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When it comes to maintaining competitiveness and viability on a global scale, manufacturers must find ways to streamline operations, reduce costs, and improve the quality of products. One proven strategy many industry leaders turn to is shelter manufacturing in Mexico. 

While this option seems daunting at first, primarily because it involves doing business in a foreign country, the benefits are substantial. Yes, relocation involves a financial investment and time commitment. But it’s not as much as you might think. And wrapping your mind around the principle and practice of this strategy doesn’t take much effort.

Let’s break down this incredible option, and identify exactly what shelter manufacturing is, how to go about it, and why it works so well. We’ll also discuss the unique benefits Mexico adds to this equation and provide helpful tips to get you started.

What Is Shelter Manufacturing in Mexico?

Shelter manufacturing in Mexico is a type of outsourcing that allows manufacturers to take advantage of the country’s lower labor costs and favorable trade agreements while minimizing their risk and financial liability. Shelter service providers in Mexico provide a full range of services for businesses wanting to leverage the country’s lost cost of labor. Just a few of these shelter services include:

• Supply chain management
• Production planning and scheduling
• Quality control and inspection
• Logistics and shipping
• Human resources and payroll management
• Legal and regulatory compliance

The foreign company may assume control of a Mexican factory known as a Maquiladora. These facilities in Mexico operate on a tariff-free or favored duty basis. Maquiladoras are sometimes also called a twin plant, because a US company can maintain an administrative facility in the US while conducting manufacturing at the maquiladora facility in Mexico. 

Equipment and inputs may be imported from the US to this facility, and finished goods exported back to the US duty free. And the shelter service manages all administrative tasks relating to the Mexican factory, freeing up the US company to focus on core mission goals.

How Shelter Manufacturing in Mexico Works

Manufacturing with a shelter in Mexico works by outsourcing the entire production process to a third-party service provider. The process typically starts with the identification of a reputable and experienced shelter manufacturer in Mexico. Companies then provide their production requirements such as volume, lead times, and quality standards to the shelter manufacturer, who uses this information to develop a comprehensive manufacturing plan.

Once the plan is in place, the shelter manufacturer takes over the production process, sourcing materials, supply chain management, and overseeing the production activities. They also handle quality control, inspection, and logistics, ensuring that the final product meets the company’s specifications.

Throughout the production process, the shelter provider maintains open communication with the foreign company, keeping them informed of progress and addressing any issues that may arise. Upon completion of the production process, the shelter manufacturer arranges for the shipment of the finished product back to the company in the US.

How to Get Started

If you’re considering shelter manufacturing in Mexico, here are four key things you need to know to get started with a maquiladora:

1. Choose the right shelter manufacturer.

Not all shelter manufacturers are created equal, so it’s important to do your research and choose a shelter company that has a proven track record of success and a reputation for quality and reliability.

2. Know your production requirements.

Before you start working with a shelter manufacturer, it’s important to have a clear understanding of your production requirements, including your production volume, lead times, and quality standards.

3. Establish clear communication.

Effective communication is key to a successful shelter manufacturing relationship, so be sure to establish clear communication channels with your shelter provider from the start.

4. Be prepared for cultural differences. 

Mexico has a different business culture than the United States, so it’s important to be aware of these differences and be prepared to adjust your approach as needed.

Why Choose Shelter Manufacturing in Mexico

Mexico offers its own advantages to manufacturers. From lost labor costs to specialized, skilled labor to unparalleled free trade access and other cost savings, Mexico is an obvious choice. Outsourcing there allows US companies to minimize costs in many ways.

But entering the country by partnering with a shelter company further removes the hassle, risk, and many of the upfront costs from the equation. When you put together the obvious advantages of manufacturing in Mexico with the shortcut of shelter manufacturing, the result is a dynamo of savings and easy efficiency.

Some of the greatest reasons to choose shelter manufacturing in Mexico include:

• Cost savings: Mexico has lower labor costs compared to the United States and other countries.
• Access to a large pool of skilled workers: Mexico has a well-established manufacturing industry and a large pool of skilled workers.
• Improved lead times: With a shelter manufacturer handling the production process, manufacturers can reduce their lead times and get their products to market faster.
• Reduced risk: Manufacturers can reduce their risk and minimize their upfront investment, as the shelter manufacturer takes on the responsibility for managing the production process.
• Better quality control: Shelter manufacturers in Mexico are typically equipped with state-of-the-art production facilities and equipment.
• Access to favorable trade agreements: Mexico has free trade agreements in place with over 50 countries, which can provide manufacturers with access to favorable trade terms and lower tariffs around the world.

This brief look at the world of shelter manufacturing in Mexico should provide you with a better understanding of what the process entails, how to get started, and what savings lie in store. Using this information, your company can greatly improve profitability and increase market share. 

If you have further questions, contact us for a free consultation to see how much your company can save.

Changes to Mexican labor law took effect this year. As a result, the minimum wage increased substantially, and the amount of paid vacation time due an employee was modified. Mexico remains a source for low and stable labor costs for global manufacturers. But the country has experienced a populist reform of labor laws under current President Obrador.

Mexico’s Labor Reform

Since 2019, and partially due to changes made to NAFTA in the new USMCA, Mexican labor laws have undergone substantial reform. The county has a clouded history with labor relations, dating back hundreds of years. Until recently, Mexico’s labor unions served little more than to rubber stamp most of the mandates enacted by government and big business alike. 

