When it comes time to decide where you want to establish manufacturing operations, there are a lot of options. Good partners can be found domestically in the U.S., China, or other countries. What many people don’t realize is that Mexico is the second most popular nation for many manufacturing industries.
Dominated by industries like automotive, machinery, optical and medical implements, and electronics, our neighbor to the south is also often the best way for U.S. companies to get their products to market and keep or improve their competitiveness.
The reasons why Mexico is a good fit for production vary from company to company. Many chose Mexico for proximity, labor costs, flexible minimum order quantities (MOQs), and workforce quality. Others develop a nearshore supply partner to diversify their sources.
In this article, we will explore the advantages of Mexican manufacturing, give some suggestions on how to decide if it is right for your product, and share some observations on how to produce your product there.
If you’re considering manufacturing in Mexico, here are four reasons why U.S. business owners choose it over other countries.
The value proposition for production in Mexico is strong, with good quality of finished products, the ability to get to market faster, and reduced costs. Most of these advantages are driven by the simple reality of how close Mexico is to the U.S. market.
The most obvious benefit of this proximity is easier shipping. Rail and truck transportation between the two countries is faster, is across a free trade zone, and more reliable than transoceanic transportation and the bottleneck presented by ports on both sides of the journey.
The other benefit comes from being in similar time zones. Communication and the time between question, answer, and action is greatly reduced. And in many cases for product manufacturing, time is more costly than labor.
The new United States-Mexico-Canada Agreement (USMCA) treaty drives many of the other benefits of production in Mexico.
The USMCA went into effect in 2020 and replaced the North American Free Trade Agreement (NAFTA) for governing trade across North America. This update was focused on adding protections for U.S. employees and companies. It also created a more modern agreement that addressed digital trade, reduced possible corruption, and put more standard regulations in place for manufacturing companies.
Most of the agreement is the same as the NAFTA treaty, which removed many barriers to trade between the three countries and encouraged foreign direct investment. NAFTA, and now USMCA, lowers or eliminates tariffs and establishes rules for doing business between countries to provide a stable and predictable trade relationship. This lowers the risk to those manufacturing in Mexico and makes the whole process of finding and utilizing a manufacturing partner across the U.S. border easier.
Mexico also modernized its program for foreign manufacturers, IMMEX. This was formerly called the maquiladora program and it offers tax benefits and incentives to foreign companies who choose to manufacture in Mexico. Primarily, it provides a 16% reduction in the country’s value added tax (VAT) to all materials, tools, and equipment imported for use by a qualified company.
To qualify for the IMMEX program and its tax advantages, Mexico manufacturers must apply for certification for their own company or work through a shelter company that already has approval. The program also lowers customs broker fees and speeds shipping across borders.
In 2020, fully burdened manufacturing wages in Mexico averaged $4.82 per hour. That compares well to $24.24 in the United States and approximately $6.50 per hour in China. Over time wages in China have been rising at a faster rate than they are in Mexico.
When comparing Mexico vs. China, many entrepreneurs assume China has the advantage on labor costs. But Mexican workers are even lower cost (25% lower) and just as well-trained. In addition, affordable Mexican engineers are some of the best in the world and are usually bilingual.
The advantages listed above can be overwhelmingly positive, not just in the cost of producing your products, but also in reducing time to market and lowering uncertainty. Also, once production starts, it’s easier to deliver your goods quickly and reliably. However, you do need to take some time to make sure Mexico is the right place for your company.
Here are some questions you should ask yourself and your advisors before you start building your production lines, finding a contract manufacturing partner, or engaging a shelter service:
- Are there experts in your desired Mexican city for your industry and your manufacturing processes?
- Can a full supply chain, including raw materials, be put in place? How robust will that network be?
- Are you ready to build relationships, understand the culture, adapt human resources, and manage production at a distance (or hire a partner that will)?
- Are the savings of manufacturing in Mexico greater than the 25% cross-border import tariffs on most products?
- Will increasing labor rates in Mexico (which jumped over 1,000% from 2000 to 2021) raise your costs too much?
If you, like many entrepreneurs, can benefit from the advantages of nearshoring your manufacturing in Mexico, you should plan your launch by following a few simple steps. As you read through these suggestions, notice a common theme — work with someone who knows Mexico and build relationships with and through them.
The first and most important step for manufacturing in Mexico is to clearly define your needs. Work with your internal manufacturing team or a production management partner like Gembah to define and capture your product lifecycle specifications.
Think through every step from raw materials through manufacturing setup and then warranty and repair. You can save significant time, increase your competitiveness, and avoid costly mistakes by taking the time to document your needs before you start.
The next step is to look at locations. You may start in places like Tijuana in Baja California and Chihuahua, familiar locations. Or you may find another region that’s the perfect fit for your industry, employee, and supply chain needs. You may need to build your own factory, explore leasing, or partner with the right contract manufacturer. All of these options require some time and research to determine the optimal location.
Each region in Mexico will have local economic development experts with the city or state who help organizations just like yours find the right fit. Also, look for other companies that are manufacturing similar products south of the border.
Then it is time to work on building relationships, getting a good understanding of local laws and regulations, and negotiating agreements. Having an understanding of the local culture is critical at this point and working with someone with an existing local network is helpful. As with any relationship, make sure everyone is on the same page and try to minimize surprises.
The last suggestion is simple but something you must constantly work at — communicate. Take advantage of the similar or same time zone and stay in touch, ask questions, and work on continuously improving your operations or those of your manufacturing partner.
Because of the popularity of manufacturing in Mexico, many of the better suppliers quickly saturate their production capacity. Make the right choices, but work with your local experts to make them quickly and with a sense of urgency.
Although Mexico has been a preferred manufacturing resource for U.S. companies since NAFTA was passed, a new move is on for companies looking for a more robust, reliable, and cost-effective manufacturing location. Critical industries like automotive, aerospace, medical devices, and electronics manufacturing have taken advantage of Mexican manufacturing for decades. Now other industries are joining them.
We hope this article helped define those advantages, offered some suggestions on how to decide if manufacturing in Mexico is right for your product, and provided some key pointers on how to get started. You may also want to watch our webinar that digs deeper into what it takes to manufacture in Mexico.
Overall, the most important thing with outsourcing any manufacturing effort anywhere in the world is to find the right partners. The partner most people focus on is the actual contract manufacturer you hire, but a strong production partner like Gembah can be even more critical to your long-term success.
In our ever-changing world, manufacturing and supply chain solutions are always shifting and evolving, and Gembah stands ready to guide you to an optimal solution. Let’s figure out your product’s production together.