Category: Uncategorized

Last week, videos coming out of China showed visitors reacting to the announcement of a Shanghai Disneyland lockdown by rushing the gates. The amusement park is the latest location of a largescale lockdown in China, where draconian measures to combat the virus are crippling the economy.

The news comes on the heels of other major lockdowns in the country, including a jailbreak of sorts at a major manufacturing facility where employees were being quarantined. These and other disruptive lockdowns are leading many to consider doing business in other countries where COVID restrictions are not so prohibitive.

The Shanghai Disneyland Lockdown

On October 31st, the resort at Disney in Shanghai, China announced they were halting operations immediately, citing COVID concerns. The resort and surrounding area, including the shopping street, were immediately cordoned off, and no one was allowed to enter or leave. 

Some visitors posted video to China’s social media platform, Weibo, showing visitors rushing to park gates where security formed a barricade, preventing anyone from leaving. Visitors have been required to produce three negative tests within a 3-day period in order to be cleared. Some rides at the attraction continued to run for the trapped guests.

The Shanghai Disneyland lockdown came the day after Shanghai officials reported just 10 locally transmitted cases, all of which presented no symptoms or illness. But due to China’s Zero-COVID policy, this was cause enough to send the area into full lockdown.

This is the 3rd Shanghai Disneyland lockdown since the 2020 wave of lockdowns ended. In fact, the resort had only just re-opened two days prior to the recent shutdown. Earlier this year, the park was closed for three months. And one year ago, the park locked down for two days, trapping 30,000 visitors inside. 

The Foxconn Lockdown

Only a few days prior, news broke that China’s largest manufacturer of iPhones, Foxconn, had locked the whole plant down, trapping 200,000 workers inside. On October 14th, the smartphone assembly factory complex went into full lockdown mode. Workers reported that no one was allowed to enter or leave and that food was simply dropped off occasionally outside the buildings. 

Foxconn denies some of the reports coming from workers, but allegedly, the company required all workers to wear N95 masks and perform “endless PCR tests.” Work continued with what the company calls “closed loop” systems of production to minimize the spread. And according to one worker, employees would be notified to leave their post and come to the testing sites and then not return to their post the following day. He suspects they were being quarantined further in smaller groups on campus.

However, at some point near the end of October, there was a reported mass jailbreak of sorts. Thousands of workers allegedly climbed the fences surrounding the iPhone manufacturing complex and began fleeing the plant in droves. According to reports from anonymous workers, the streets that night and all the next day were packed with escaped Foxconn employees, working their way home over many miles on foot. 

China’s Zero COVID Accelerating an Exodus

China’s relentless war on the virus has resulted in any potential contacts of someone with a positive test to be quarantined on mere suspicion. As a matter of course, anyone who might only have the potential of coming in contact with the COVID-positive person is quarantined. China’s Zero COVID policy has had a devastating effect on the world’s 2nd largest economy. While most other countries have chosen to live with the virus, nearly three years after the outbreak, China continues its disruptive lockdowns, mass testing, and mass quarantines.

As a result, China’s long-term economic outlook is bleak. Already facing an economic downturn prior to 2020, China’s growth continues to stall. Many manufacturers and large companies are jumping ship, recognizing that Zero COVID is here to stay. Early on, many had assumed such large-scale lockdowns would fade soon. But the realization now is that China is no longer a stable place for business.

Already a popular alternative to China, Mexico has seen a lot of these businesses reshoring to their pro-business country. Shortages, the container crisis, and supply chain issues have only exacerbated the problem, and what started as a gradual shift is becoming a mass exodus out of China straight to Mexico. The Latin American country enjoys proximity to the US consumer market and a deep pool of skilled, low-cost manufacturing labor.

But Mexico also has a business-friendly track record regarding COVID restrictions. Mexico never mandated vaccines for citizens or visitors and re-opened the US border to non-essential travel in early 2021. It was never closed to business travel. Most of the country returned to pre-pandemic norms in 2021. And while Mexico is facing economic challenges like the rest of the world, there are no massive disruption events like the Shanghai Disneyland lockdown. As a result, a large portion of the business leaving China is headed for Mexican factories. 

These recent stories coming out of China underscore the need to think strategically and long-term in the modern world of manufacturing and business. 

In Mexico, international commerce plays an integral role in propelling the national economy. As such, Mexico’s industrial parks are highly valued as economic drivers, facilitating foreign direct investment and international trade. 

Mexico has invested heavily into infrastructure, including state-of-the-art industrial parks and manufacturing communities. As the country diversifies and enhances these locations, international companies are moving operations to Mexico in droves, cementing the Latin American country’s status as an outsourcing destination of choice. 

Mexico’s industrial parks are highly modern, hyper connected edifices to progress. Great attention is paid to key parameters like telecommunications, energy, transport connectivity, and access to skilled labor pools. Foreign manufacturing companies are able to establish highly functional operations in these complexes, thanks to years of improvements and prioritizing. 

What are Mexican Industrial Parks?

After the expiration of the Bracero Program, the United States and Mexico created a program to provide employment to Mexican workers while meeting the labor needs of US industry. This program became known as the Maquiladora system or IMMEX. 

