Hidden Cost Savings of Nearshoring to Mexico04.14.21
When it comes to considering costs for nearshoring to Mexico, there are many advantages that come into play. Cost-effective wages, reduced shipping expenses, and competitive pricing and availability of industrial real estate are all reasons why U.S. manufacturers choose to expand their operations to Mexico.
Meanwhile, there are hidden cost savings accompanying these hard costs that provide an equal or, in some cases, greater value. These include convenience, reliability, and security in different areas, particularly when working under a shelter model.
Unique Convenience of the Shelter Model
The shelter model is unique to Mexico and provides a convenience that also reduces the risk and liability of operating in a foreign country. One of the built-in advantages of working with a shelter service provider is having all of the proper certifications and licenses ready to go.
Application and approval can take weeks, if not months, for U.S. manufacturers seeking to set up an entity on their own. Bypassing this process helps get an operation up and running in as little as three months. Working with a shelter also offers the convenience of having all managed services available in one place, including tax and accounting, human resources and recruiting, and legal, trade, and government compliance.
Greater Reliability Than China
Although U.S. manufacturers have historically chosen China for its cheap labor, China is not as reliable for the North American market as it once was. Wages have begun to increase more quickly and unpredictably than Mexico. Plus, the distance, time zone differences, and changing regulations are complex compared to what nearshoring to Mexico has to offer.
When nearshoring to Mexico, there are no travel restrictions or retaliatory tariffs to face. In fact, working with a shelter service provider allows you to benefit from a 16 percent value-added tax (VAT) exemption from day one on all your temporary imports. In order to receive this advantage, you need to operate utilizing the IMMEX program with a valid VAT certification. This reliability allows operations to run smoother without delays or unforeseen challenges.
Security Through the USMCA
Mexico’s IMMEX program also allows U.S. and other foreign manufacturers to temporarily import goods, equipment, and machinery without paying Mexico’s VAT tax. Again, this benefit only applies when you’ve secured valid VAT certification. Additionally, with the recently updated USMCA in effect, U.S. trade with Mexico takes precedence over trade with China or other Asian countries. The USMCA focuses on increased intellectual property protection and promotes original content production and favorable trade between the U.S., Mexico, and Canada.
Whereas, countries like Thailand, Vietnam, and India, which have all been regions for offshore manufacturing in the past, are currently less alluring. These countries are all part of their own free trade agreement and are becoming oversaturated, which has caused industrial wages to increase and opportunities to decline.
Hard Cost Benefits: Labor, Logistics, and Real Estate Expenses
In addition to the stability and savings of hidden costs when nearshoring to Mexico, the hard costs make it a valuable choice. When compared with China, Mexico has lower labor, logistics, and real estate expenses to consider.
One of the advantages of nearshoring to Mexico is the accessibility to a skilled, competitive workforce at a cost-effective rate. The general average wages for a fully-burdened, non-skilled operator for a manufacturing position is $860 USD per month, considering a work shift of 48 hours per week, which increases as the skills required for the role increases.
This is far less expensive than wages for similar roles in the U.S. and represents a much steadier increase than the recent rise of wages in China. Additionally, the close proximity between the U.S. and Mexico allows for better oversight and quality assurance than China, where traveling or issues abroad can be expensive and difficult to manage.
Shipping and Logistics
Closer proximity also means your finished goods can be delivered to the U.S. on the same day they were shipped from your Mexico plant. Shipping from Asia can take several weeks versus a few days or less when shipping from Mexico. Logistically speaking, the trade relations between the U.S. and Mexico also make it far easier to import and export goods when compared to China’s unreliable tariffs and regulations.
Furthermore, customization when nearshoring to Mexico is made it easier to meet each manufacturing company’s specific goals. IVEMSA can create a site selection analysis that compares viable regions in Mexico and compare costs and features required for your project. Building rates and regions, in addition to labor costs, utilities, and other operational expenses are outlined and have been updated through our Mexican Manufacturing Costs guide.
Placing Value on Nearshoring to Mexico
Both the hidden and hard costs place intrinsic value on nearshore manufacturing in Mexico. Though it’s most common to compare line-item benefits that have dollar amounts attached, the hidden cost savings can also result in monetary returns long-term.