, there has been an annual growth rate of 20%, which doesn’t appear to be slowing down any time soon.
Mexico didn’t become a manufacturing powerhouse overnight, there was decades of progress paving the way. It began with NAFTA, which revolutionized how modern economies could work together. Previously, Mexico’s economy was struggling to emerge and find its identity, but the lifting of tariffs and other similar hindrances to trade changed everything. One of the benefits of NAFTA is that it allowed for the creation of international supply chains between the trading partners, which, in turn, instigated Mexico’s transformation into a manufacturing powerhouse.
Since then, IMMEX and the USMCA have done their part to make Mexico an even more attractive opportunity for foreign investment:
- IMMEX – The 2006 IMMEX decree sought to kindle excitement and investment in conducting business in Mexico. While the provision changed many operating factors and barriers to entry, the critical result of the plan was to allow for a duty-free temporary import of raw materials, components, parts, shipping containers, and machinery so long as they would be subsequently exported. This dramatically lowered the cost of manufacturing, especially when compared to China.
- USMCA – Although the roll out remains in medias res, President Trump’s NAFTA 2.0 took some steps that encouraged companies to manufacture in Mexico as opposed to Asia. The critical updated provision is known as the Rule of Origin. According to JMR:
After contentious negotiations, the three countries agreed that this would increase to 75%, putting pressure on automakers to increase their sourcing and manufacturing to the region. This has the potential for a major effect on companies with global supply chains who will now have to find ways to replace a significant amount of their foreign sourcing with domestic capacity that may or may not exist.
Since much of Mexican manufacturing already operates above the 75% threshold, analysts expect that exceedingly more American companies will have to transfer at least a portion of their manufacturing efforts from China and Korea into Mexico.
Benefits of US Companies Doing Business in Mexico
There’s always a cost benefit analysis that comes into play when a company decides where to do their business. In the past, such an analysis often led to conclusions that Asia was the place to be, specifically China. But that was the past and China’s competitive advantage has been shrinking day by day. Reasons for US companies to manufacture in Mexico include:
- Low labor costs – While there are provisions in the USMCA that allow the Mexican labor to form unions, its labor costs are amongst the cheapest in the developed world. This factor creates the largest disparity in the cost of doing business when compared with the U.S. According to Al Dia, “the average payroll of a Mexican worker in the US was $ 1,870 per month at the end of last year. The average wage in Mexico was six times lower: $ 291 per month.”
This pay disparity becomes even larger when you compare manufacturing wages:
- Mexican manufacturing hourly average – $2.70 per hour, which has remained virtually stagnant over the past decade.
- American manufacturing hourly average – $30 per hour, which has risen and is expected to continue to rise.
Many American companies extend their cost savings even further when it comes to products that are heavily labor intensive. Even though Mexican workers might not be able to fully match American efficiency, the additional time costs are far less substantial than U.S. labor costs.
- Early entrance into emerging markets – Although the Mexican economy is experiencing a boom and influx of foreign investment, it still remains an emerging market. As a result, by getting in early and beating the rush, you can take advantage of unique opportunities or have a chance to corner your share of the market before other competitors can establish a foothold. Typical benefits a company might receive from a preemptive move include:
- Low labor costs
- Governmental support
- Low competition
- Limited market sophistication
- Predominance of low-quality goods and services
- Reduced operational costs – The cost of doing business in Mexico is far cheaper than in the states. Economies of scale create serious cost savings when it comes to:
- Leasing a building to operate out of
- Hiring labor
- Hiring managerial staff
- Water service, natural gas, and electricity
- Increased capital potential – Emerging markets such as Mexico provide businesses with access to troves of new capital. The increase in available capital makes it easier to expand into the country and improve product potential. Taking this step will not only boost growth but income as well.
- Labor force demographics – Mexico has a labor force that consists of 54,000,000 workers with a median age of 26. The average worker in Mexico not only costs less but is a decade younger than a comparable worker in the states. According to Trading Economics, “Labor Force Participation Rate in Mexico increased to 60.50 percent in June from 60.20 percent in May of 2019. Labor Force Participation Rate in Mexico averaged 59.81 percent from 2005 until 2019, reaching an all-time high of 61.47 percent in June of 2012 and a record low of 58.18 percent in December of 2010.” Of the working class, 43% of the population is under 25 years old.