Under IMMEX, US companies can import raw materials and equipment into Mexico duty-free for the purposes of manufacturing finished products for export back to the US. These finished products can themselves be exported duty-free, providing they meet certain basic criteria. Because of the demand that came from early maquiladora manufacturing, Mexico’s first industrial parks were built. 

These parks are essentially defined as certain urbanized areas dedicated to optimal manufacturing and logistics activity, complete with all necessary utilities, permits, and infrastructure. These industrial parks provide an optimal space in which companies can lease or purchase manufacturing facilities. In order to maximize the potential for their tenants, parks often seek special certifications, including but not limited to:

• Authorized Economic Operator for Industrial Parks
• Safe Park Program
• Green Park Certification
• Smart Parks
• Social Responsibility, Environment and Governance Policies for Industrial Parks

Prevalence of Mexico’s Industrial Parks

Since the early 1990s, Mexico’s number of industrial parks has exploded. Primarily located along the northern border with the US, but also located throughout the country, Mexico’s industrial parks are many.

• Approximately 24 of Mexico’s 32 states have industrial parks.
• There are well over 350 total industrial parks at this time.
• Nearly 3,500 companies own or lease space in these manufacturing communities.
• Nearly two thirds of these companies are foreign or international.
• Mexico’s industrial parks house over 45 million square meters of industrial buildings.

The states with the highest concentration of industrial parks are located in the north, starting with Baja California. But some of the central states also have high densities of these communities. In fact, just five states account for over 80% of Mexico’s industrial parks: Baja California, Nuevo León, Estado de México, Guanajuato, and Chihuahua.

Cost Considerations

When choosing an industrial park to join, there are several cost factors to consider:

1. Transportation
   
   

If your market is the United States, choosing a location in a border state makes the most sense. You should also consider accessibility via railways, land-entry ports, major highways, etc.

2. Population Density

Mexico’s cost of labor is substantially lower than in the US. And in more densely populated areas, these costs are likely to be lower than in sparsely populated regions. 

3. Utilities Availability

Plant access to utilities like gas, water, and electricity should be factored in. The average cost for industrial electricity in Mexico is about 2.3 pesos per kilowatt hour. Water and gas prices tend to stay the same from region to region. Factories can request a direct line from utilities authorities.

4. Rental or Purchase

If you choose to lease rather than purchase your factory, plan on a standard lease duration of 5 years. While the average price per square foot varies for each industry, it will likely come to about 8-9 pesos. 

5. Administrative/Startup Costs

The cost to open a foreign operation or establish a factory on foreign soil can be difficult to estimate. However, most of these administrative and start-up costs can be minimized or eliminated by partnering with a shelter service, under whose umbrella your company can operate seamlessly. 

While manufacturing is hugely important to Mexico’s overall economy, one particular industry dominates them all. Automotive manufacturing in Mexico has grown to become one of the strongest industry hubs in the world. 

Breaking it down by the numbers, the statistics show a vibrant manufacturing sector that has grown to an impressive size in recent years and will continue to lead the way in capacity, innovation, and profitability. 

The History of Automotive Manufacturing in Mexico

Stemming all the way back to the early 20th century when Daimler, Renault, and Buick established small factories in Mexico city, Mexico has been building cars for a long time. Ford built a factory there all the way back in 1925, making it the longest running auto brand still in the country today. 

After experiencing ups and downs for most of the century, automotive manufacturing finally took off in the mid 1990s, thanks to the advent of the NAFTA (now USMCA). Mexico’s economy was on the upswing, and several major brands renewed their commitment to the Latin American location. Other brands opened there in recent years to feed the renaissance. 

In 2005, Mexico’s annual passenger car sales tipped one million units. Hybrid and EV carmakers soon began investing in Mexico for the long term – a trend that is only intensifying. Dozens of makers of trucks, luxury cars, passenger vehicles, and industrial vehicles have since poured billions of dollars into the country’s automotive industry. In just the first few months of 2014, the nation’s auto industry saw an investment of more than $10 billion USD. 

Currently:

• Mexico is host to around 300 R&D centers, 50+ auto brands, and 500+ models.
• Auto manufacturing accounts for 17.6% of Mexican manufacturing.
• Mexico is the 2nd largest automotive manufacturer in the Western Hemisphere.
• Mexico makes at least 3 million vehicles per year (4 million in 2017).
• Mexico is the 6th largest manufacturer of heavy-duty cargo vehicles.
• The auto industry there employs about 1 million workers.
• Automotive manufacturing accounts for 3.5% of the country’s GDP and 20% of manufacturing GDP.
• Mexico is the 4th largest producer of automotive parts worldwide ($94 billion USD in annual revenue).

Manufacturing for Export

Without a doubt, the bulk of automotive manufacturing in Mexico is for the purpose of exporting around the world. Thanks to numerous free trade agreements, but especially the USMCA, manufacturers in Mexico may import raw materials, parts, and equipment into the country virtually duty free. The finished product can then be exported to the US or other countries with little to no tariffs. 

According to USMCA terms, as long as 70-75% of the vehicle’s content originated in North America, there are no tariffs on exports. This has facilitated a booming export manufacturing industry for automotive parts and vehicles in Mexico.

