Manufacturing in Mexico offers foreign companies tax advantages, cost savings, and a vibrant industrial workforce to support their operations. There are several operational structures available when setting up a new operation in Mexico. However, working with a shelter company is one of the most cost-effective, efficient, and safest ways to get a project up and running.
Here are a few key reasons why partnering with a shelter is an invaluable part of the manufacturing process.
Partnering with a shelter company offers savings in multiple ways, one of which is time. When a U.S. or other foreign manufacturer decides to operate in Mexico, they have the option of creating their own entity and operating as a standalone or working under the umbrella of an established shelter.
When working under a shelter, manufacturers maintain complete control over their processes, while all administrative responsibilities fall to the shelter, resulting in a quicker launch time. It takes approximately three to four months to get up and running with a shelter compared to six to seven months when working as a new entity.
Another added value is minimized risk and liability. Working with a shelter company is one of the safest ways to do business, since foreign manufacturers do not have to establish a legal entity. The shelter is also responsible for keeping up-to-date with all new information and compliance measures, which reduces the learning curve necessary for manufacturing companies new to the space.
Tax and customs compliance are key areas where manufacturers face challenges as regulations change constantly. For example, in 2020, Mexico’s tax reform affected the fiscal rules and terms previously set forth in 2014. Initially the term under a shelter was limited to four years after which they could continue in the shelter paying income tax for four more years or transition to a standalone maquiladora.
The tax reform repeals the four-year period for nonresident entities to operate in Mexico without paying income tax. The language and specifics of changing regulations can become confusing and overwhelming. Fortunately, the expertise and experience of a shelter protects companies and helps keep projects on track.
A shelter works as a partner to alleviate the administrative tasks, such as HR, accounting, legal, customs, and tax compliance, so manufacturers can fully focus their attention on production. Manufacturers maintain complete production control and retail full intellectual property rights throughout their time working with a shelter. Additionally, a shelter company can eventually help companies graduate from their services to eventually work as a standalone.
These are a few of the many unique benefits of working with a shelter. When manufacturing in Mexico, it’s valuable to have a reliable resource with experience and expertise in the field that can seamlessly guide your efforts.
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The manufacturing industry is ever-evolving, and there’s been a particular shift that’s picked up steam over the past several years. U.S. and other foreign companies are moving or expanding their operations to Mexico at an increasing rate. They join several of the top global leaders in the manufacturing industry that have benefited from the advantages of nearshoring to Mexico for decades.
Despite this increase, navigating post-pandemic shutdowns has left many remaining in a gray area of how best to proceed. However, Mexico continues to be a viable option with minimal risk and optimal reward, particularly when compared with offshoring to China. Here are five reasons companies are nearshoring manufacturing to Mexico as part of their strategic operations.
In early 2021, it was reported the manufacturing skills gap in the U.S. could result in 2.1 million unfulfilled jobs by 2030. Over a million U.S. manufacturing jobs were a casualty of the Covid-19 pandemic and recouping that loss has been slow due to ongoing difficulties attracting and retaining workers in America. Whereas, in Mexico, the availability of highly skilled talent has always been the main driver for companies that need to hire technical talent.
Over 110,00 engineers graduate in Mexico every year. There are incentivized specialized training programs designed to get more people qualified to work in advanced technical industries. Plus, companies can benefit from a young working population; the median age for manufacturing industry employees in Mexico is 27-28. With an emphasis on education and training programs in collaboration with U.S. and other foreign manufacturers operating in Mexico, the level and availability of talent is a consistent resource much needed in today’s industrial environment.
A second reason foreign companies are choosing nearshoring manufacturing to Mexico is competitive costs. This includes everything from labor to tax exemptions to costs associated with shipping times and quality assurance. As an example, per Statista, estimated manufacturing labor costs in Mexico start at $4.82 per hour compared to $6.50 per hour in China and $7.25 per hour in the U.S., which is the current federal minimum wage.
Additionally, Mexico’s maquiladora/IMMEX program offers tax exemption from the 16 percent VAT when importing raw goods, materials, and equipment for the manufacturing process. For companies that choose to operate under a shelter, this offers a significant cost advantage that begins from the first day of operation. These are only two of the many areas of cost-effectiveness when nearshoring to Mexico and working with a shelter, specifically.
