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Mexico had a bad week in the international press. Cartel violence erupted in several states, causing tourism to crater over the weekend and once again reinforcing the stereotype that Mexico isn’t safe.

Fortunately, Mexico remains a relatively safe place to do business and travel, episodic violence notwithstanding. However, the events of the past week have reminded international travelers of the risks of being in Mexico. And what’s worse, they have underscored the problematic policy Mexico’s federal government currently follows in handling drug cartels.

Convenience Stores and Cars Set on Fire

The headlines last week weren’t pretty. It started with a string of strikes in the state of Jalisco. Buses, cars, and convenience stores were torched by the Jalisco New Generation cartel. Over the next few days, the violence spread to involve several major metro areas, including Guadalajara, Guanajuato, and León. 

A couple days later, gang violence in a prison in Juárez spilled out into the surrounding border city. Random shootings killed several innocent bystanders. On the west coast, in the border city of Tijuana, at least two dozen cars were hijacked and burned, although no one was killed. Across the border region, including Mexicali and other cities, numerous fires and barricades were reported. 

Overall, this violence seems random. The cartels clearly targeted innocent bystanders to create terror and evoke a response. But it’s not clear what their motive was or what the desired outcome is. 

Mixed Signals

There are conflicting theories as to what prompted this recent spate of cartel violence. Perhaps the greatest cause for concern in this instance is that government officials are conflicted in their explanations for it.

President André Manuel López Obrador, or Amlo, as he is called, has urged calm. He issued an address from the national palace in which he assured Mexicans, stating, “I want to tell the people of Mexico to be calm, that there is governance, there is stability.” 

His explanation for this outburst in cartel violence sounds a bit conspiratorial, seeming to allege that there must be some sinister involvement on the part of the conservatives, who did well against his party at the polls in the last election. At the very least, he accused the conservatives of trying to amplify this recent outburst to paint his administration in a bad light. He theorized:

I don’t know if there was a connection, a hidden hand, if this had been set up. What I do know is that our opponents, the corrupt conservatives, help in the black propaganda.

But the conservatives have fired back that this is yet another sign of a failed policy. Amlo came to office, promising “hugs, not bullets” as the preferred attitude towards the cartels. But as the US has pressured his administration to be tougher on cartel violence, he has placed the sole responsibility in the hands of the military, rather than local police. In the past year, the federal government has reversed its hands-off policy and begun targeting high ranking cartel leaders. 

This past July, Mexican marines captured fugitive drug lord Rafael Caro Quintero. And on August 9th, the federales attempted to capture a senior leader of the Jalisco New Generation cartel, provoking the string of cartel violence this past week. This reversal in strategies seems to have placed a lot of pressure on the drug cartels. But these arrests have not been undergirded by strategic financial pressure. Mexico’s government does not focus on seizing assets or targeting the financial operations of the cartels.

Meanwhile, Defense Secretary, Luis Cresencio Sandoval, attempted to spin the recent cartel violence as a desperate attempt for the cartels to get attention or remain relevant. His statement implied that these cartels are in fact much weaker under Amlo, and that their attacks show how successful the current government strategy is.

Exercise Caution in Mexico

In spite of the recent cartel violence, Mexico remains a relatively safe and peaceful location for business and travel. In spite of all the bad press and the occasional outbreak, Mexico’s public safety is consistently ranked high. Most violence is related to infighting within the cartels. But like any other country, visitors there should exercise caution. 

Conducting business in Mexico is a special designation and comes with special safety considerations. Businesses should do their research and implement strategic measures to safely operate in Mexico. Here are some helpful considerations to make Mexico a safe place for your business.

• Businesses should operate in securely fenced industrial parks outside the inner cities.
• It’s important to hire reputable security personnel. 
• Use public transportation wisely or authorized taxi services.
• Avoid danger zones by consulting with a shelter service when planning the location of a factory.
• Do not flaunt wealth by wearing expensive jewelry or driving luxury cars, etc.
• Know and understand the laws and regulations pertinent to your business in Mexico.
• Keep tabs on your billfold; pick-pocketing remains one of Mexico’s most commonly reported crimes.
• Don’t go it alone – partner with a shelter service when doing business in Mexico. 