• A full 90% of all vehicles produced there are later exported to other countries. 
• 76% of them go to the US alone. 
• Mexico is the largest exporter of tractor trucks in the world. 
• Mexico is the 2nd largest export market for US medium and heavy-duty trucks.

Major Players, Sectors, & Regions

The northern border is especially central to automotive manufacturing in Mexico, but there are industry hubs and clusters throughout the country. 

Manufacturers primarily operate in northern regions like Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, and San Luis Potosí.

Original equipment manufacturer or OEMs also maintain robust plants in Guanajuato, Aguascalientes, Jalisco, Estado de Mexico, Hidalgo, Morelos, Puebla, and Veracruz.

Automotive parts producers are highly integrated into the supply chains they feed, but they are especially concentrated in Coahuila, Chihuahua, Nuevo León, Guanajuato, Queretaro, Puebla, Tamaulipas, and Estado de Mexico.

Heavy-duty vehicles are primarily manufactured along the northern border in Baja California, Coahuila, Nuevo León, Sinaloa, San Luis Potosí, Guanajuato, Querétaro, Hidalgo, Veracruz, as well as Estado de Mexico.

Virtually all of the major automotive brands and auto parts makers have a presence in Mexico, including (but not limited to):

• Audi
• BMW
• Ford
• General Motors
• Honda
• Jeep
• Hyundai
• Kia
• Mazda
• Mercedes Benz
• Nissan
• Dodge
• Toyota
• Volkswagen
• Cummins
• Freightliner–Daimler
• Kenworth Mexicana
• Mack Trucks de México
• International-Navistar
• Volvo Group VW 
• Isuzu Motors
• Bentley
• Cadillac
• Porsche
• Maserati
• Ferrari

There are several sub sectors within Mexico’s automotive manufacturing industry, including:

• Original equipment (OEM)
• Aftermarket parts
• Electric vehicles (EV) and hybrid vehicles
• Remanufactured products
• Heavy vehicles
• Other specialty motor vehicles

Automotive Industry Forecast

In spite of the slowdown that occurred in the 2020 crisis, Mexico is rapidly regaining lost ground in automotive manufacturing. In 2021, annual revenue from passenger vehicle manufacturing reached over $51 billion USD. 

Market analysts predict steady industry growth over the next four years. In spite of a slower recovery in light vehicle output, Mexico is still the leading automotive manufacturing country in all of Latin America. The OE market alone is currently worth $73 billion USD and represents one of the greatest opportunities for growth in the industry. Already, the sub sector is comprised of over 2,500 production companies. 

As of September of this year, car production is up more than 31% over last year. This represents the 5th straight month of production growth.  Ford, GM, and Toyota are seeing the bulk of this growth.

As Mexico pioneers innovations in big data, wireless technology, electrification, and other leading trends, the Mexican automotive market will increase in relevance and market share. Many in the industry believe that sourcing in Mexico will help alleviate the semiconductor chip shortage that plagues the car market today. With extensive supplier networks and more strategic access to the US market just over the border, automotive manufacturing in Mexico is gaining more attention and renewed confidence.

For nearly 200 years, textile manufacturing in Mexico has flourished. Currently, the Latin American country boasts numerous industry clusters and specializations for both apparel and non-apparel textiles and a total economic output in the billions of dollars. 

In spite of the slowdown in the past two decades, Mexico’s industrial activities in sewing and textile manufacturing have historically grown steadily. Recent studies indicate the country is poised for a resurgence in skilled textile manufacturing for not only apparel, but also several other related industries.

The History of Textile Manufacturing in Mexico

Weaving was first mechanized in Mexico during the era of Porfirio Díaz, around 1900. However, Mexico’s first textile factory actually opened in 1830 in the city of Puebla. Since then, maquiladora factories have arisen throughout the country and especially on the border with the US to create a thriving industrial sector.

The history of textile manufacturing in Mexico is one of success and advancing skill and sophistication. On average, the industry has grown between 5% and 7% per year until the late 1990s. During this period, China began outcompeting Mexico for US textile imports.

However, in the past decade, Mexico has pivoted to more skilled industrial sewing for use in other important industries while also contributing extensively to apparel applications. Mexico’s textiles were once highly prized for their local artistic influences, but now they compete on a global scale, thanks to an extensive free-trade network.

Textiles and the Mexican Economy

A full third of Mexico’s economy is based in manufacturing. And textiles and apparel production make up approximately 3% of Mexico’s gross domestic product. Mexico’s textiles sector is quite versatile, encompassing the manufacturing of finished apparel and textile goods to the production of materials like yarns and synthetic fiber production. 

• Mexico produces about 3 billion pieces of apparel per year.
• Mexican apparel exports are worth around $4.3 billion USD.
• Annual textile exports total around $7 billion USD.
• Mexico’s total retail apparel market is valued at about $27 billion USD.
• Mexico is the 4th greatest textiles exporter to the United States.
• 70% of Mexico’s textiles are exported to the US.
• Nearly 640,000 skilled workers are employed in Mexican textile manufacturing.

Mexican textiles utilize a variety of materials, including nylon, polyesters, and natural fibers, to produce products in fashion, technical, household, and other applications. Textile manufacturing in Mexico often feeds the Mexican auto manufacturing industry and other related sectors like aerospace and even medical equipment. 