A significant advantage for U.S. manufacturers is proximity and location. Rather than operating facilities overseas in China or other Asian countries, many companies can operate on the same time zone and with much easier access when nearshoring to Mexico.
The close proximity of U.S. headquarters and final market destinations to the U.S.-Mexico border results in quicker shipping times and less expensive shipping costs. An operational setup in one of Mexico’s border cities is often able to ship finished goods within 48 hours, if not the same day to their U.S. destination. Whereas, the same type of shipment could take weeks to receive from China and cost thousands of dollars more.
Mexico’s free trade agreements are another incentive that entices foreign manufacturers. Mexico maintains 14 free trade agreements with over 50 countries, including the USMCA with the U.S. and Canada. The USMCA offers protections and provisions for North America trade, such as the rules of origin regarding automotive content and greater intellectual property (IP) protection.
IP protection has been an ongoing challenge between the U.S. and China. With technology quickly evolving, having specialized protections in place are important for manufacturers who wish to develop their products in a foreign country. Since the U.S. and Mexico have maintained a favorable trade relationship, it’s more encouraging for companies that are ready to expand their operations or move them from China.
For decades, China was the go-to source for international trade, particularly for the U.S., mostly because of its cheap labor cost. However, in more recent times, there has been hurdle after hurdle, which has caused companies to rethink their current strategies and future plans.
These problems first started in 2018 with the trade conflict between the U.S. and China that resulted in rising and retaliatory tariffs increasing the costs of operation. Then, the pandemic hit in 2020 and halted the supply chain, which has been slow to resume. U.S. manufacturers saw the negative implications of relying solely on China for outsourced production and have since focused efforts on either diversifying or leaving China altogether and setting up closer to home.
Overall, nearshore manufacturing to Mexico delivers a favorable solution on multiple levels. Significant turning points in the manufacturing industry don’t always happen all at once. They often start small and then gain momentum due to a sequence of events that requires companies to pivot, which is what’s happening at the present moment.
Sources:
https://www.nam.org/2-1-million-manufacturing-jobs-could-go-unfilled-by-2030-13743/?stream=workforce
https://www.statista.com/statistics/744071/manufacturing-labor-costs-per-hour-china-vietnam-mexico/
Ally shoring, as defined by the U.S.-Mexico Foundation, is “the process by which countries rework critical supply chains and source essential materials, goods, and services among and between trusted democratic partners and allies, with a focus on investing in the short- and long-term relationships that protect and enhance joint economic and national security.”
This term and strategy has recently emerged in the manufacturing industry with the goal of motivating U.S. companies to work solely with trade allies in an attempt to reconfigure and stabilize supply chains. The Covid-19 pandemic resulted in economic shutdowns with supply chains held at a standstill or severely delayed. It became clear how over-reliance on any one country served as a challenge, particularly when that country was on the other side of the world.
Previously, U.S. manufacturers have viewed China as its go-to supply chain due to the low cost of production. This advantage has changed over the years with Chinese labor rates increasing and Mexico’s industrial workforce remaining steady at equal or lower competitive costs. In addition to finding a cost-effective solution closer to home, manufacturers also seek a strategy with higher flexibility and less risk involved. For the U.S., ally shoring to Mexico fulfills the needs of what companies are trending toward today.
In addition to its cost-effective labor rates, the U.S. and Mexico are trade allies bonded by the USMCA. It makes logistical and strategic sense to see the shift of more manufacturing companies taking advantage of the benefits nearshoring to Mexico delivers.
The trade partnership between the U.S. and Mexico has held strong for the past several decades and across multiple industrial sectors. Mexico is the sixth largest global passenger vehicle manufacturer, with 88 percent of vehicles produced in Mexico exported to the U.S. With regards to the aerospace sector, Mexico has grown from 100 manufacturing firms in 2004 to 368 by mid-2020, with an estimated 48 percent of foreign direct investment in 2019. Additionally, Mexico is positioning itself as a high-quality software developer to the aerospace, manufacturing, and finance industries with 38 IT clusters throughout the country.
This is a sampling of how the U.S.-Mexico partnership has positively affected trade and the respective local economies. By capitalizing on the infrastructure and trade relations already in place, plus the implementation of the USCMA and the focus on ally shoring, the number of U.S. manufacturers expanding their operations or setting up new facilities in Mexico is only expected to rise.
