Nearshore Manufacturing Trends
The last two pandemic years have significantly changed the strategies, and ways companies elect to do their work. In addition to the current health emergency, the relatively recent trade war with China and the update of the treaty between the United States, Mexico, and Canada (USMCA) has caused many companies to consider the option of changing their international operations from China to Mexico or expanding for the first time to a location south of the US border.
CLOSE TO MEXICO, CLOSE TO HOME PRODUCTION.
Since 1960, there has been an increasingly robust presence of US manufacturers trending towards nearshore manufacturing in Mexico. However, in the late 1990s and early 2000s, many producers turned to China to find an alternative manufacturing venue with lower costs. As is the case with any strategy transferring their manufacturing China came with its pros and cons. One of the most critical cons and risks with the production in the Chinese market was the problem of intellectual property protection and copied products. This is because the rules and regulations governing IP protection and copywriting are mainly absent.
In many cases, the market was flooded with Chinese-made knockoffs of products that US manufacturers had developed. This had the negative result of shrinking US firms’ market share and resulted in reduced profitability for these companies. One pro, however, was that labor costs were so low that foreign manufacturers that operated in China were willing to risk and lose their intellectual property. They were willing to ignore adverse long-run outcomes to obtain short-term economic benefits.
Nearshore manufacturing in Mexico became more attractive when Chinese production, beginning in 2015, showed an increase in the cost of labor. As labor increased, so did the cost to the buyer of the product that was made in China. In 2016, factory wages in China reached a peak. They increased by 64% from 2011, with an average wage of $ 3.60 per hour. The increase continued, and now China’s average hourly manufacturing wage is $ 4.95. Part of the reason for this wage inflation is that the country has its lowest working-age population in a decade. As a result, companies have a reduced labor pool from which to source their employees.
On the other hand, in terms of labor costs, nearshore manufacturing in Mexico offers stability, growing at a rate similar to inflation at 4% -5%, with an average fully loaded wage rate of approximately $ 4.00 per hour.
In addition to the above-mentioned labor expense, companies that chose to produce their goods in China assumed the additional cost of having more inventory. Therefore, they carried hire costs in this area. It is important to note that the average time for products made in China to reach the United States is 30 to 40 days (Today, this is wishful thinking due to current supply chain issues). In contrast, products made through nearshore manufacturing in Mexico can be shipped by truck and rail. These conveyances arrive in the United States in 2 or 3 days. As a result, shorter supply chains can reduce inventory sizes and costs and reduce expenses associated with transportation.
For many manufacturers, nearshore manufacturing in Mexico is not about eliminating all production that takes place in China. In some cases, establishing production closer to home helps diversify the supply chain and spread out risk. In addition, nearshore manufacturing in Mexico offers proximity to US markets. Finally, Mexico is an attractive place to manufacture because it offers a young workforce with competitive salaries, and unlike China, intellectual property protection. These characteristics make it a desirable site selection option.
NEW ADMINISTRATION, NEW LAWS
With the change in government, some new laws came into effect in Mexico in 2020. One of the most notable of these is the process of obtaining permits for US or foreign companies seeking to start manufacturing operations in Mexico.
Previously, the Mexican Ministry of the Economy staff performed IMMEX program inspections to approve to complete the approval. These site visits were made to ensure full compliance with IMMEX requirements before a project started. This was a process that lasted between 2 and 3 weeks. However, with the new administration, these inspections began to be carried out by a local notary. As one might expect, many of these individuals do not have experience in manufacturing. Despite this, they are responsible for submitting compliance reports to the Ministry of the Economy. Their job is to document under oath that the company that wants to begin nearshore manufacturing in Mexico under the auspices of the IMMEX program meets all the required standards. This change in the approval process has extended the time needed to gain the necessary permitting by an additional 30 days. If everything is in agreement, Mexican authorities will accept the program. If not, companies must resubmit their applications and wait another 30 days on average. This is an example of one of the rules that companies must consider and comply with if they wish to engage in nearshore manufacturing in Mexico.
Companies considering nearshore manufacturing in Mexico must remember that shelter company services have always been of great value to companies that are manufacturing in Mexico. In addition to providing service in all non-core areas of a production operation, the Mexican shelter service company often holds required permits or guides its clients through all bureaucratic processes.
In addition to helping manufacturers with compliance when they start operations in Mexico, one of the initial steps in working with a shelter company is selecting the location. Although the border region is known to have an active market thanks to its proximity to the United States, wage rates in the area may be a bit higher than those paid in the interior due to more competition for available labor. Therefore, when researching the possibility of initiating nearshore manufacturing in Mexico, Manufacturing firms interested in Mexico must keep in mind that each area of the country is different, and wages are determined by local demand.
Each region is known for its specialized field. In these areas, skilled workforces are already established. The main areas that are associated with nearshore manufacturing in Mexico are the following:
- Aerospace: Tijuana, Mexicali, Guaymas-Empalme, Monterrey, Nogales, Saltillo and Chihuahua.
- Automotive: Tijuana, Mexicali, Hermosillo, Monterrey, Nogales, Saltillo, Chihuahua, Ciudad Juárez, Aguascalientes, San Luis Potosí, Querétaro, Silao, Celaya, Puebla and León.
- Electronics: Tijuana, Mexicali, Hermosillo, Monterrey, Nogales, Saltillo, Chihuahua, Ciudad Juárez, Tecate, Querétaro, Aguascalientes, San Luis Potosí, León and Guadalajara.
- Medical devices: Tijuana, Mexicali, Hermosillo, Nogales, Chihuahua, Ciudad Juárez and Tecate.
A reputable shelter company can propose regions in which the facilities maintain a higher level of cost stability and which are conducive to a particular industry.
POST PANDEMIC CHANGES
Finally, with the Covid-19 pandemic, there has been much speculation regarding the new normal and what the world will be like after the coronavirus. However, the spread of the virus will almost certainly motivate manufacturers to resort to nearshore manufacturing in Mexico increasingly.
Iram Chavez, president of the US and Mexico company, Prince Manufacturing, has noted that many foreign operations of companies in the United States are considering and examining the prospects of nearshore manufacturing in Mexico. In addition, he has observed that current conditions will lead to a resurgence of nearshoring in Mexico in the post-pandemic.