When Manuel Obrador came to power as Mexico’s new president in 2018, he ushered in an era of reforms and populist sentiment regarding the relationship between labor and business. For the first time in decades, labor unions are no longer sock puppets for the employers. Employees are guaranteed certain benefits and rights, such as a reasonable minimum wage, ample vacation time, etc. And to strengthen the formal economy, companies are no longer allowed to outsource, but must keep all roles directly related to corporate mission and goals in house.

Additional provisions to come out of this era were:

• A rapid response mechanism, allowing unions to organize without interference from employers
• The ability of any person or organization to a complaint against any company that exports to the US
• Independent labor courts and monitors

New Minimum Wage

The majority of these reforms in Mexican labor laws took place in the first couple of years after President Obrador came to power. However, in 2023, a couple new labor laws went into effect, one of which is a substantial minimum wage hike.

Due to the ongoing and historic level of inflation in the country, Mexico sought to prevent the labor shortages seen in the US by raising the minimum wage 20%. Along the border, the new minimum wage is $312.41 pesos per day. In the rest of the country, the new daily minimum wage is $207.44 pesos – a full 20% higher in each case than the previous year. 

Nevertheless, Mexico’s labor costs remain among the lowest in the developed world and continue attracting new manufacturing investment from around the world. At current exchange rates, these new minimums equate to about $16.50 USD and $11 USD respectively. But for a country with low-to-moderate growth in wages, these changes come as a welcome change for workers in low-skill positions. 

Still, the move came only after a lengthy process of multiple years to decouple the minimum wage from many other official prices like speeding fines and mortgages, which were determined as multiples of the minimum wage. And a government study was necessary to determine the impact such a change would have on hiring, future wages, and employment. 

New Paid Time Off

Mexico also changed their paid vacation time, which is governed by federal law. The new law went into effect in 2023 and effectively doubles the minimum paid vacation time required for all employees from six days to 12. 

According to the new table, all employees who have been employed for at least a year are given a minimum of six days paid vacation. This must be available to them within the six months following their first anniversary of hiring. 

After the first year, this number of days increases each year by two days until the 6th year, when the number increases every five years by two days. So, an employee with five years of service will have 20 days, and this minimum increases until the 31st year, in which that employee will have 32 days. 

Under the new law, all employees employed for at least a year are guaranteed a minimum continuous paid vacation of 12 days. 

Mexico continues to evolve and grow as one of the world’s primary manufacturing destinations. And these reforms to Mexican labor law are intended to foster a continued atmosphere for profitable employment in the formal economy. Manufacturers in all parts of the globe will find a willing and able workforce ready to produce their products at an affordable rate.

For the first time in decades, China’s population growth is in the negative. And the timing couldn’t be worse for a country already beset by economic woes. Struggling to slow the decline in birthrates at the same time as declining global market share in manufacturing, China relaxed their limitations on having children. But these efforts were too little too late, as China is now set to lose their title of the most populous nation in the world. 

As a result, China’s economic model must shift. Their dwindling and aging population will not be able to sustain the manufacturing output that drove China’s economic rise. China’s declining population signals a shift toward a new economic focus. Their rising labor costs will drive manufacturers to other locations. And China will have to adapt to a new way of doing business, as they work on repairing the effects of decades of communist policies and growth restrictions.

The Cause of China’s Declining Population

In the 1950s, Mao Zedong’s socialist economic plan, The Great Leap Forward, had brought about one of the worst famines in recorded history. In 1961, the 30 million cumulative starvation deaths turned around the country’s rapidly rising population, and brought about a population decline. But since that low point, the country’s population rose each year afterward – until now.

In 2022, for the first time in 61 years, China’s declining population rate returned. But this time, the Great Leap Forward wasn’t the cause. In 1979, China began enforcing a One-Child policy. With very few exceptions, most parents have aborted pregnancies after having a first child. And they tended to favor sons, resulting in a shortage of females. 

In 2016, China began allowing a second child, and in 2021 a third. However, world estimates continued predicting China’s population would begin receding and be overtaken by India as the world’s most populous nation in 2030. Now, it looks like India will close the gap sometime this year.

• China had 850,000 fewer people living there in 2022 than in 2021.
• Total Chinese population is predicted to shrink by nearly half by the end of the century.
• Total births dropped to 9.56 million in 2022, the lowest number since 1950.
• 25% of the total Chinese population will be over 65 years old in 2040.

Economic Ramifications

The really concerning aspect of China’s declining population is what it means for the Asian giant’s economy long term. The working age population, ages 15-59, has dropped from 70% to 62% in just the past decade. Chinese census data shows this demographic had only 875 million people in 2022, down from 970 million in 2014. 

The combined factors of fewer women than men, more women entering the workforce, an aging populace, and cultural aversion to larger families mean China’s workforce will not be able to maintain the economic output of previous years.

With fewer and fewer young people in the workforce, labor shortages will drive labor costs higher. China has already seen dramatic increases in their minimum and average wage levels over the past decade. This trend will intensify.

Additionally, these higher labor costs will drive the cost of manufactured goods higher. In turn, more and more companies will choose alternative manufacturing destinations like Mexico or Viet Nam, resulting in long-term economic contraction and a manufacturing exit.

China’s Communist Party leader, Xi Jinping, had planned to double the nation’s wealth by 2035. However, the reality shows a much bleaker forecast and downward trend. In 2021, GDP was 8.1%. 2022 was forecasted to be 5.5%. It turned out to be just 3% – the second lowest annual GDP since the 1980s. 