In support of ally shoring, one of the main advantages of nearshoring to Mexico is it reduces the dependence on Asian supply chains and makes companies less vulnerable to trade risks, such as retaliatory tariffs and disruptions to the supply chain. With joint production in place between the U.S. and Mexico, ally shoring also fosters creation of industrial-focused jobs in both countries and a way to get new technology and products to market faster and at a more cost-effective rate.
Receiving products of high quality, at a lower cost, with quick delivery are the key factors every business wants to provide their consumers. U.S. manufacturing companies can benefit from the close proximity to the U.S./Mexico border, especially when compared to production in China. Close proximity equals faster delivery and lower costs. This then results in better market satisfaction and more room for customization demands.
Another benefit ally shoring brings to the table is the unique advantage of working with a shelter operation. Shelter operations in Mexico allow foreign manufacturers to get up and running with their production in a timely manner, usually within three to four months.
Furthermore, companies that choose nearshoring to Mexico limit their liability and exposure when partnering with a shelter because they do not have to establish their own entity. A shelter company takes care of all administrative responsibilities, including but not limited to site selection, hiring HR, tax, legal, and customs personnel, and acquiring all the necessary permits and certifications to be in compliance to operate in Mexico.
Lastly, the implementation of the USCMA has only strengthened the advancement of ally shoring due to the specific provisions that incentivize original content production within North America, as well as stronger intellectual property protection.
Ally shoring is mutually beneficial for the U.S. and Mexico and has become a central focus in the manufacturing industry today. Due to the contentious relationship between the U.S. and China first brought on by trade conflict and then heightened by the pandemic, the allyship between the U.S. and Mexico will only continue to grow.
Sources:
https://usmexicofound.org/images/programas/documentos/1614490856AllyShoring.pdf
https://www.trade.gov/country-commercial-guides/mexico-automotive-industry
https://www.trade.gov/country-commercial-guides/mexico-aerospace
https://www.trade.gov/country-commercial-guides/mexico-internet-and-it-services
Mexico manufacturing includes several benefits, such as lower labor and production costs, access to a skilled industrial workforce, minimized risk through shelter services, and a close proximity to the U.S. However, as with any new operation, it’s important to establish a solid strategy before starting the process to ensure it aligns with your ideal budget, timeline, and goals. Entering the market in Mexico includes but isn’t limited to:
There are three main ways to meet these requirements and move forward with your manufacturing strategy. Evaluating the pros and cons of each can help you determine which route will be most favorable to you.
When setting up your own standalone entity, you take on the responsibilities of establishing the proper permits, certifications, and compliance measures required when manufacturing in Mexico. This option also involves hiring and training employees, as well as finding the right real estate, and making connections with vendors and supply chain operators.
Pro: Setting up your own entity means you’re responsible for oversight for every part of production, and you’ll run your business using your own legal entity from day one.
Con: Add in potential language, cultural, and timeline barriers and this can seem less cost-effective or efficient than when you first began. Setting up a new legal entity can take up to six to seven months, compared to working with a shelter company, which can take as little as three months to start production.
A second option when establishing your Mexico manufacturing strategy is hiring a contractor or third party to handle setup and fabricate your products in Mexico. Keep in mind, not all contractors provide the same services or the same level or price of services.
Also, typically, under contract manufacturing, you don’t have any control over shipping, quality, production, intellectual property protection, equipment maintenance, etc. You will only receive a finalized product with your name or brand on it. Additionally, you may be working with several different individuals to deliver everything you need to operate.
Pro: Contract manufacturing may be a good option if you need predictable solutions for consistent runs of certain products in the earlier stages of business growth.
Con: Manufacturers are at the mercy of the vendors and give up partial oversight over production quality, scheduling, shipping, equipment maintenance, and everything related to the fabrication of your products. There is also a higher likelihood of missed communication or delayed timelines since you don’t control this operation.
A shelter service company allows the best of both worlds. With this option, U.S. manufacturers retain complete operational control over their production as with a standalone entity. Plus, logistical responsibilities that may be contracted out are coordinated and implemented under the umbrella of an experienced shelter provider. This minimizes the risk and liability of manufacturing in Mexico that companies would otherwise face.