Domestic Market Set for Growth

Domestically, Mexico’s textiles and apparel market represent a significant opportunity for Mexico’s textiles industry. According to a recent report, Mexico’s textiles market is set to grow nearly $4 billion USD in the next five years. Year-over-year growth is expected to approach 2.93% this year and then through 2026 accelerate at a CAGR of 4.13%. Incrementally, this means an annual growth rate of nearly 4%.

Some of the major retailers and apparel companies in Mexico include:

• Aquasea Inc.
• CS Tech Contract Manufacturing
• Delta Apparel Inc.
• El Grande Group
• Grupo Denim
• Grupo Siete Leguas
• Juegos Divertidos SA
• Roma Mills

Some of the primary textile manufactures in Mexico include:

• Delta Apparel
• Grupo Denim
• Levi Strauss & Co.
• Carolina Performance
• Toray Industries

Hubs for textile manufacturing in Mexico are primarily located along the northeast border and central Mexico. Key manufacturing states include:

• Mexico State
• Hidalgo 
• Tlaxcala
• Jalisco
• Queretaro
• Coahuila
• Sonora
• Guanajuato
• Nuevo Leon
• San Luis Potosi

Since 2004, all tariffs on textile imports from Mexico have been lifted by the United States. The US is the world’s largest importer of textile products, and Mexico is strategically positioned to continue supplying a significant portion of this demand. 

In the US, many are eyeing the likelihood of an inevitable recession, inflation is still roaring, and energy prices remain high. Europe, too, is feeling the economic pain of high energy prices and a bear market. But even if the world is heading into a downturn, it will not affect all countries the same. 

In the past month, several positive signs have emerged for the Mexican economy, which has struggled since the 2020 crisis. In spite of headwinds, the manufacturing sector has been churning out hope for Mexico’s economic future. While the Latin American economy will likely be negatively impacted by a global recession, especially if it is felt sharply by their neighbor to the north, optimism abounds. 

Positive Inflation Signals

Mexico has not been immune to the inflation the rest of the world is experiencing. Recent inflation reports have put Mexican annual inflation, year over year, at well over 8%. This has caused challenges to the Mexican economy. 

But a recent report from the Mexican Finance Ministry showed better-than-expected easing of the national inflation rate. By the end of 2023, Mexico’s rate of inflation should be down from a high of 8.6% to just 3.2%. This is consistent with the prediction of Mexico’s central bank, Mexico Bank. Likewise, in just the next couple of months, inflation is predicted to fall to 7.7%.  

There are a few factors potentially contributing to this positive trend. Some have pointed to President Obrador’s conservative fiscal policy during the COVID crisis. The Mexican president spent far less than the US government and other regional leaders in post-COVID relief programs. The administration has been very hesitant to open new debt. As such, inflation may be reigned in sooner than it may have been had spending levels been higher.

Mexico Set to Reclaim Pandemic Losses

About a month ago, Fitch Ratings released a report on Mexico’s economy, showing the country is on track to regain the pre-COVID levels of economic growth. 

In 2020, Mexico suffered its biggest contraction since the Great Depression. And like most countries, the road to recovery has been fraught with disappointment and unexpected challenges. Nevertheless, the industrial and manufacturing sectors have looked positive, leading many to remain optimistic about Mexico’s economic outlook post-COVID. 

Yet the report acknowledged Mexico’s likely trajectory to reach the levels of Q1 2020 at some point in 2023. Now, the cumulative growth will be near 0%, but the losses will likely have been regained, and Mexico’s growth will be able to move on from the recent crisis.

Q3 Numbers Better Than Expected

Most recently, the numbers came out for Mexico’s economic growth in Q3 of 2022. And results were promising, leading J.P. Morgan to revise their outlook for the Mexican economy. Analysts with the financial leader noted that the manufacturing sector was producing more than previously expected. 

The revised forecast now calls for 1.5% growth for this period, up considerably from just .5%. For the year, the forecast now calls for 2.2% annul growth, up from 2%. Manufacturing was largely to thank for this elevated outlook. 

Signals among manufacturing have been mixed in the past. But this recent hike in Q3 numbers were cause for optimism. However, the forecast did note that overall, Mexico will likely experience a slowdown next year, as will many economies around the world. 

Infrastructure Investments

In addition to the positive signals coming out about Mexico’s economic prospects for the next year, there is the bedrock of infrastructure the country has been laying down. This investment in the future capacity of Mexico’s manufacturing and industrial sector will likely help ease the velocity of next year’s slowdown. 

In 2020, President Obrador announced a rebooted infrastructure revitalization program to boost the Mexican economy long term. Mexico’s national government is partnering with the private sector to invest approximately 300 billion pesos in approximately 39 infrastructure projects. 

These investments will ensure Mexico’s continued viability and strength as a global manufacturing hub and healthy economy in spite of the challenges and crises the world is facing.

If you’re considering nearshoring to Mexico, you’re probably wondering how to go about it. Opening a factory in another country is sure to be a complex and complicated ordeal. It’s crucial to understand the various modes available to you.

While there are several entry models, shelter manufacturing in Mexico is the easiest and most popular. But how do you go about opening a factory with a shelter service? How does shelter manufacturing differ from other modes like contract manufacturing or opening a maquiladora? What are the pros and cons? And how quickly can you be up and running?