The New China

Going forward, China must face the reality that their economy will no longer be able to rely on a labor-intensive growth model. Manufacturing and other sectors dependent upon cheap labor are no longer viable for China in this century. In the coming decades, China will face a new reality and new expectations. They will recognize that an aging populace combined with China’s declining population requires a shift into a post-manufacturing and post-industrial economy.

Competition and advances from other manufacturing-centric economies have already reduced China’s manufacturing marketing share. And the trend seems unlikely to be reversed in this century. China’s economy can no longer rely on either the demographic growth dividend or new FDI related to manufacturing. And to compound the situation, they will be supporting their overproportionate aging population for decades to come.

How the Chinese communist government responds to this change is essential. With a global recession on the horizon, these long-term challenges will only be amplified. How China’s economy evolves will depend on swift, institutional changes at all levels of government and industry. 

As a savvy manufacturing executive, you’ve probably considered the various outsourcing options, including Mexico. But if, like most who first encounter this possible option, you still have questions about the ins and outs of managing a maquiladora operation south of the border, this complete guide is for you.

Making the decision to outsource the manufacturing function to a foreign country comes with risk factors and other serious considerations. One such consideration is how to go about managing a foreign operation while remaining profitable and what taking on a foreign factory will entail. Below, we will detail just what it looks like to manage a maquiladora factory in Mexico safely, effectively, and profitably.

Nearshoring in Mexico

Nearshoring as opposed to offshoring removes certain factors from the equation of outsourcing. From a management perspective, there is greater hands-on potential for a factory located just south of the border, reachable within a few hours by plane or car in some cases.

Furthermore, nearshoring in Mexico:

• Reduces transit times
• Better aligns business hours through comparable time zones
• Affords greater control of supply chains
• Provides enhanced flexibility
• Leads to more efficient manufacturing
• Presents less cultural difference for management to overcome
• Minimizes duties and tariff concerns

Additionally, manufacturing in Mexico:

• Gives management access to deeper pools of skilled manufacturing labor
• Opens up more free-trade markets globally
• Reduces management and production costs
• Provides strategic resilience in economic downturns and market disruptions

Selecting A Site in Mexico

Mexico is home to state-of-the-art industrial parks and manufacturing infrastructure. These parks are urbanized areas dedicated to optimal manufacturing and logistics activity. They typically include all the necessary utilities, permits, and infrastructure. They are available for either lease or purchase and often include special certifications to ensure maximum potential for tenants.

Consider the following factors when choosing your Mexican manufacturing site:

• Access to transportation
• Population density and worker access
• Available utilities
• Cost for either rental or purchase
• Total start-up and administrative costs

How to Open a Maquiladora

Properly entering the world of Mexican manufacturing is crucial for long-term success and profitability. Mexico’s IMMEX program allows foreign entities to establish and own factories within their borders for export manufacturing under special duty considerations. 

In order to establish a maquiladora (or maquila) operation under IMMEX, you must properly complete all paperwork and provide all necessary documentation. The process of opening a maquiladora can be quite daunting, but below is a checklist of necessary items:

• A completed IMMEX Application
• Advanced electronic signature certificate (SAT)
• Federal taxpayer registration for owning entity
• An active tax domicile in the federal taxpayer registry
• Certified copy of your company’s articles of incorporation
• Copy of a document certifying possession of the factory property with photographs
• Contract of maquila, showing the orders of purchase your operation will manufacture for
• Copy of your Power of Attorney or Unique Registry of Accredited Persons (RUPA)
• Document detailing which IMMEX guidelines/classifications pertaining to your maquila processes
• Production processes and plant capacity details
• Letter of conformity from the company or companies manufacturing or sub-manufacturing, declaring the specific liability on temporarily imported goods

Next Steps for Managing a Maquiladora

Managing a maquiladora in Mexico means stepping into a completely different workplace culture. Fortunately, the cultural divide is not as stark as with managing in an Asian culture. Nevertheless, there are certain distinct differences with workplaces in the USA.

• The workweek is typically 48 hours long, as workers tend to stay later than the prescribed working hours.
• Mexican workers typically receive more paid vacation time and holidays.
• Benefits like overtime, sick pay, and maternity leave are more generous in Mexico.
• Hierarchy matters, and official titles are widely used, while lower-level workers are not expected to exceed their authority. 
• Time is much more flexible, with workers often arriving 20 minutes late and staying much later than quitting time to avoid being perceived as rude.

When travelling in Mexico to oversee your business operations and relationships, there are certain important considerations for managers:

• Business lunches are expected to be mixed with much personal conversational and even alcoholic beverages and smoking; relax and take your time.
• Formality is important, even when it comes to business attire; bring the proper senior executives to equate to those you are meeting with.
• Driving into the Mexico Free Zone border region requires no special visas or paperwork. 
• If flying into Mexico, use only registered sitio taxi lines in the country, as it can be unsafe to use independent taxi operators.

And speaking of safely conducting business in Mexico:

• Be sure to locate your factory in a safe area of town.
• Hire a reputable security firm to guard your operations.
• Do not be careless with company assets or flashy with personal wealth.
• Know the law and carefully ensure full compliance to avoid risk of blackmail or confusion.

Take the Shelter Shortcut

You can forego much of the guesswork, planning, costs, and exposure by taking a shortcut. Rather than performing all of the necessary research, site set-up, workforce hiring, and compliance paperwork, many US executives find managing a maquiladora much simpler via a proxy.