This mode of entry is also highly favorable since the shelter already has the certifications and permits necessary to operate, including the IMMEX maquiladora licensure. Companies operating under the IMMEX program are exempt from 16 percent VAT tax on all temporarily imported goods, materials, and equipment. This is a significant cost advantage that U.S. and other foreign manufacturers benefit from at the initial operating stages.
Read more: Are Mexico shelter services worth the cost?
There are no serious cons to speak of when working with a shelter service company. Shelter services are customized and implemented to align with the goals of each manufacturer. Additionally, a shelter company like IVEMSA sets up manufacturers for success and eventually “graduates” them from the shelter program, if operating as a standalone entity is the end goal.
Manufacturers are already well-versed in the ever-changing economic landscape and the complexities of maintaining stability among a global supply chain. 2020 highlighted a growing problem regarding the U.S. reliance on China for manufacturing as supply chains came to a halt. The pandemic created a greater sense of urgency for many manufacturers to diversify their facilities and move operations to Mexico as part of their strategy in 2021 and beyond, with the quest for stability on everyone’s mind.
At the same time, the final enactment of the newly drafted USMCA went into effect July 1, 2020, making manufacturing in Mexico the favored option for U.S. companies wanting to securely expand their global footprint. Among the many new provisions, the USMCA requires original content, particularly in the automotive industry, be made in North American regions. In addition, there are built-in protections to the trade agreement that protects companies against intellectual property theft, copyright infringement, and other ownership challenges previously faced by U.S. companies when operating in China.
With slow-moving trade negotiations between the U.S. and China, it makes distribution plans unsteady. Furthermore, international travel concerns and supply chain limitations remain in play in a post-pandemic world. The USMCA provides greater incentive for U.S. manufacturers to move operations to Mexico as a way to promote economic stability for the future.
Read more: The rise of nearshoring to Mexico.
Although many companies have included manufacturing in Mexico as part of a strategic solution toward economic stability, it’s a complex process that requires many moving parts to complete successfully. By partnering with a Mexico shelter company, like IVEMSA, foreign manufacturers can benefit from their decades of experience and expertise.
By shouldering the administrative responsibilities required for operational setup, such as HR, accounting, tax and customs compliance, and securing permits and licenses, it allows manufacturers to focus solely on production. It also reduces the learning curve when it comes to navigating international trade and reaping the full benefits of the USMCA and other unique programs, such as the IMMEX maquiladora program and the Section 321 program.
Mexico’s IMMEX maquiladora program is a cost-saving benefit for foreign manufacturers. It exempts the 16 percent value-added tax when temporarily importing goods, materials, and equipment.
Manufacturers can take advantage of this immediately when working under a Mexico shelter company. Additionally, U.S. manufacturers can rely on the supply chain and Mexico shelter service models already in place to manage and meet operational requirements and goals.
Read more: The IMMEX program – a brief overview for manufacturers.
There’s also an added advantage for U.S. manufacturers moving goods from facilities in China to Mexico. The Section 321 Program reduces costs and duties on international goods. The statute refers to de minimis, which “provides admission of articles free of duty and any tax imposed on or by reason of importation, but the aggregate fair retail value in the country of shipment of articles imported by one person on one day and exempted from the payment of duty shall not exceed $800.”
For example, shipping inventory directly from China to Mexico prior to importing it into the U.S. eliminates 100 percent of the duty costs without affecting shipment accuracy or delivery windows. A Mexico shelter company can guide you through the process and ensure you’re in compliance with the regulations set forth by the USMCA and receiving as many of the cost-savings benefits as possible when setting up a new operation.
Source:
https://www.cbp.gov/trade/trade-enforcement/tftea/section-321-programs
Ally shoring has become a significant part of the manufacturing conversation in recent months following the realities the global pandemic has brought to light. Namely, a shift from the historical U.S. reliance on China for foreign trade. For years, the U.S. has relied heavily on manufacturing in China due to its low-cost labor and production. However, trade conflicts, international travel delays, and halts to supply chains have all led many U.S. manufacturers to consider moving operations closer to home.
Ally shoring refers to the process of shifting supply chains and sourcing essential goods and services to trusted allies. The focus is on creating a strong foundation and business relationship to improve economic and national security. Over the past several decades, companies have found manufacturing in Mexico also meets the demand for cost-effective labor and production, plus the added security of supply chain management through an ally bound by the USMCA.