The dream of unbridled growth and flawless production, facilitated by highly efficient, global supply chains, has begun to crumble. Globalization offered manufacturers the chance to minimize waste, streamline production and inventory, and source from all over the globe to reduce costs. But the events of the past two years and even longer have amply demonstrated the flaw of running on such small margins. 

In recent years, complicated and lengthy value chains not calibrated to risk exposure, have proven problematic. Systems built globally for efficiency rather than resilience were more suited to a world in which disruptions were the exception, not the rule. Today, the global economy finds itself in the midst of multiple major disruption events – from the Ukraine war to the closing of the Suez Canal to the semiconductor shortage. What worked in the 1990s is not working today.

Perhaps it’s time to rethink globalization.

Resilience v. Efficiency

Whereas the word of the day twenty years ago was “globalization,” today, we are hearing far more about regionalization, reshoring, and nearshoring. And it’s easy to understand why the shift in thinking.

On average, supply chain disruptions lasting at least a month now occur every 3.7 years. This substantially changes the focus from efficiency to risk mitigation. A supply chain disruption on this scale can be a huge financial blow for a company if they are not prepared. And new events like this are announced seemingly every week.

Yet globalization is still currently the norm. Since 2000, global trade in intermediate goods has tripled. Lengthy supply chains supply most major manufacturers today. But this represents a substantial risk, depending on the shock exposure a manufacturer may have. 

This is particularly acute in a marketplace where consumers expect products to arrive next day or to be available when the need arises. Shipping delays of 4-6 weeks can cripple a company. What was intended to maximize profit by minimizing marginal costs like inventory is now reducing market share and hurting long-term company viability.

CEOs today are realizing the priority should be on resilience. Efficiency is still important, but the ability to weather major disruptions will be the real differentiator in the current decade. 

Nearshoring

Globalization prevailed in a pre-Amazon world. Before next-day and same-day shipping, sourcing materials and parts in Asia made sense for North American manufacturers. Fuel costs were down; transportation across the Pacific was a small price to pay for the low cost of Chinese labor and lower inventories. 

But now, proximity to the consumer is paramount. Already, companies are maintaining higher inventories of key products and parts. The ability to consistently respond to changing consumer demand and fulfill orders within hours or days rather than weeks is critical to business success. Container shortages and spiking fuel costs be damned. The manufacturer of tomorrow must adapt to these and other crises to maintain market share.

Enter the rise of nearshoring.

Prior to 2020, the manufacturing world was already beginning to shift to reshoring supply chains and manufacturing processes. US companies have been bringing manufacturing back to Canada, Mexico, and the United States in increasing numbers for the past decade. 

But now, the urgency of reshoring or nearshoring is more apparent. For all the reasons globalization has cost companies in the past few years, nearshoring can help them.

• Nearshoring greatly reduces transit times.
• Nearshoring affords tighter control of supply chains.
• Nearshoring provides greater flexibility in the event of disruptions.
• Nearshoring can even increase cost effectiveness due to closer and more responsive management of operations.
• Nearshoring greatly reduces or eliminates import/export duties.

Indeed, if an economic model is to succeed, it must be sustainable. And nearshoring is that locally sustainable option.  Many emerging markets are now turning their focus to the capability to foster networks of interconnected local suppliers, sourcing local goods rather than global. This independence from global trade makes these local markets more resilient, much faster delivering to market, and far more flexible to global problems.

A Paradigm Shift 

Whatever the future holds – from more inflation to natural catastrophes to trade wars and geopolitical friction – bringing supply chains closer to home gives the manufacturer more control over the process. To an extent, globalization still works in many situations and industries. And it will likely continue in new forms.

But it should no longer be the dominant paradigm. In fact, regionalization can offer many industries comparable efficiency and lower costs.  But it will require rethinking the way we do business. Nearshoring will involve creative thinking and an eye to the future. 

Nearshoring should be viewed as an overdue transformation in the manufacturing business model. In this way, it is an opportunity to transform and modernize our companies. It is time to update our processes, our systems, and our culture. In order to remain in touch with customer demand and adapt to the digital age, we must think outside the box and inspire those around us to better our companies. 

If you would like help nearshoring your supply chain to North America, we can help. Contact us now for a free consultation.

This month, President Biden is signing into law the Chips and Science Act, which aims to increase investment in the US domestic semiconductor manufacturing industry and decrease US reliance on foreign companies.