This proxy comes in the form of a shelter service provider, which provides you with numerous advantages. A shelter company acts as the owner of record of a Mexican corporation and typically has existing workforces and supplier networks already in place. In fact, often, these services already have factories in place awaiting an owner. Additionally, the shelter will have competent labor and top tier suppliers on tap and handle all necessary tariff, tax, and compliance forms, hiring and administration, maintenance, logistics, security, and more.

You can speed up the process of entering the Mexican manufacturing scene, eliminate the headache of sourcing materials and personnel, and devote your management time to core activities like maximizing quality, profitability, and ongoing product design. 

Regardless of how you set up your operation, managing a maquiladora in Mexico can be a highly effective and profitable alternative to offshoring. And with the insights contained in this guide, you are ready to experience the Mexico advantage for yourself.

As producers in the United States face ongoing challenges and a tightening economy, it’s important to consider alternatives. Many US producers considering Mexican relocation have found that shelter manufacturing benefits their bottom line and solves other critical problems they face. 

In spite of global economic uncertainty, there are savings to be had by outsourcing expensive labor to markets with cheaper labor costs. But offshoring to Asia presents a whole new set of problems for many manufacturers. The answer for many is nearshoring, which allows the US producer the convenience and proximity of manufacturing just south of the US-Mexico border. 

And using a shelter service makes those benefits all the more accessible. Let’s examine a few of those benefits.

The US-Mexico Partnership

Sometimes misunderstood as a competitive rival to United States manufacturing, Mexico is actually a vital US trade partner and key component in a vast, North American manufacturing dynamo. Nearly 40% of inputs in Mexican-made products were actually produced in US factories. Trade data shows that outsourcing to Mexico benefits US industry in the long run, through partnering along the value chain.

And while the US is losing skilled workers at a rapid rate, Mexico is training thousands of new engineers each year through industry-academia partnerships fine-tuned to meet specific manufacturing needs. While the US provides the bulk of design and innovation, Mexican factories and skilled labor bring these concepts to fruition. This partnership allows both the US and Mexico to compete at a dominant level in a global market.

The Savings

Manufacturing in Mexico reduces expenses for US companies in several critical areas:

• Labor costs are in Mexico are a fraction of US labor costs.
• Freight costs for rail or trucked shipments are lower than trans-Pacific cargo from Asia
• Startup in a Mexican factory with a shelter service is simpler and less expensive than going it alone.
• Labor costs are somewhat lower in Mexico than in China and substantially lower than in the US.
• Shelter manufacturing in Mexican maquiladoras reduces tax liability.
• Opportunity costs are lowered by a more rapid time to market and more table supply chain.

How Shelter Manufacturing Works for Producers

Shelter manufacturing in Mexico is a unique assist for those US companies seeking to nearshore manufacturing operations. While Mexican factories or maquiladoras allow for duty-free manufacturing for US export, setting up a factory in Mexico can be quite daunting for a company not familiar with the process.

Fortunately, shelter manufacturing benefits these companies by shortcutting the process and providing a turnkey option. A shelter company already owns a corporation under Mexican law, already owns property or even factories, already has relationships with suppliers and labor, and already understands all of the compliance and cultural nuances required to make a Mexican operation successful.

This company can assist the US producer at every turn, from site selection to hiring and payroll to logistics. The client becomes a joint partner for the purpose of this already established legal entity, and delegates previously agreed upon administrative tasks. This allows the US firm to shorten the learning curve and forgo the hassle of starting up a foreign operation. 

Within a matter of weeks, the company is overseeing product development and quality, while all of the administrative tasks are carefully overseen by the shelter service provider.

Additional Shelter Manufacturing Benefits

• Safety

Shelter services offer an insider advantage in a country that poses certain safety challenges. In addition to providing dedicated site and personnel security services, shelter companies also understand the culture and geography to create a situation of maximum advantage and security. Often, manufacturing operations are established in highly secured industrial parks owned by the shelter partner.

• Reduced Tax Exposure

US companies that partner with a shelter company are not liable for Mexican income tax and do not deal directly with any Mexican tax authority. The shelter service typically includes all tax paperwork preparation and compliance, resulting in little to no tariffs on raw materials and equipment as well as the finished product.

• Operational Time Savings

Partnering with a shelter means cutting out of the equation the time required to manage day-to-day operations of a plant. Maintenance is also handed off to the shelter provider. The US producer is free to focus on core activities like product quality, innovation, and increasing market share.

• Advanced Network

Any newcomer to Mexico may have the advantage of long-term, well-established relationships with vendors, suppliers, and labor unions. These extensive networks provide a bedrock of stability and access in an otherwise uncertain and new venture through shelter manufacturing. Shelter providers can often get the best deals and secure lasting labor relationships in ways a foreign company could not.

Taking advantage of the many advantages and costs savings of outsourcing your manufacturing operations to a foreign country need not increase your administrative hassle or destabilize your standing in the market. Shelter manufacturing in Mexico benefits US manufacturers by reducing overall costs, maximizing insider access, and eliminating the risks and stress of opening a foreign factory. 

A shelter service is not only a legal shell for your manufacturing operation, it is also a trusted partner and guide in Mexico.

Over the past few years, the US cost of labor as seen strong growth, leading many companies to seek outsourcing alternatives. In spite of the Fed’s recent aggressive interest rate hikes, the overheated jobs market in the United States continues to support high labor costs. 