The USMCA offers protections for intellectual property and trademarks in trade relations between the U.S., Mexico, and Canada. It also enacts provisions to protect original content, particularly within the automotive industry, which requires the majority of production to take place in North America.
There are a number of other unique benefits that make ally shoring between the U.S. and Mexico a favorable option compared to China. Proximity and predictability are two key characteristics that stand out when securing and maintaining successful foreign trade operations.
With the majority of U.S. manufacturing facilities so close to the U.S./Mexico border, there’s no question the risk of transit delays is reduced significantly when compared to overseas shipments to and from China. The close proximity also gives U.S. manufacturers greater oversight for quality assurance of their operations, as well as allows them to better respond to demand fluctuations.
As demand for customization from consumers increases, it requires manufacturers to reduce shipping time through multiple warehousing locations and swift delivery times, which makes ally shoring with Mexico another competitive advantage for the U.S. Being geographically closer often means same-day shipping and delivery with less of an environmental footprint required due to lower transportation costs.
Read more: Five benefits of nearshoring to Mexico.
The ongoing trade conflict between the U.S. and China combined with the halt to supply chains and international travel due to the Covid-19 pandemic has left many manufacturers looking for a more secure solution for future strategies. When manufacturing in Mexico, there is greater predictability and reliability of supply chains and resources when compared to China.
Since Mexico is already well-equipped with the type of infrastructure, technology, and cost-effective industrial talent needed for growing manufacturing needs, it provides a strong foundation for manufacturing companies to set up new operations. Many global manufacturers have already invested in Mexico and continue to expand as innovation grows.
Read more: Why nearshoring to Mexico may be more cost-effective than offshoring to China.
Furthermore, with the unique opportunity presented through Mexico shelter services, U.S. manufacturers setting up new operations in Mexico can do so within three to four months versus the six or seven months it could take launching production as a standalone entity. A partnership with a Mexico shelter company minimizes the risk and liability of foreign operators by operating under the shelter’s established entity.
Another value of working under a shelter is that it allows U.S. manufacturers exemption from the 16 percent VAT for all temporarily imported goods and equipment and reduces costs on labor, permits, licensing fees, and infrastructure. In the meantime, manufacturers maintain complete control over production and property throughout the entire process.
The shift of manufacturing from China to Mexico is not a new concept, as companies decide to diversify their portfolios. Mexico simply offers more favorable benefits that China can’t provide.
Nearshoring has become a top strategy for U.S. manufacturers that want to relocate their facilities from China and bring their operations closer to home in Mexico. As with offshoring, the goal of nearshoring is to create a more cost-effective solution through lower labor and facility costs. However, nearshoring to Mexico provides far more benefits due to the close proximity to the U.S.
Here is a list of five benefits of nearshoring to Mexico that highlights why many U.S. manufacturers are considering making the operational move from China or expanding their operations internationally for the first time.
Mexico’s geographical location provides a significant advantage over offshoring to China. The close proximity to the U.S. creates the opportunity for faster delivery and less costly shipping. In many cases, if your operations are located in one of Mexico’s border cities, you can receive shipped goods on the same day at their final destination in the U.S. The same type of shipment can take two to three weeks when being sent from China.
Also, by working in similar time zones, it allows for more seamless communication and fewer interruptions in the day-to-day workflow. Whereas, offshoring production to China is challenged by a 16-hour time difference between America’s West Coast and China.
Read more: Why companies are switching from China to Mexico for manufacturing.
Another benefit of nearshoring to Mexico is it allows for more frequent visits from managers who want to oversee the process or come in and make changes. Travel to Mexico doesn’t require too much planning. For many, a round-trip from the U.S. to Mexico can be conducted in a single day versus the logistics that go into scheduling a trip to China.
When there is a decline in quality or new production is being introduced, the closer location allows problems to be fixed more quickly with regular site visits scheduled when necessary.
Read more: 3 things to consider when moving manufacturing from China to Mexico.
The ongoing trade conflict between the U.S. and China has been a turning point for many manufacturers who seek more stability for their operations. This involves tariff negotiations and intellectual property protection, areas where the U.S. has struggled in dealing with China. Fortunately, with the USMCA intact, there are provisions that protect manufacturers’ intellectual property, across the North American region, which makes nearshoring to Mexico a more secure solution.