The $208 billion bill contains $52 billion in subsidies for domestic chip manufacturers to help build future infrastructure and remedy the current chip shortage facing producers since last year.

To better understand how this new law will impact US manufacturers, it is helpful to understand how the chip shortage came about and what factors are at play. 

The Current Chip Shortage

When the COVID health crisis occurred in 2020, most companies downgraded demand forecasts for the near future. With Wall Street in a tailspin and lockdowns sweeping the nation, the expectation was for a bleak summer and beyond. In turn, the companies that manufacture the semiconductor chips inside many of these products immediately reduced production capacity. 

But within weeks, consumers responded to home confinement by purchasing consumer electronics like laptops, iPads, and cellphones in unprecedented volume. Over the next year, the overall economy bounced back strongly, and demand for new cars, medical devices, consumer technology, and other products containing semiconductors soared. However, the semiconductor industry was entirely unable to bounce back in time to prevent a significant bottleneck in the market.

Fast forward to 2022, and with the help of the Ukraine war and soaring inflation, we’re still in the middle of a chip shortage that has the price of used vehicles at historic highs and backlogs for many of the products that are in the highest demand. 

Chips Are in Everything

Of course, chips are integral to so many products that make up the global economy. The electronics industry relies on them for virtually all products, from medical devices to mobile phones to computers, etc. Semiconductor chips are made up of elements like silicon, germanium, lead sulfide, certain types of plastics, etc. Many devices rely on the unique conductivity properties of these materials, including diodes, photo cells, solar cells, and transistors.

Indeed, the automotive industry cannot survive without them. There are literally thousands of chips in each new car made today. In fact, approximately 40% of the cost of a new car is the semiconductor chips alone. And that percentage is climbing. By some estimates, the shift to hybrid and electric vehicles will increase global demand for automotive semiconductor chips to $67.6 billion USD by 2026. 

The Path to Shortages

While it is easy to understand how the 2020 crisis created a whiplash effect that plummeted production just before an historic rise in consumption patterns, this does not fully explain the current chip shortage. As it turns out, the US actually has been on a path to shortages for many years. 

While companies in East Asia were investing billions of dollars per year in innovation for semiconductor technology, the United States invested very little. In fact, the world’s largest semiconductor producer, Taiwan-based TSMC, has been investing multiple billions per year for well over three decades. In 2022 alone, they invested $44 billion USD. In this way, TSMC and other companies in East Asia have come to possess the lion’s share of the semiconductor industry.

In this context, the one-time $52 billion investment created by the recent Chips and Science Act seems rather insignificant. US-based companies like Apple and Intel are now behind Chinese and Taiwanese producers of chips. And in the past two decades, the US market share of global semiconductor manufacturing capacity has fallen from a high of 37% in 1990 to just 12% this year.

Chip Manufacturing Is Too Centralized

While it seems the new Chips and Science Act will positively impact US production of chips and perhaps help to ease some of the pain in the current automotive and electronics industries in the short-term, one wonders what it will do in the long-term. Will the US continue to outsource most of its chip manufacturing to one or two countries in Asia? Can a one-time investment significantly shake up the global order for chip production?

Some have blamed the shrinking supplier base and consolidation of global semiconductor manufacturing for the current crisis. Approximately 75% of all chips are manufactured in East Asia. These forecasters see the problem only worsening unless companies start expanding the size of their supplier network and outsourcing to other countries like Mexico. 

Mexico already has a strong semiconductor manufacturing industry that turns out nearly 12% of the global supply annually – on par with US production. And as the 4th largest automotive manufacturer and 8th largest electronics manufacturer in the world, the Latin American country is already highly integrated with the industries most impacted by a chip shortage. With an extensive network of suppliers built up over decades, Mexico offers US companies a cost-effective and resilient option for diversifying their semiconductor manufacturing outsource locations to withstand current and future shortages.

When prices begin to rise and the profit levels of production are threatened, it can be a trying time for manufacturers. During times of rising inflation, it is helpful to understand just how rising prices affect manufacturing and what to do about it. We will identify contributing causes, correlating conditions, and mitigation measures you can take to protect your operation and weather the storm.

Inflation is marked by a rising consumer price index (CPI), the given price for a chosen basket of goods or services. A period of inflation is generally considered to be a sustained period of time in which the CPI grows. Over the past year or two, the CPI in the United States has been growing rapidly. And this holds true in Mexico and most countries around the world.