Even in the face of such strong counter forces, the US cost of labor is still growing, albeit not as rapidly as last year. In the coming year, the jobless rate is expected to climb, putting downward pressure on wages. Yet payroll continues to be a primary consideration for companies considering relocating manufacturing to foreign locations such as Mexico or Asia.

The Shortage

In 2020, the US jobs market saw a devastating net loss of around half a million jobs. Yet, surprisingly, by the end of the year, half a million jobs went unfilled. And this number isn’t getting any better. In fact, according to a recent study by Deloitte and The Manufacturing Institute (MI), the gap in manufacturing jobs is estimated to hit 2.1 million by 2030. Currently, the manufacturing industry in the US is missing 1.4 million workers for essential manufacturing roles. 

As such, the United States is facing a critical shortage in laborers. Primarily due to the Baby Boomer generation retiring en masse, but also due to problems with training and certifying new manufacturing professionals, the US workforce today is shrinking. In turn, the cost for labor is growing. 

US Cost of Labor Still Growing

The shortages seen in 2021 and 2022 have been referred to as the “Great Resignation,” as many people who worked from home during the lockdowns have now decided to retire or work in the gig economy rather than return to the office or factory. This gap between workers and open jobs continues to drive up wages even amidst aggressive interest rate hikes and an intentional economic slowdown. 

The Employment Cost Index is the broadest measure of labor costs in the US, and each quarter over the past couple of years has seen an ongoing increase. For 2021, labor grew by 4% year-over-year, the largest increase since 2001. And at the end of the year, there were 10.6 million unfilled jobs. While growth slowed down in late 2022, costs remained high. 

• In the third quarter, productivity declined 1.3% year-on-year.
• Unit labor costs increased at a 2.4% rate.
• Hourly compensation increased 3.2%.

While differing from industry to industry, the average cost of labor for US businesses is 20-35% of gross sales. The average cost of labor in private industry is estimated at an average of $27.44 per hour worked for wages and $11.47 for benefits. According to data from the List Foundation, averaged across all skill levels, the average manufacturing worker in the US earns about $38,000 per year.

High US Labor Costs Benefitting Mexico

Considering that labor costs account for such a substantial percentage of overall expenditure – especially in labor-intensive industries like manufacturing – US companies are forced to find alternatives. In order to remain viable and profitable in these uncertain times, the prospect of relocating manufacturing is increasingly attractive for US producers. 

In particular, Mexico offers US companies an attractive alternative with its low-cost, high-skill manufacturing labor just south of the border. While China has been the long-favored offshore go-to destination, wages there have risen rapidly over the past decade. Meanwhile, Mexico’s cost of labor has grown very modestly. At this point, the cost of labor in both countries is roughly equal. 

Mexico’s average manufacturing worker earns the equivalent of about $3 dollars an hour (compared to $24/hr in the US). This has led numerous US manufacturing companies to turn to Mexico to mitigate the impact of rising wages in the US. Doing so allows them to recoup the difference at a rate of 4 to 1. 

Relocating to Mexico to escape the high US cost of labor is made easier by the use of shelter manufacturing. Because Mexico is a signatory of the USMCA, special duty-free factories (or maquiladoras) can be operated by a Mexican subsidiary of a US shelter company, which in turn handles all the necessary compliance paperwork, taxes, personnel management, vendor relationships, and more. They then partner with US companies seeking to operate in Mexico, which allows these companies to forego all of the administrative hassle and exposure, freeing up more time and attention for product quality and profitability. 

With this ease of access, Mexico is becoming an increasingly attractive outsource destination for US companies. Mexico’s workforce is highly trained for sophisticated manufacturing and basic assembly alike. And decades of infrastructure investment are finally paying off. Manufacturing for export to the US is thriving, as American companies like Ford, Honeywell, General Motors, and others collectively will invest around $40 billion USD into Mexican manufacturing by 2024. 

Whether the US cost of labor continues to grow into 2023 remains to be seen. Aggressive measures to cool down the jobs market will likely slow down any future growth. But for the time being, labor costs remain prohibitively high for most US companies.

As the global economy continues to reel from the ongoing crises stemming from 2020, China manufacturing is in a tailspin. Their downward spiral as the “factory of the world” is evidenced by recent data showing new manufacturing orders are continuing to decline at a rapid pace.

Several factors are driving this trend, but the Asian country’s ongoing handling of COVID is primarily to blame for growing disillusion regarding China’s ability to safely and predictably manufacture for export. 

New Manufacturing Orders Are Down

Long the favorite destination for offshore manufacturing efforts, China has been on the decline since prior to the COVID crisis. From corporate loan crises to the Trump tariffs to the 2020 public health crisis, China’s manufacturing economy has grown less and less appealing for leading companies in the US and abroad.

China manufacturing has historically been the cheapest way to outsource labor for manufactured goods. For years, the Asian giant has been called the “factory of the world.” Home to sprawling industrial megaplexes and factories, China manufactures almost everything Americans consume. But recent data shows they’re shopping elsewhere in increasing numbers.

According to recent numbers, US manufacturing orders for Chinese-made goods are down a staggering 40%. Supply chain disruptions and other challenges are reducing demand for goods made in China. Many US companies are now finding it’s just too difficult or expensive to outsource there. 