One of the benefits unique to Mexico is the IMMEX maquiladora program. This program offers favorable tax benefits to foreign manufacturers operating in Mexico. Operators approved under the IMMEX maquiladora program are exempt from the 16 percent value-added tax when importing raw goods, equipment, and materials used for manufacturing.
This is a significant cost-savings when compared to retaliatory tariffs imposed by China. Furthermore, those that choose to work with a Mexico shelter services provider can operate with its maquiladora licenses and receive this tax exemption starting from day one.
Read more: Why nearshoring to Mexico is more beneficial now than ever.
Nearshoring to Mexico already provides benefits not applicable when offshoring to China due to location alone. However, there’s also the advantage for U.S. manufacturers to work with an experienced Mexico shelter company. The benefits of Mexico shelter services include but aren’t limited to: minimized legal risk and liability, reduced labor and infrastructure costs, and a reduced learning curve when establishing permits, recruiting and hiring employees, and maintaining the correct protocol culturally and legally.
In essence, partnering with a shelter service provider lifts the burden of handling all the administrative tasks associated with setting up a new operation. Plus, production launch is much quicker with a three- to four-month timeline versus the six to seven months or more, it can take when setting up a new standalone entity.
After decades of reliance on trade with China, primarily as a source of low-cost labor for U.S. manufacturing operations, the COVID-19 pandemic has been a strong push of motivation causing companies to rethink their strategies going forward. With the halt on supply chains and international travel, in addition to the ongoing trade conflicts between the U.S. and China, it’s resulted in the development of ally-shoring.
In essence, ally-shoring is exactly how it sounds, a program of sourcing services, goods, and materials with allies, while disengaging from trade relations with China and other countries that don’t favor American interests. While many have already prospered from manufacturing in Mexico, many other U.S. manufacturers are also bringing their operations closer to home.
Ally-shoring makes sense both from a logistical and fiscal standpoint while adhering to new protocols set forth by the USMCA. This free trade agreement between the U.S., Mexico, and Canada focuses on strengthening regional supply chains across several industries, with particular emphasis on automotive.
USMCA provisions include increased domestic content, enhanced IP protection, and improved U.S. patents in Mexico. These changes strengthen the business relationship between the two countries and incentivize new investments being made in Mexico.
Read more: Mexico vs China Manufacturing
In a case for ally-shoring presented by the U.S. – Mexico Foundation, it states several goals and mutual economic benefits between the countries, including:
Ally-shoring yields additional benefits, such as predictability, cost-effectiveness, and transparency, all areas of concern for foreign companies wanting to expand their operations. When it comes to predictability, Mexico has been a top trading partner with the U.S. over the past few decades. The country has proven to be a reliable economic partner, thanks to a strong supply chain, favorable geographical positioning, and experience in advanced manufacturing for everything from automotive to aerospace and medical devices to electronics.
Secondly, Mexico’s cost-effectiveness is competitive with China, and has recently emerged as a more cost-effective option over recent years. Mexico offers U.S. manufacturers lower labor wages for higher-skilled employees who work longer workweeks.
Additionally, ally-shoring with Mexico provides a higher sense of transparency than operations in China or other foreign countries. Manufacturing in Mexico is more easily monitored than in many other countries and follows the same provisions set forth by the USMCA with regards to intellectual property and trademarks.
Ally-shoring as a strategy is made easier when partnering with a shelter services operation. The shelter setup is unique to Mexico and provides U.S. and other foreign manufacturers a way to ramp up operations within a few months with reduced legal and financial risk. All administrative responsibilities are taken care of, including HR and accounting, legal and trade compliance, among others, to free up time and resources for manufacturers to focus on production.
Sources:
https://usmexicofound.org/images/programas/documentos/1614490856AllyShoring.pdf
The rise of nearshoring to Mexico has been steadily increasing over the past decade for several reasons. First, ongoing trade conflicts between the U.S. and China have caused uncertainty when it comes to the cost and quality of production, in addition to concerns regarding intellectual property protection.
Second, following a year after the world was shut down due to the Covid-19 pandemic, it illustrated just how risky it was to have such a heavy reliance on a weakening supply chain. And third, more North American manufacturers are taking a regionalized approach to their strategies due to the provisions outlined in the USMCA, which was officially effective on July 1, 2020.
When compared to offshoring, which relocates factories from costly countries to lower-cost regions to produce goods or services, nearshoring allows operations to be in closer proximity to where the goods or services will ultimately be sold.