These are the questions we’re going to answer in this quick how-to guide for shelter manufacturing in Mexico.

Why Use a Shelter?

Manufacturing in Mexico offers numerous advantages – from the deep labor pool to the extensive free-trade access to the proximity. The neighbor to the south has been a popular outsourcing destination for US manufacturers for several decades. 

But how you enter Mexico is important to the goals you hope to achieve. Depending on the size and needs of your organization, you may prefer one mode of entry over another. But for most small-to-mid-sized companies, shelter manufacturing makes the most sense.

For several reasons, partnering with a shelter service can be key to your company’s success. Some of these reasons include:

1. Faster Startup – Opening a wholly owned subsidiary in Mexico can take a year or more, whereas a shelter operation can usually be up and running within 6-12 weeks.
2. Less Tax Exposure – Mexico is already a smart choice for reducing tax liabilities, but shelter manufacturing can reduce this exposure even further.
3. An Established Network – Shelter providers are already entrenched in the local economy and culture, allowing you to plug into deep relationships right from the start.
4. Less Administrative Hassle – Because the shelter company is handling all administrative tasks, shelter manufacturing is the hassle-free option.
5. More Security – Shelter companies already know the pitfalls and dangers to avoid.

Maquiladora vs. Contract vs. Shelter

In the 1960s, Mexico created the Maquiladora system that in the 90s blossomed into the full-fledged manufacturing powerhouse it is today. Under this program, known as IMMEX, Mexican-owned factories, or maquilas, manufacture goods for US companies with certain preferential tariff treatment. Under the NAFTA and later USMCA, this came to mean virtually duty-free import and export for most goods and inputs. 

Another option for US companies to take advantage of Mexico’s manufacturing advantages is to place orders with contract manufacturers. This is a much shorter-term and flexible arrangement, but allows smaller companies a quick and relatively painless entry into Mexican manufacturing, albeit with less control. Manufacturers with varying demand for their products and a need for simplicity find great value in contract manufacturing.  

But for those companies wanting maximum control and value, operating a maquiladora factory is the go-to. This option means owning and controlling a dedicated factory, operating within the Mexican legal framework and geography, importing inputs and exporting products virtually duty free over the US border. However, shelter manufacturing further simplifies the process and maximizes savings by shifting the administrative and legal load to a partner.

Opening a Shelter Manufacturing Operation

Partnering with a shelter company offers many advantages, primarily in administrative hassle, but also in cost. One way in which shelter manufacturing offers greater savings than a mere maquila is the VAT tax. Initially, maquiladoras did not pay VAT. However, in 2014, maquilas were required to post a VAT tax up front, which would be refunded six months later. Most shelter providers have a special certification that allows them to forego this deposit, saving your company up-front expenditure.

When entering Mexico with a shelter service, you must first settle on the kind of shelter services you require. Common services provided include among others:

• HR and recruiting
• Labor relations and payroll
• Import/export
• Security
• Site selection
• Tax and compliance issues
• Vendor and supplier agreements

As the legal entity in Mexico acting on your behalf, the shelter company you choose will greatly reduce the administrative side of your business. In turn, you will be free to focus more on the core manufacturing tasks that set your products apart. This division of responsibilities is an important aspect to nail down with your shelter provider. It’s important to understand just what all they are taking off your plate.

You should also do your due diligence before choosing the right shelter partner. Ask them key questions like:

• What are the specific services provided in each function (HR, environmental compliance, tariffs, etc.)?
• Will your business be under an umbrella business license or a dedicated license the shelter secures for only your business?
• What does the shelter company provide under real estate? Will the lease cover all property taxes, maintenance, etc.?
• Are there other charges to expect along the way, or is the quoted fee all-inclusive?

Beyond this research and discussion, your company is responsible for little more than providing the working capital, training in your processes, and any specialized equipment your products require.  As a turnkey solution, saying yes to a shelter instantly simplifies Mexico for you. 

Reputable shelter manufacturers even provide step-by-step assistance in planning the move, weighing logistics and cost considerations, and arranging for you to see your new manufacturing plant as soon as possible.

A crisis was recently averted when a massive railroad strike in the US was avoided in negotiations in the 11th hour. However, the threat could still return, as tensions remain high. And the US economy is already in a tenuous position should it occur. The reduced freight capacity in an already strained network could be disastrous for US manufacturers. These effects would compound existing problems in the supply chain, causing damaging effects to reverberate for months to come. 

However, there are precautions manufacturers can take to mitigate the risk and minimize disruptions, should the threat of a labor strike reappear. Labor leaders have called off the strike for now, but the narrow miss should serve as a warning call to be prepared in the event of a massive strike like this, which is still very much in the realm of possibility.

Railroad Workers Call for Improved Conditions

In recent months, about a dozen labor unions representing the nation’s railroad workers have been calling for a national railroad strike to demand better working conditions. They have complained of strenuous schedules and even being penalized for taking time off for medical reasons. 

According to negotiation proceedings in this looming strike, the unions allege that these systematically bad time-off policies and practices hurt the railroads’ ability to hire new employees and have already forced out thousands of employees. Union representatives have referred to the treatment as harassment and demanded better time-off policies. Short of reaching an agreement, a national strike was set to shut down the nation’s freight railroads on Friday morning, September 16.