In November, China’s manufacturing purchasing managers’ index recorded the lowest reading in seven months at 48. And China’s non-manufacturing PMI, representing general business sentiment in services and construction, dropped to 46.7, down two points from October to November.

And in a stunning reversal of a historic container shortage and backlog at US ports, total vessel container volume between August and November dropped 21%. Trade data shows US imports from Asia have dropped to their lowest level since 2020. Far from being congested, US ports are now relatively inactive as demand for China manufacturing continues to slide.

What’s Driving the Shift?

Without a doubt the largest factor driving this shift away from China manufacturing has been China’s ongoing Zero COVID policy and its devastating effects on the country’s manufacturing sector. Seemingly endless waves of lockdowns follow only very small outbreaks of COVID. Recently, Foxconn – China’s largest manufacturing plant for iPhones – locked down over 200,000 workers when their entire plant was closed for about a week. Workers eventually broke out of the facility and fled into the surrounding villages. 

Now, three years since the world was introduced to this virus, China continues to disrupt entire supply chains in a fruitless attempt to eradicate every trace of it. As a result, their overall economy is in danger of plunging into a deep recession as leading companies shift their operations elsewhere. 

But other factors are also at play. With fuel prices on the rise, it’s just not as attractive to transport cargo from across the ocean. And because of the recent tariff war, duties on Chinese-made goods are becoming prohibitive. Disruptions, shortages, and quickly changing demand trends compound the situation and make large, global supply chains untenable and unattractive. More resilient and localized supply chains are becoming the new paradigm, as global brands rethink globalism. 

Where Is Manufacturing Moving To?

Certainly not all China manufacturing is being reshored to the US. Many large companies like Apple are shifting to other Asian countries. Vietnam is expected to be the largest beneficiary for technology manufacturing leaving China. India is also seeing much of this rearrangement in the global manufacturing configuration. Gradually, China is losing their manufacturing market share.

Since 2016, China’s share of manufactured goods has dropped in many categories, some of which include:

• Clothing & accessories (41% to 37%)
• Furniture (64% to 53%)
• Footwear (72% to 65%)
• Travel goods (83% to 70%)

Meanwhile, Vietnam has increased market share in these same categories. And India is poised to take on a large portion of the semiconductor chips market, along with Taiwan. But many companies are looking outside of Asia entirely. To many, the answer is not another Asian offshore destination, but rather nearshoring their operations to North America – specifically to Mexico. 

Mexico’s market share for manufacturing has been on the rise in recent years. And recent numbers show the economy is in growth mode again after the 2020 crisis. Mexico is attractive to US firms for its proximity to the US market as well as its low-cost, skilled manufacturing labor. Mexico’s skilled labor costs are on par with or in many cases actually lower than China’s. Shipments are usually made by truck and therefore not subject to port congestion or high fuel costs of transoceanic freight. 

And most importantly, Mexico’s response to COVID was mild and business-friendly. For the past two years, Mexico’s economy has been entirely open with little to no restrictions on workers, factories, or international travel. As such, much of the loss in China manufacturing is Mexico’s gain. 

More and more, China is looking like an old answer to the new challenges the world now faces. And with global markets likely entering a recession in 2023, this contrast will appear in stark relief. China’s days as the world’s factory are numbered.

The countdown to a looming rail strike is getting low, and Congress is scrambling to intervene in stalled negotiations between railway labor unions and railroad companies. For the better part of 2022, the unions have been threatening to strike, but previous agreements have been tentative and only kicked the can down the road. 

Payday is swiftly approaching for US manufacturers and consumers alike if negotiations fail to produce real, lasting changes rail workers can get behind. The impact of the threatened rail strike would be felt immediately by every consumer in the US and especially for those manufacturers who rely on freight by rail.

The Rail Strike

For most of the year, labor unions representing the approximately 125,000 unionized rail workers in the United States have been pressing for changes to their contracts and working conditions. The primary complaint has been about sick leave. Workers have complained of being penalized for taking time off for doctor visits and the like. 

According to union representatives, these bad time-off policies constitute harassment and have prevented the railways from hiring an adequate workforce. They allege the US rail system is understaffed, making for overly strenuous schedules and unacceptable time-off allowances. 

A strike was called off in mid-September after months of negotiations produced a tentative agreement. However, several major unions refused to ratify the arrangement, primarily because it did not provide enough additional sick days. Nevertheless, the September 16th deadline came and went without a strike. 

The Tentative Deal

However, a new date has been set for the strike should a deal not be ratified by all parties: December 9. And Congress, authorized to intervene by the Railway Labor Act of 1926, has been hammering away at a deal to avert the looming rail strike. 

On Nov. 30, the House passed a tentative deal that would thwart the rail strike and force labor unions to accept the new terms. However, the unions are arguing that this measure denies them the right to strike and fails to correct the conditions making the strike necessary. The bill was opposed by members on both sides of the aisle and now heads to the Senate.

The bill approves new contracts raising pay 24% in the next five years and an immediate bonus payout averaging $11,000 per worker.  It would also give workers one extra day of paid time off, but the House soon passed a separate bill upping that to seven sick days of paid leave. Currently, rail workers have no guaranteed sick leave, and union rules require a worker to be out sick for four to seven days before any sick pay can be paid out. 

Supply Chain Havoc

While the bill is expected pass the Senate, it will only be a tentative deal – yet another Band-Aid patch on a festering wound in the industry. It likely will not hold for long. And the timing for such a strike could not be worse. The economy is still reeling from supply-chain disruptions and shortages stemming from the 2020 crisis. Not to mention we are in the middle of the holiday gift-buying season.