According to Kearney’s 2019 Reshoring Index, Mexico increased exports to the U.S. by $28 billion in 2018, which equaled a 10 percent growth rate over the year previous and was documented as the fastest growth experienced in the past seven years. This occurred at the same time manufacturing imports from China registered a sharp decline, as a result of the major disruption caused by the U.S./China trade conflict.
Starting in 2016, Kearney research also shows that over half of U.S. companies manufacturing in Mexico had moved production there from other countries, including China, to specifically focus on and serve the U.S. market. As more companies are re-evaluating their options, nearshoring is becoming the preferred choice.
With the uncertainty in China that companies have experienced over the past several years, manufacturing in Mexico has emerged as the top strategy. With this decision comes cost benefits that are similar, or in some cases, more cost-effective than the cheap labor force China has long been known for providing.
However, lower wages don’t minimize the level of education, skills, and training Mexico’s industrial workforce offers. For years, Mexico has invested in the manufacturing sector by graduating over 110,000 engineers yearly and providing specialized training programs qualifying more people to work in advanced, technical industries.
In addition to the cost-effective labor force, shipping is less expensive with quicker delivery times due simply to the closer proximity. For many manufacturers, they can ship goods from Mexico and receive them in the U.S. on the same day. Although, perhaps one of the greatest advantages of manufacturing in Mexico is the option of working with a shelter services provider.
Under a shelter operation, foreign manufacturers work with the licenses and permits already in place. This includes maquiladora program certification, which exempts the 16 percent VAT tax on all temporarily imported goods, as long as they are eventually exported.
Shelter services also provide companies full administrative support to get a new operation up and running in a smooth, efficient manner. These shelter services include site selection, recruiting and hiring employees, securing permits and trade compliance, among a range of other responsibilities necessary to operate in Mexico.
Source:
https://www.kearney.com/operations-performance-transformation/us-reshoring-index/full-report
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.
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.
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.
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.
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.
Download our Mexican manufacturing cost sheet to learn more about labor rates.
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.
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.
Many U.S. manufacturers are reconsidering their previous investment in offshore manufacturing to China and bringing it closer to home and nearshoring to Mexico instead.
While most companies would agree keeping their production domestically based is most beneficial, the cost-effectiveness of offshoring to China has been a strategic way to reduce labor costs and expand operations in the past. However, recent years have highlighted how China is no longer the most viable option, due to increased labor wages, ongoing trade conflicts with the U.S., and the most recent challenges caused by the coronavirus pandemic.
With production set up in China, there’s also the disadvantage of shipping distance, cultural and language barriers, as well as time zones that don’t align with U.S. business hours. As a result, a growing number of companies are considering nearshoring to Mexico to save on costs but with less risk and greater advantages.
For U.S. manufacturers that want to benefit from both domestic operations and nearshoring services, comparing Mexico with China shows how working closer to the U.S. border makes the most sense on all levels. From hourly rates of workers to intellectual property protection, it shows nearshoring to Mexico is likely the most cost-effective and convenient opportunity.
The cheap cost of manufacturing in China is what led many U.S. companies to expand production there for years. However, hourly wages have quickly risen at an unpredictable rate and are often higher than industrial wages in Mexico. This is partly due to the decline of China’s minimum wage working population and increased number of retirees for what’s been deemed as a “negative population growth,” an imbalance in the ratio of young and old. China’s once young and cheap industrial labor force is now looking for alternative employment at higher wages.
Whereas, Mexico has allotted lower wage increases at a rate that’s proved beneficial for budgeting and forecasting future foreign investments. Additionally, Mexico retains a competitive workforce of skilled workers by graduating tens of thousands of engineers every year.
The trade war between the U.S. and China has caused concern for many manufacturers due to the uncertainty and rising costs of shipping products. Under the USCMA, there are no duties, taxes, or other charges on exports of any goods between the U.S., Mexico, or Canada when the origin of those goods is from the USMCA region (unless these are also applied to the same good when used for domestic consumption). Furthermore, when working with a shelter service provider, U.S. manufacturers are exempt from the 16 percent value-added tax from day one.
Due to the proximity of each country to the U.S., it’s logical that shipping items from China takes much longer than shipping items from Mexico. It often takes several weeks to transport goods by boat or carried by plane, which comes at a hefty transportation price and higher risk of damaged or lost goods during transport. Conversely, in many cases, the time it takes to package and ship goods from Mexico is the same as what it takes for cities stateside.