In response, the National Carriers’ Conference Committee (NCCC), who represents US freight railroad companies in national collective bargaining, insisted workers already receive significant time off and fair pay raises built into their contracts. 

Crisis Averted

Last month, the Biden administration assembled an emergency board to issue recommendations and reach a satisfactory compromise. While ignoring the demand for a new attendance policy, the board did recommend a pay-raise schedule to increase wages 24% by 2024 along with bonus increases. 

Finally, a tentative deal has been agreed upon as of Thursday, September 15. While most of the unions struck deals with the railroads days or weeks ago, there were three significant holdouts: the Brotherhood of Locomotive Engineers Trainmen (BLET) the SMART Transportation Division (SMART-TD), and the International Association of Machinists and Aerospace Workers (IAM). These three holdouts represented nearly 62,000 workers – over half of the entire railway labor force.

This tentative agreement includes wage increases and bonuses with no increases to insurance copays and deductibles, as well as more time off for certain medical events. While the Biden administration is celebrating a win, this agreement is tentative and subject to ratification by the unions’ memberships.

The Damage Potential of a Railroad Strike

Should the strike have continued as planned, the potential damage to manufacturers and the US economy as a whole are substantial. According to a recent report by the Association of American Railroads (AAR), the strike would:

• Mean idling over 7,000 trains per day
• Cost US producers $2 billion per day of the strike in economic output
• Trigger retail product shortages and widespread manufacturing shutdowns
• Result in disruptions to hundreds of thousands of passenger rail customers

The timing for the strike is incredibly inopportune. The US economy is already unstable and reeling from shortages and spiking inflation. Hiring problems continue to exacerbate the situation. And the supply chain is fragile and stretched thin for many industries. Freight railroads account for over 30% of all freight movement in the United States. 

Risk Mitigation

For now, the railroad strike has been averted. But the agreement must be ratified by the labor union memberships. And in this window of time, manufacturers should take stock to minimize risk should the threat of a strike return. There simply isn’t enough trucking capacity available to offset the amount of freight handled by rail. This is a wakeup call to take mitigation steps immediately. 

Jenny Dobmeier, of the University of Denver, recommends researching raw material substitutes and preparing for a drawdown on inventory on the supply side. On the demand side, manufacturers can prioritize orders to first serve their most important customers and secondarily fulfill non-contractually obligated orders or delay them if called for. 

Ideally, manufacturers should assess their shipment situation. How many of their shipments come directly from the port? How many of them are typically sitting in rail yards or on freight trains? If need be, arrange for alternative transportation. Shipments arriving from Asia should potentially be re-rerouted to Canadian or Mexican ports to circumnavigate rail entirely. 

However, many if not most manufacturers do not receive freight directly from railroads and do not have the ability to re-route as needed. These companies should analyze their immediate and critical material needs and then discuss options with freight providers. During this window, it may be prudent to ask them to prioritize trucking for critical materials first.

Next, manufacturers should conduct preliminary research local suppliers, even if more expensive. Communicate with them about your needs should the negotiations break down and a railroad strike take place in the near future. Having an open relationship with these suppliers can be crucial, even if you pay a higher price to ensure you have what you need when you need it.

Lastly, in the long-term, consider recalibrating supply chains for a more local and more resilient base. While it has been profitable for decades to source materials from around the world, many are now re-thinking globalization and the risk exposure it comes with. Ensuring sustained productivity and flexibility even in crises is becoming more and more important in our new world. 

With political changes and changes in technology, electric vehicles are becoming more widespread. And Mexico’s already strong automotive manufacturing sector is preparing to capitalize on this trend. New companies are announcing investment in Mexico EV manufacturing, and predictions for growth over the next few years are overwhelmingly optimistic.

The Rise of EV Automotive

Last month, California dropped a bombshell on the world by passing legislation to ban all gas-only cars by 2035.  This move has been viewed in the US as somewhat extreme, yet several other US states have signed onto California’s emissions standards. The goal is to reduce greenhouse emissions in the future by requiring all new vehicles in California and partnering states run on either electricity or a combination of electricity and gasoline. 

This is a historic moment for California, for our partner states and for the world as we set forth a path toward a zero-emission future. 

– Liane Randolph, California Air Resources Board Chair

It is likely that this will set into motion a trend to develop EV technology faster. Already, automotive manufacturers are identifying opportunities to re-tool existing factories or invest in research and development to propel this young industry forward. 

In response, EV manufacturer, TESLA, called for a faster route to EV car sales. Toyota also is investing heavily in plug-ins. And Steve Douglas, a vice president at the Alliance for Automotive Innovation, has announced these changes represent “the most sweeping and transformative regulations in the history of the automobile.”

Mexico EV Manufacturing

Mexico is already a leading automotive manufacturer for the world, and investment in this sector is rising rapidly.  Currently, Mexico:

• Employs 1.7 million skilled laborers in automotive manufacturing
• Is the 7th largest auto producer in the world
• Is the 5th largest producer of automotive parts in the world
• Has over 40 free trade agreements
• Hosts major automotive manufacturers like Ford, GM, BMW, Toyota, and many others

While automotive manufacturing represents a full 3% of the manufacturing output of the country, currently, the country is only selling about 45,000 units per year. But Mexico is not sleeping. As this monumental shift occurs in the automotive industry, Mexico EV manufacturing is kicking into high gear and preparing to capitalize on this trend.