- A stable economy – Instability and volatility within an economy makes it difficult to project profits, especially in foreign countries. Since the 2008 recession, Mexico’s economy has remained quite resilient and stable, especially in comparison to the rest of the world. Mexico’s banking system and Peso have remained strong and projections indicate that the country will continue to be a phenomenal avenue for investment. By doing business there, you decrease the risk involved.
- Free-Trade Agreements – Mexico has the most free-trade agreements of any country in the world—17 with 49 different countries. This liberalization of trade has resulted in the country being one of the most welcoming and competitive trade economies globally. All of these trade policies are aimed at lowering the cost of doing business and undercutting China’s market.
Having access to all of these countries duty-free gives you the opportunity to import various inputs and then export them at far lower costs than you’d get in the U.S. In addition, Mexico has dramatically reduced the paperwork involved with imports and exports, saving you time and money.
- Proximity to the states – Although you’ll have to leave the country to enjoy the cheaper input costs, Mexico’s proximity to America makes this a far less perilous logistical undertaking. Its geographical location reduces the difficulty involved with transporting goods back into the U.S. while also making it easier to manage your Mexican business interests. On top of that, the similar time zone reduces the time change hassle you’d experience in Asia.
- A faltering Chinese market – In the past, China was the place to be, but that’s no longer the case. Various factors have increased the cost of doing business in China, thus lowering its competitive advantage, if not completely eliminating it all together. Reasons why many U.S. companies are choosing to leave China include:
- Increased labor costs
- Increased oil prices
- Trump’s Chinese tariffs
- Currency fluctuations
- Transportation infrastructure – Mexico already had a far-reaching rail and highway infrastructure in place, but the influx of foreign investment into the country has encouraged the government to put a renewed emphasis on development. Extensive rail lines networks and highways systems expand over the vast majority of the country with extra efforts being made on developing those closer in the north (to say, those that are closer to the U.S. border).
- Ease of entry – Mexico is a much simpler country to enter and begin doing business with than other locations like China. There’s a higher crossover between languages, cultures, business climates, and geographic proximity, which makes it easier to acclimate and begin doing business immediately.
- Educated Workforce – In recent decades, the country has put a large emphasis on producing an educated labor force. Even manufacturing requires a developed skillset and knowledge on assembly production and technological innovation. Unlike the U.S. worker demographics, which tend to be blue collar, Mexican manufacturers have employees that are focused on higher education and improving their skills.
- Access to professional services – Operating in a foreign country, even one as close as Mexico, is complex. You have to deal with a host of compliance issues, including:
- Environmental laws
- Regulations on accounting
- Government labor laws and requirements
- Cultural and language differences
An entire industry has cropped up that focuses solely on helping foreign companies effectively handle compliance. These professional services have years of experience in helping American companies successfully navigate this foreign business climate and ensure that you’re operating in compliance with local laws.
Making the Switch
Mexico has become a haven for many businesses currently operating in the U.S. or China who are looking for ways to cut the costs of operations. Governmental action combined with recent trade policies have created a business climate that is increasingly more attractive to foreign investors. Although it might be quite the undertaking, the dozens of benefits of doing business in Mexico renders heading south an appealing transition.
And that’s exactly why their economy continues to evolve.
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Brookings. Global Manufacturing Scorecard. https://www.brookings.edu/research/global-manufacturing-scorecard-how-the-us-compares-to-18-other-nations/
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Marklines. Mexico – Flash Report, Production Volume, 2018. https://www.marklines.com/en/statistics/flash_prod/productionfig_mexico_2018
Made In Mexico. Aerospace Manufacturing in Baja California is an Engine of Growth. (2018). https://www.madeinmexicoinc.com/aerospace-manufacturing-in-baja-california-engine-growth/
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Al Dia. The Other Wall: Giant wage gap between US and Mexico explains migration flows. (2017). https://www.aldianews.com/articles/editors-picks/other-wall-giant-wage-gap-between-us-and-mexico-explains-migration-flows
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