International sea port congestion has finally let up in the US,  but supply chains remain strained by labor shortages and rising energy costs. Manufacturers are prioritizing shipments made by rail to mitigate risk should a rail strike take place. The Association of American Railroads estimates the US economy would suffer a loss in GDP of $2 billion each day of a strike.

Railway freight is absolutely essential to the US economy. According to the Biden administration, 765,000 US workers would be without a job in just two weeks. While manufacturers are turning to trucks to minimize the impact of a rail strike, the industry is already short some 80,000 drivers. And the railways currently move the equivalent of 467,000 long-haul trucks every day. 

30% of cargo shipments are moved by rail. And arguably the largest customer of US rail is UPS. Just one train shut down by a rail strike would mean around 200,000 undelivered packages this holiday season. Even a very brief strike would take weeks if not months to recover from, heightening prospects for a recession in the near future. 

In fact, even a near miss could disrupt the economy. Railroad carriers begin scaling back operations a full seven days prior to a scheduled strike. According to federal safety measures:

• 7 days prior, sensitive materials are prioritized.
• 96 hours prior, hazardous materials shipments stop.
• 72 hours prior, railyards begin shut-down preparations.
• 48 hours prior, passenger trains are held at customer locations.
• 24 hours prior, trains are cancelled or consolidated.
• 12 hours prior, no more trains are allowed to leave the yards.

This means we may feel the effects of a Dec. 9 rail strike even if it does not occur. And if Congress imposes this temporary halt to the strike, the problem will only be pushed back to next year. Now is the time to secure your supply chains and take steps to prioritize essential shipments in the case of a strike. 

US manufacturers have a weather eye on the economy. And regardless of the back-and-forth of political punditry, there are undeniably dark clouds on the horizon. It is vital to sustained viability and success in manufacturing that leaders properly read the forecast and understand what it takes to come out on top.

While nothing is certain in economics, there are certain cues we can pick up on and common-sense precautions we can take. Manufacturing in a recession is typically a lean period exacerbated by the largesse of the boom that invariably preceded it. Yet this is not to say that scared overreactions win the day. Strategic investments made in the early days of a recession often determine the winners.

If and when a recession strikes may be uncertain. But prospects for manufacturers in a recession comes down to acumen and circumstance. There are certain things going for US manufacturers right now, yet there are also challenges that must be overcome. Below, we will discuss the likelihood of a recession and identify key challenges and opportunities for businesses to maximize success while manufacturing in a recession.

Is a Recession Coming to the US?

The question of whether a recession is coming is of course complicated. Technically speaking, the US economy entered a recession this summer. A recession is typically defined as two consecutive quarters of negative growth in GDP. But a strong labor market and high corporate earnings have concealed this fact. 

An alternative definition offered by the National Bureau of Economic Research or NBER states that a recession is when the economy experiences a significant decline in economy activity over a sustained period of more than a few months. That has not yet occurred.  

Yet the prospects for entering a recession by all accounts is a strong one. By some statistical models, the chances of a sustained slowdown occurring by late next year are around 100%. Between the ongoing war in Ukraine, historic inflation, and aggressive interest rate hikes, short-term prospects for manufacturing in the US aren’t good. 

Forbes offers the following signals:

• Gross domestic product or GDP is poor (2.6% for Q3).
• The consumer price index for CPI is poor (+7.7% in October).
• The Institute of Supply Management’s (ISM) purchasing managers index was at a neutral 50.2 this past summer.
• Industrial production is growing (.4% in September).
• Retail sales remain neutral (0% growth).
• Conference Board leading index is poor (-0.4% in September).
• The stock market year-to-date performance is poor (-1979% in November).
• The treasury yield curve is inverted (-0.49% in November).

Countering Inflation

Possibly the strongest challenge to US manufacturers is current inflation rates, which are the highest since 1980. Manufacturing in inflationary times is difficult as access to capital is limited and the cost of borrowing prohibitive. It disrupts the supply chain and drives prices up. 

In modern times, governments have been tempted to respond to most crises by increasing the money supply, which in turn drives the devaluing of goods and services. As such, inflation acts as a counterforce to growth and profit, reducing the value of the goods manufactured before they’ve gone to market.

• Lower priced inventory becomes more expensive to replace.
• Services become more expensive. 
• Personnel shortages result from labor costs rising faster than wages.
• Investment capacity is shortened by higher interest rates.
• Purchases drop, creating negative momentum with which to face these challenges.

Yet successful manufacturing in a recession is possible, and inflation can be countered strategically:

• Production maximization measures are key, because they counteract rising labor costs. 
• Automation can increase efficiency and lower labor costs.
• Investing in a loyal workforce and promoting from within preempt labor shortages.
• Raising prices early and consistently will prevent falling behind in market share.
• Rethinking the packaging process to shift values is a suitable alternative to outright price hikes.
• Continuing to invest in R&D will position your operation to remain competitive after the recession.
• Avoiding expensive debt allows for more flexibility in an economic storm.

Resilient Manufacturing in a Recession

Industrial manufacturing is always hit hard and early in an economic downturn. But it is also quick to bounce back. The opportunity here for US manufacturers is to invest in resilience right now. This is primarily achieved by cash liquidity and targeted capital investment. 