Proximity is also important when it comes to oversight and quality assurance. Offshoring operations to Asia requires complex planning when taking into account time zone conflicts and travel barriers. Mexico, on the other hand, is a quick drive or flight that makes it inexpensive and convenient to make regular visits to maintain quality assurance and oversee operations as needed.
Intellectual property rights have always been a challenge when operating in China. Although there have been improvements in providing greater intellectual property protection, it’s been reported approximately forty percent of online products in China are counterfeit. With nearshore manufacturing in Mexico, the USMCA has made notable changes to previous NAFTA provisions that support intellectual property rights for both physical and digital objects. These include regulations for patents, trademarks, and industrial designs, among others.
With these factors in mind, nearshoring to Mexico emerges as the more cost-effective option, as well as a secure and stable selection when compared with China. And fortunately, due to the historical success of U.S. manufacturers that have been operating in Mexico for decades, there’s a blueprint to follow, which can be customized to the specific needs of your company.
For those considering expanding to Mexico or relocating production from China, the guidance of an experienced shelter service provider is key. A shelter allows manufacturers to focus on production and product development without assuming legal risk or setup responsibilities. IVEMSA offers companies support at every stage of the process. This includes a full suite of managed services, including site selection, recruitment and hiring, taxes and accounting, as well as customs compliance and other administrative support. IVEMSA also has the proper permits and certifications in place to get an operation up and running in a few short months.
Sources:
https://time.com/5523805/china-aging-population-working-age/
https://www.cnbc.com/2012/10/24/chinas-aging-population-threatens-its-manufacturing-might.html
The trend of reshoring manufacturing to Mexico is a strategy U.S. companies are considering as a way to stabilize their supply chains and protect future manufacturing investments and opportunities. According to a 2020 survey of professionals in the industrial sector, 64 percent say they are likely to bring their production back to North America.
Although Mexico manufacturing is not a new concept, it’s drawing the attention of a growing number of businesses, due to the uncertainty that lingers regarding trade security between the U.S. and China. Furthermore, challenges resulting from the coronavirus pandemic have also been a contributing factor regarding increased reshoring production. Shipping delays and trade restrictions, in addition to travel and health safety issues in China have caused disruption and feelings of instability.
Manufacturers had already been considering the inherent benefits of reshoring manufacturing to Mexico or at least, diversifying their portfolios in order to maximize gains. However, the significant and abrupt changes in 2020 have led many to speed up the decision-making process as they move their strategies forward.
Despite the volatility of trade relations between the U.S. and China, and the general economic ebb and flow over the past few years, Mexico has remained resilient as a favorable long-term solution for foreign manufacturers. There are several advantages of operating in Mexico, such as favorable U.S. trade relations and optimal cost-effectiveness.
With regards to trade, provisions under the USMCA focus on the value of product origination in North America. This favors manufacturing in Mexico versus operating in China or other overseas locations. These rules and regulations also help secure intellectual property, which has been notoriously problematic for U.S. manufacturers with facilities in Asia. Although, even prior to the USMCA enforcement, many were already considering moving operations due to Mexico’s competitive workforce.
Among the many benefits of setting up operations in Mexico, foreign manufacturers can rely on a technically-skilled, stable workforce at a more cost-effective rate. Labor costs in China have continued to outpace wages in Mexico over the past several years. This combined with China’s higher transportation and shipping costs and lengthier timelines have made it appear increasingly practical to move production to Mexico.
Many global manufacturing companies have successfully operated in Mexico for decades and have optimized their investments over time. For those newer to the Mexico manufacturing landscape, working with a shelter company is the most efficient and cost-effective way to get a new operation up and running. Choosing this production route minimizes risk while allowing manufacturers to maintain complete operational control.
Manufacturers can operate under a shelter’s existing entity and utilize the certifications and permits already in place, which creates a smoother transition and faster startup time. There is also a comprehensive list of shelter services involved, which can be customized based on each company’s unique needs. These include site selection, HR and recruiting, tax, legal, and customs compliance, as well as other administrative responsibilities.
Source:
https://business.thomasnet.com/press-room/news-highlights/supply-chain-dive-mfg-reshoring-is-likely