Consultancy firm, Frost & Sullivan, recently forecasted that sales of EVs and hybrid vehicles in Mexico will grow at a sustained rate of about 25% per year through 2030 to eventually produce two thirds of Latin America’s EV output. 

Growth Signals

These growth predictions are substantiated by solid growth signals and tangible moves to increase Mexico’s capacity for manufacturing electric vehicles. 

In addition to a $700 million USD investment in their Mexican automotive production, Nissan also announced they are bringing the Nissan Kicks e-POWER technology to Mexico. Labelled the “electric rebellion,” Nissan claims this new technology will help their fleet achieve 50% electrification by 2030.

General Motors recently announced a new investment in Mexico EV manufacturing in the amount of at least $1 billion USD. Their Ramos Arizpe production complex is set to produce at least one electric vehicle beginning in 2023. 

Stellantis NV, the owner of Jeep, Ram, and Peugot brands, is in discussions with Mexico’s President Obrador over retooling their Saltillo, Coahuila plant to manufacture electric and hybrid vehicles. The move represents multiple billions of dollars in future investment. They are also considering investment in EV manufacturing at their facilities in Mexico state, where they already make the compact Jeep Compass crossover, soon to be electrified in 2024.

Noodoe, a global leader in EV charging technology, recently announced their expansion in Mexico. The company has extended their charging footprint in Mexico by installing multiple stations at the Holiday Inn Express & Suites Otay.

Government Preparations

The Mexican government is also getting into the act. They recently announced that Mexico will host up to 180 production plants for EV components within just a few years. They’re already planning to expand the Santa Teresa, New Mexico, port of entry in the next year to accommodate explosive growth in Mexico EV manufacturing activity along the border. 

California…has decided that all of its new vehicles must be electric by 2035. What does that mean? That we must build factories to manufacture batteries, that we need to procure lithium, cobalt, copper and nickel, that we need to modify all of our industrial processes, that we need to accelerate the technology that goes hand in hand with electromobility.

– Mexican Foreign Secretary Marcelo Ebrard

The Mexican government is working with government officials in the US and global auto makers to ensure the country’s manufacturing infrastructure can support crucial activities and requirements like engine production, energy accumulation and storage, and speed controls, etc. It is likely that in the next few years, as demand rises, Mexico EV manufacturing will rise up to meet it.

When it comes to being competitive on a global scale, many companies choose to manufacture in Mexico. But if you’re new to the process, you may be wondering what the best methods are. Fortunately, regardless of your unique situation or needs, you have options. 

Let’s look at the most popular ways to manufacture in Mexico and consider their pros and cons. Each method is right for some, but not all. Depending on your current needs, capacity, and desired outcome, you will probably find one of these options better suited for your company than the others. 

Let’s break each of them down one at a time.

Contract Manufacturing

Contract marketing is simply when one company contracts with another company to manufacture components or parts on their behalf. If your company has demand for a developed product but doesn’t have quite the infrastructure required to meet this need, contract manufacturing may make sense if you want to manufacture in Mexico.

This option enables companies to meet changing customer demand rapidly. Yet they don’t need the capital commitment required of a full-scale manufacturing facility in Mexico. Put simply, contract manufacturing is a very low-risk, cost-effective, and short-term investment.

Knowing when contract manufacturing in Mexico is right for you requires evaluation of the pros and cons. This specific option means:

• Greater efficiency and a smaller footprint
• Reduced control over the manufacturing process
• Minimal learning curve
• Fast startup (usually a few weeks)
• Greater risk of intellectual property violations
• Minimal or no regulatory risk
• Short-term over long-term savings
• High scalability and flexibility

If your business is small, prioritizes simplicity and convenience, and experiences frequent changes in product demand, then you may want to choose a quality contract manufacturer to open the benefits of Mexico to you. 

Open a Standalone Factory

Many companies opt to open a standalone factory in Mexico called a maquiladora. In a nutshell, a maquiladora is a factory that operates on a tariff-free or favored duty basis, while the parent company provides administrative support and oversight from within the US. Sometimes called maquilas, these factories are owned and operated by US companies who staff them with Mexican workers and import materials and export finished goods duty free or near duty free, providing certain restrictions and requirements are met. The company is responsible for all aspects of this factory just as they would be at home.

This method can be a very cost-effective way to manufacture in Mexico. Manufacturers can take advantage of Mexico’s lower cost of labor, free-trade savings, and reduced shipping costs in comparison with other outsource destinations. It further affords other pros and cons, depending on your company’s needs. For example, opening a standalone maquiladora in Mexico means:

• Maximum control over the process
• A more complex startup process and steeper learning curve
• Reduced risk of IP violations
• Less flexibility and maximum commitment
• Greater responsibility for regulatory compliance
• Long-term over short-term savings
• Longer startup times (typically measured in months)
• Incorporation in Mexico and other legal paperwork
• Direct link to domestic customers (important for expanding footprint in Mexico)

Partner with a Shelter Manufacturer

In short, shelter manufacturing is like taking a shortcut to unlock Mexico’s advantages. A shelter service is the owner of record for the Mexican factory, but the US company wanting to manufacture in Mexico controls the facility. The shelter service handles all administrative and regulatory issues, including labor relations, tariff certifications, government and tax reporting, and can even assist with site selection and more. 

