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American manufacturers have taken advantage of Mexican manufacturing for decades to cut costs. However, this operational strategy has now become an increasingly popular alternative to offshoring to China due to significant changes in global trade policies and infrastructure. In 2020, the challenges posed by the COVID-19 pandemic and the application of the United States-Mexico-Canada (USMCA) agreement have prompted many American manufacturers to change their strategies and to relocate their operations abroad. from China and bring them closer to their country. , in Mexico.
COVID-19 has had a significant impact on global manufacturing, shutting down the supply chain in China, leading many manufacturers to reduce their dependence on a single region and diversify their portfolios. With the impact of COVID-19 still in effect, travel and manufacturing operations in China remain an unstable option. Combined with the ongoing trade disputes between the United States and China and the lack of available quality assurance, the cost advantages that once made China a powerful trading partner have now faded.
Meanwhile, the USMCA has replaced the long-standing North American Free Trade Agreement (NAFTA) and its provisions are a strong incentive for US businesses to consider relocating to Mexico, when previously they could have considered. to relocate to China. A notable part of the USMCA is its focus on protecting intellectual property, a historical area of ​​contention between the United States and China. There are also specific provisions regarding the percentage of original content that must be produced by North American countries.
As a result, nearshoring in Mexico has become an increasingly viable option for US manufacturers who want to strengthen their supply chains and create a streamlined import-export process. In an age when businesses seek a greater sense of certainty and security, manufacturing in Mexico is an attractive option.
Main advantages of manufacturing in Mexico
When looking at the benefits of offshoring to Mexico versus offshoring to China, there are several key areas that make the former the more favorable choice. These include: proximity to the United States, availability of a highly skilled and profitable workforce, and increased protection of intellectual property, among others.
Facilities established near the United States
Manufacturing in Mexico is not a new concept. It is the one that has proven itself for decades. Many of the world’s leading manufacturers have established and expanded their facilities in different regions as the demands for technology and products have increased.
For this reason, Mexico is already set up structurally, with stable supply chains and transportation, to support new businesses entering the space. In addition, with the proximity to the United States, the cost of freight and time to market for products is significantly reduced compared to relocation to China.
A profitable and highly skilled workforce
The biggest draw to offshoring to China in previous decades was low cost labor. However, as minimum monthly wages have continued to increase, this factor no longer compensates for the high cost of production due to facilities located overseas.
In comparison, the cost of labor rates offered by Mexico remains low and the emphasis on industrial education and training remains constant. US manufacturers benefit from a profitable workforce, while maintaining production quality through a competitive market.
IP protection
The protection of intellectual property (IP) is essential to the US economy and has been a source of concern when operating in China for years. With the urgency of new technologies in all industrial sectors, putting in place security for product protection and licensing is of great value.
Certain provisions of the USMCA include extended or updated protections on trademarks, trade secrets and geographical indications, which protect the distinctive products of certain regions.
Include hosting services as part of your manufacturing strategy
There are nuances involved when manufacturing in a foreign country. US manufacturers wishing to locate in Mexico have the option of partnering with a hosting service provider. This partnership reduces the risk and responsibility of setting up operations, streamlines the process, and allows manufacturers to focus on their day-to-day production.
Shelter services include, but are not limited to: site selection, human resource management, tax, legal and customs compliance, and ensuring that all certifications and permits are in place. Additionally, US manufacturers who work with a hosting service provider have the advantage of working under their IMMEX maquiladora license, which exempts them from 16% VAT on all temporarily imported goods, machinery and equipment. which represents a significant cost saving.
As the industry continues to evolve, flexibility remains a top priority for manufacturing companies. There must be adaptability to scale up or stop production as needed.
IVEMSA
About the Author: Sergio Tagliapietra is CEO of IVEMSA. He can be reached at 855.493.1936 or info@ivemsa.com.
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