Is Manufacturing in Mexico Right for Your Business?03.20.18
If you’re running manufacturing operations in the United States, you’ve no doubt heard the potential benefits of offshoring or nearshoring to Mexico, namely the lower labor costs. As of December 2017, the average hourly wage in manufacturing in the US was just over $21 (source), while in Mexico it was less than $3 (source).
Or maybe you’ve been offshoring for some time in a country like China, and you’ve been seeing rising labor costs cut into your profits.
In either case, you’re wondering if you should move your manufacturing operations to Mexico.
Does it live up to the hype?
Are the savings really worth it?
What about the quality of the finished products?
In this post, we answer all these questions and more. Let’s have a look at the advantages, the potential challenges and the types of companies that could benefit most from manufacturing in Mexico.
What Are the Advantages?
Beyond the low cost of labor, there are a number of other benefits to Mexican manufacturing you may not have known about. For example:
- Faster, more cost-effective delivery
It is dramatically faster and cheaper to get finished goods to the US from Mexico than pretty much anywhere else. This is especially true for companies that manufacture high mix, low-to-medium volume products, as transporting goods in a standard shipping container from China is costly and can take weeks.
- Significant cost savings
US companies can expect to save 20-30% on labor costs Real estate is also less expensive—we typically find rates for a Class A building in Mexico to be comparable to a Class B or C building in the US.
- Skilled workforce
Over 110,000 students graduate with engineering degrees from Mexican universities and technical schools each year. As foreign companies demanded more and more top talent, the Mexican government—along with those companies—invested heavily in engineering programs, which are now well-regarded and growing in size: in 2014, four of the five largest engineering schools in North America were in Mexico (source). This translates to highly skilled workers who produce high-quality goods.
- Flexibility in production
Companies that need to ramp up production quickly to meet increased demand, or that produce a high mix of products and need to switch up processes frequently, can do so easily, thanks to Mexico’s highly skilled workforce and geographic proximity.
- Benefitting from 12 multilateral trade agreements with 44 countries
Mexico is one of the world’s most open countries for international trade.
- Access to US market
Automotive companies like Kia, Volkswagen, and Mercedes-Benz have set up plants in Mexico in order to import their cars to the US. Mexico’s maquiladora and shelter programs provide significant tax benefits to these foreign companies. Companies headquartered in the US will see cost savings through those programs as well.
What Are the Potential Challenges?
Of course, moving operations to another country is a significant undertaking and still poses some challenges and a learning curve. Here are some things to keep in mind as you’re considering whether or not to make the move.
Local Laws, Regulations, and Legal Risk
Navigating US business laws is challenging—navigating an entirely different set of laws in another country may seem overwhelming. Luckily, in Mexico you can operate under a “shelter,” which means your company won’t have a legal presence in Mexico. Your shelter provider will assume all legal liability and will help you navigate everything from labor laws to obtaining permits to the import/export process. If you do set up your own legal entity in Mexico, make sure you have a full understanding of local regulations, or work with consultants in Mexico that specialize in helping foreign businesses set up operations.
One of the attractions of doing business in Mexico is that its Western culture is relatively similar to the US, but you should still be aware of some key differences. For example, US companies often find there are differences in communication styles. With our clients, we’ve learned it helps if the plant manager is a Mexican national who’s worked for US companies before. He or she will be able to help US employees communicate well with the Mexican workers and vice versa.
A good shelter provider can help you navigate these cultural differences.
Misconceptions of Corruption and Bribery
While some clients express concerns about corruption and bribery, in reality, these are not an issue in the manufacturing sector. The national and local governments in Mexico have been cracking down hard on corruption to change Mexico’s reputation. Companies that work with an IMMEX or maquiladora permit are highly regulated, and these regulations are set up in a way to prevent bribes.
What Types of Companies Can See the Most Benefit?
Most of the time, you hear about major companies like Ford, Bombardier, Cessna, and Honeywell manufacturing in Mexico. Undoubtedly, the low cost of labor and real estate is one of the primary attractions for these companies.
In addition to taking advantage of the lower costs in Mexico, larger corporations often look to tap into Mexico’s growing supply of top engineering talent and shift design or R&D to the country. They can also put themselves in a position to do market research and sales as they move to emerging markets.
However, while it’s easy to think setting up manufacturing operations in Mexico is only appropriate or available for large, multinational corporations, that isn’t the case.
Smaller companies or start-ups also look for ways to lower costs as they refine their production processes. This is especially appealing if your manufacturing requires technical workers, like welders, machinists, or CNC operators—Mexico’s lower wages, compared to the US, means significant cost savings as the company grows and develops. Mexico has industrial facilities for companies and production output of any size.
Want to know what manufacturing in Mexico would look like for your company? Get in touch with us for a complimentary consultation today.