In this way, this option is a turnkey process. Companies can skip ahead of the line and let the shelter company handle cultural and local matters, legal compliance, vendor and supplier networks, acquiring assets, and even logistics and freight considerations. The shelter service handles all the day-to-day processes, freeing up your company to focus on production quality.

There are many reasons companies benefit from choosing this third option, some of which include:

• Fast startup (as little as a few weeks)
• Minimal learning curve
• Greatly reduced tax exposure
• Full control over product design and quality
• Minimal IP risk
• A balance between flexibility and efficiency
• A combination of long-term and short-term savings
• Little to no regulatory risk
• Instant integration with and insider access to the local culture and networks
• No operational or maintenance hassle
• More available time for focusing on core goals

Using this option, companies may manufacture in Mexico as a division of the shelter company. The US manufacturer hits the ground running, already fully compliant with Mexican regulations and standards, and fully plugged in and equipped from the start with all the tools necessary for success.

With more and more manufacturers considering nearshoring operations to North America, there is a renewed interest in using a shelter service to do so. In order to regain control of their supply chain and better manage the process, companies want their operations closer. 

Mexico is an increasingly popular alternative to China and East Asia. But investing in an unfamiliar locale can be daunting. This is why it’s so important to understand the strategic benefits of a shelter approach to nearshoring.

What Is a Shelter Service?

Transitioning operations to a foreign country is complex at best. Using a shelter service simplifies the process, but precisely how? When presented with the idea, many executives have questions.

• Just what is a shelter company? 
• How much control or oversight will we retain?
• What sort of regulations and restructuring will this cause?

These questions shouldn’t be an obstacle. In fact, a shelter service exists to remove obstacles and simplify the outsourcing process. Here’s a quick breakdown:

A shelter company acts as the owner of record of a Mexican corporation. They are fully established, often have existing workforces and supplier networks in place, and some even have factories already in place. Your company may partner with them to retain full control over your manufacturing process and focus on quality and design while the shelter service focuses on all administrative tasks, such as:

• Recruiting
• Human Resources
• Permits and regulatory compliance
• Accounting and payroll
• Import/Export tax compliance
• Site selection and construction
• Freight coordination
• Government reporting

Why Mexico?

Mexico offers manufacturers numerous strategic advantages over producing in the States. Of course, the primary consideration in outsourcing is cost savings, and Mexico excels in this area. But it’s not the only reason to do business in Mexico. Some of the biggest advantages of manufacturing in Mexico include:

• Skilled Labor – Mexico’s labor force is not only suited to basic assembly, but also for highly skilled manufacturing jobs.
  
• Free Trade Access – Manufacturers operating in Mexico enjoy preferential-tariff trade options around the globe with over 50 nations.
  
• Cost Savings – Mexico’s labor costs are now on par with China or lower, import and export with the US is now duty free on most goods and materials under the USMCA, and shipment costs across the border are minimal.
  
• Flexibility – Maintaining a supply chain near to your distribution network just makes sense; nearshoring to locations like Mexico allows for agility in responding to changing market trends.

5 Benefits of a Shelter Service

1. Fast Startup

Companies that go it alone can expect their startup process to take many months, navigating the regulations, permits, and culture, as well as building vendor networks from scratch. Those that partner with a shelter service can expect to take advantage of a turnkey process ready for their products and brand vision. The logistics and paperwork are handled by the shelter company, while the manufacturer makes crucial decisions and focuses on product quality. A new factory can be up and running in a matter of weeks.

2. Reduced Tax Exposure

Manufacturers partnering with a shelter company enjoy certain tax incentives and a reduced overall exposure. They are not liable for Mexican income tax. They do not have to deal directly with any tax authority in Mexico. And they may import materials and equipment into Mexico duty free while exporting finished goods at 0% tariff. The shelter company ensures all compliance and regulatory paperwork is in place to enjoy maximum savings.

3. Established Relationships

Shelter companies are already entrenched in the local scene. They already have relationships with labor groups, they understand how to pay their people a fair wage to ensure loyalty, they know where to find the safest facilities, and they have entire supply chains and vendor networks established.

4. No Operational and Maintenance Hassle

Part of running any factory is handling maintenance and utilities. This can be particularly complex in a foreign country. Fortunately, a shelter company specializes in expertly managing these issues to mitigate impact and maximize savings and efficiency.

5. Security

While Mexico is safe for business, there are certain risks that can be avoided through using a shelter service. These companies have highly secured industrial parks, or they know what areas of town to avoid. Further, they contract with reputable security firms to keep things running smoothly and safely, from factory construction to personnel security to guarding shipments and equipment. 

The complexity and daunting unfamiliarity of opening a factory in Mexico should be no reason to forego its numerous advantages. Mexico is helping successful companies in all industries reduce costs and compete on a global level. A shelter service is the stress-free way to maximize those savings and ensure maximum benefits for years to come.