Direct cashflow modeling combined with closely managing debt can create a situation in which a period of low profitability gives way to a strong and rapid recovery period following the recession. Likewise, scaling up targeted investments in assets, rather than scaling back, is actually shown to dramatically increase the chances of high revenue recovery. Investments should be made into digitalization, automation, and lean manufacturing.

According to Forbes, the following five trends can increase the chances for successful manufacturing in a recession and boost your manufacturing outlook in the near future:

1. Technology Investment: manufacturers with higher digital maturity and advanced manufacturing technologies create agility and resilience.
2. Talent Management: pre-empting workforce churn during the shift in talent models by prioritizing retention and close management will reduce labor drain.
3. Supply Chain Strategies: increased utilization of digital technology and creating redundancy into the supply chain can counter-act one of the most significant disruptions for manufacturers.
4. Smart Factories: smart factory transformations may prove key to future competitiveness.
5. Corporate Social Responsibility: with regulators cracking down on environmental, social, and governance (ESG) metrics, sustainability and voluntary compliance may set apart manufacturers as sustainability leaders.

In spite of supply-chain disruptions, debilitating inflation, ever-rising interest rates, and geopolitical uncertainty, US producers can rise to the challenge. The coming year will likely see a downturn, but it’s important to remember that manufacturing in a recession is a pivotal moment. Trying times have a way of sorting out the leaders from the followers. Prospects for future success depend on smart leadership now.

In spite of the 2020 crisis and the difficult times that have ensued, Mexican manufacturing is growing again. Recent numbers indicate the slump of more than two years has finally ended, in spite of ongoing pressures. Factories are back in business and boosting Mexico’s economy, attracting foreign investment and renewing optimism about an uncertain future. 

There are pronounced factors driving Mexico’s factory growth. Long home to manufacturing hubs in a variety of industries, Mexico remains a very popular destination for outsource manufacturing as well as domestic production. Recent reforms and investments have placed the Mexican manufacturing economy on sure footing to weather the global economic storm currently brewing. 

Mexican Manufacturing Growing for Two Months

October’s numbers are out, and while not dramatic, they point to some growth for manufacturing in Mexico for the second straight month. The seasonally adjusted S&P Global Mexico Manufacturing Purchasing Managers’ Index (MXPMIM=ECI) is once again at 50.3, the same as in September. Anything under 50 is considered a contraction, so this means that – ever so slightly – Mexico is back in the black.

After the collapse world economies experienced from the 2020 shutdowns, Mexico’s index saw numbers as low as 35 (April 2020). In the two and a half years that followed, Mexico struggled to break the slide. Crisis after crisis kept Mexican factories in contraction. 

However, that slide has been halted. Mexican manufacturing is growing again. And breaking the barrier between contraction and growth for two consecutive months has now reinforced other positive signs for Mexico’s economy overall and for manufacturing in particular. 

Globalization Out, Nearshoring In

One of the trends driving this positive outlook for Mexican manufacturing is a shift away from globalization. While offshoring manufacturing operations has produced highly efficient value chains over the previous two decades, the instability and volatility in recent markets has caused many to rethink globalization in favor of more stable alternatives like nearshoring. 

With fuel prices at historic highs, the costs of transporting freight across the oceans is becoming prohibitive. Add to this the container shortages and port congestion levels of late, and the rewards of manufacturing in China and other Asian countries are soon overwhelmed. 

Companies prefer the resiliency of nearshoring manufacturing operations to the North American continent as a hedge against shortages, high transportation costs, longer lead times, and unpredictability in the market. Some of the many advantages of this new wave of nearshoring include:

• Lower transit times
• Greater flexibility
• Working in comparable time zones
• Cost effectiveness
• Reduced tariffs/duties

China’s Star Waning

Indeed, at the heart of this reshoring trend is China’s recent fall from grace. Not only are companies concerned about a general inaccessibility and unpredictability inherent in manufacturing in locations on the other side of the planet, they are specifically concerned about China’s downward evolution. Once the darling of manufacturing outsource locations, the Asian giant no longer has the same benefits it offered in the 1990s. As such, many companies are leaving China for Mexico.

• Wages in China are rising quickly, outpacing Mexico’s.
• China’s “Zero COVID” policy is never-ending.
• The recent tariff war with China has made US goods more expensive to manufacture there.
• IP protections are problematic.
• Fuel costs are rapidly rising, making transportation more costly.

As such, China’s loss is Mexico’s gain. Home to lax COVID restrictions, stable and low labor costs, duty-free import/export with the US, and a host of free trade agreements with other countries, it’s not hard to see why Mexican manufacturing is growing. 

Challenges Facing Mexican Manufacturing

What the future holds for Mexico is uncertain. Like other countries, Mexico is facing strong headwinds from inflation. However, recent numbers give some hope, showing a reduction from 8.64% in September to 8.53% in October. 

Nevertheless, these inflationary pressures on companies doing business in Mexico are compounded by liquidity squeezes, materials shortages, and a looming global recession. Whether Mexican manufacturing continues growing in 2023 remains to be seen and will depend largely on how the global economy performs. 

Yet, for those companies seeking to weather the coming storm and build resilience to prepare for a downturn, Mexico is becoming an increasingly attractive option. Over the past decade, Mexico has invested heavily in transportation infrastructure, telecommunications capacity, the energy grid, and a skilled labor supply tailor made for industry needs. These investments have propelled Mexico to recover from an unprecedented global crisis and begin preparing for the next.