Business Opportunities in Mexico Increase for US Companies As China Costs Escalate

Originally published on the NAPS Blog

In recent years, manufacturing within Mexico has been an increasingly more viable and cost-effective alternative to production in Asia. Businesses not only derive benefits from close proximity to the states but can also find competitive advantage thanks to favorable trade deals and a skilled low-cost workforce.

Below, we’ll dive into the various factors as to why a growing number of US companies are doing business in Mexico.

Business Opportunities in Mexico for US Manufacturers

Since manufacturers are always seeking ways to maintain their competitiveness and make a smart investment, it makes sense that most businesses that do a cost-benefit analysis conclude that the Mexico sector is their best option. Factors that tip the scale include:

• Increased Costs Of Doing Business in China – China was once the mecca for manufacturers, but that is simply no longer the case. Although it does maintain the largest share of the market, the last decade has witnessed a diaspora of international businesses fleeing the once business-friendly climate. The reasons for this are manifold, but the predominant factors are:
  • Rising fuel costs – The past two decades have seen a global cost of oil and gas that is far higher than in previous decades, and experts forecast that this will continue to occur. As a result, the cost to ship goods from Asia begins to outweigh the cost savings accrued via labor and warehousing.
  • Rising wages – Per Douglas Donahue of the Entrada Group, “labor costs in China are growing rapidly, up to 22 percent a year for some regions in China serving competitive industries. By contrast, wages in Mexico have remained stable during this same period and, in many cases, are in parity with manufacturing wages in China.”
• Proximity To The States – Mexico’s proximity as a manufacturing base shortens supply chains, reduces turnaround times, and creates better visibility and oversight of the supply chain. Goods made in China may take weeks, if not months, to get back to the states, whereas those manufactured in Mexico could be expedited in a matter of days. In addition, the fact that most maquiladoras lie upon either the NAFTA Highway or the Pan-American Highway ensures easy transport and delivery across the U.S.
• Maquiladora Status – Thanks to IMMEX, manufacturers in a maquiladora program are able to import components and goods to be assembled within the country duty-free, so long as those final products are eventually exported. As a result, dozens upon dozens of auto, aero, and medical device businesses have realized that using a Maquiladora for assembly would be their cheapest and most effective option.
• Free-Trade Agreements – Currently, Mexico has 17 different free-trade agreements with more than 49 countries. That’s more than any other country on earth and demonstrates that Mexico seeks to open its markets and workers to any and all comers. By doing business in Mexico, you gain access to partner with all these global players and their duty-free imports.
• Section 321 – In 2015, the U.S. passed the Trade Facilitation and Trade Enforcement Act. Amongst other things, it included an update to section 321, which raised the maximum shipping value of goods being brought into the country duty-free from $200 to $800. The stated purpose of this was to “streamline and facilitate the movement of low-value shipments.” As a result, businesses shipping items beneath this threshold saw a massive opportunity to derive serious cost savings thanks to duty-free importation.
• Highly-Skilled Low-Cost Labor Force – Mexico has sought to turn itself and its citizenry into manufacturing specialists. In order to encourage this, they have created an infrastructure that offers a host of programs and training schools meant to churn out technically proficient laborers who have experience in all facets of the manufacturing landscape (from the assembly line to management).

Despite this, wages in Mexico are incredibly affordable. Although minimum wage will fluctuate, currently, a fully burdened employee is paid $4.75 per hour; and cut and sew employees with base income and incentives are paid approximately $6.00 per hour.

• USMCA – In 2018, the U.S. resolved to make fixes and changes to NAFTA. It came in the form of the US-Mexico-Canada Agreement, which was incredibly favorable for Mexican manufactures. Per the Office of the U.S. Trade Representative:

The agreement promises stronger intellectual property rules to protect manufacturing inventions, setting new and improved standards for the digital economy. It expands U.S. manufacturing’s ability to export products abroad, ensuring manufacturers can sell their products duty free and eliminating red tape at the border that often hinders small- and medium-sized businesses seeking to sell their products in both Canada and Mexico.

One of the most important changes for the Auto Industry includes an increase to the Rule of Origin from 62.5% to 75%, which means that three-quarters of any vehicle must be made within either Mexico, Canada, or America.

Doing Business in Mexico 

There are dozens of reasons why you need to consider moving or starting a business in Mexico. Whether it be the location, the labor force, or a host of other factors, it’s easy to see why Mexico is expected to become the 6th largest manufacturing economy in the world by 2025.

Knowing this, if you want to take advantage of the business opportunities in Mexico, it would be wise to get in now before your competitors beat you to it. Understandably, this may seem a daunting task. But with NAPS consulting and guiding you throughout the process, it’ll be seamless.

If you’re considering moving your production to Mexico, reach out so we can help make that transition seamless.