Currently, the inflation rate in the United States is over 9% – the highest rate since 1980. As consumer prices rise in conjunction with increasing costs for virtually every material and input for manufacturers, the Fed has entered crisis mode, raising the interest rate multiple times this year. And more rate hikes are expected during the remainder of the year. 

As a result, manufacturers are facing very tough times:

• Producer input prices rose by over 22% year-to-date in May of 2022. 
• Producer output prices rose by nearly 16% in the same year. 
• Manufacturers must grow by 8.1% just to break even.

And as inflation costs rise, many are preparing to weather a recession, which many consider inevitable at this point. 

Causes of Inflation

Inflation and the way it affects manufacturing is a complex process. One of the chief factors is disruptions and changes in supply and demand. 

As COVID regulations kept people from travelling, their spending habits changed. Consumption levels rose dramatically. This was only accelerated by the stimulus money the US government sent out. But manufacturers had recently reduced output in anticipation of an economic downturn due to market uncertainty. The market’s negative response to COVID had led many producers to slow down and even lay off workers. 

Because of this severe miscalculation, the mismatch of rising demand with reduced supply contributed significantly to price inflation. Companies were simply unable to meet the consumption levels they were faced with. 

Further disruptions from the war in Ukraine only exacerbated the supply-and-demand problem. With supply chains being strained and disrupted by war and economic retaliation, manufacturers were once again unable to adequately meet demand levels.

Labor is another factor contributing to the current levels of rising inflation. After many factories sent workers home, many of them never came back. In what has since become known as the Great Resignation, workers dissipated en masse. The US is now facing a critical labor shortage. As such, maintaining supply is problematic.

Rising fuel costs have also compounded the problem by multiplying manufacturing and transportation costs. With gasoline now around double the price from two years ago, trucks and heavy equipment are all much more costly to operate.

Undoubtedly, the most fundamental and pervasive factor contributing to inflation is expansion of the money supply. As governments print money and fund social programs with money yet to be created, the existing supply of money is diluted. The purchasing power of a given dollar is reduced by the amount of new money pumped into circulation. 

The Trickle-Down Effect

Inevitably, each supplier and vendor along the supply chain is forced to raise prices, which are in turn passed along to the manufacturer and ultimately the consumer. Inflation affects manufacturing in numerous ways. Here are some of the more notable ways inflation trickles down to every manufacturer, from raw materials to suppliers to financing to labor, etc:

• Replacing lower-prices inventory becomes more costly.
• The cost of service rises.
• Fuel and maintenance cost increases make transportation more expensive and problematic.
• Labor costs rise faster than wage increases, causing personnel shortages.
• Throughput is decreased, deliveries are delayed, and invoicing is lowered by higher labor turnover.
• Higher interest rates reduce borrowing and investment capacity.
• Customers purchase less in response to sticker shock.

How Manufacturers Can Mitigate Inflation Damage

Th strategic way in which a manufacturer heads into an inflationary period is decisive in how they weather the storm. Being too cautious can result in stagnation and reduced market share. But too much risk exposure can prove disastrous in an economic downturn. Here are some practical steps to minimize the effects of inflation for your business:

• Increase productivity without increasing labor to avoid or minimize price hikes.
• Reduce material costs by maximizing efficiencies without cutting quality.
• Avoid heavy lending during the boom cycle, as being overleveraged will prove disastrous when buying levels decrease in a recession.
• Repackage products to offer similar package sizing or smaller quantities without changing the familiar consumer price point.
• Increase prices gradually and consistently; price hikes are an inevitable way inflation affects manufacturing, and failing to raise prices will reduce market share and profitability in the long run.
• Consider automation or software upgrades for increased productivity.
• Invest in people and wages now to secure a loyal workforce in the future.

Inflation affects nearly every facet of manufacturing. But taking steps early to respond to the situation can enable a company to evolve with the changing times. Anticipate rising supplier and transportation costs, and keep price increases reasonable. Look for an inevitable reduction in demand. And begin building back now in preparation for the recovery before your competitors.

Often the choice for manufacturing companies seeking to minimize costs and outsource manufacturing operations is between Mexico and China. For decades, China has been the popular choice. But that’s changing rapidly. And as the economic risks and complexities of globalization increase, it makes more and more sense to choose Mexico for outsourcing manufacturing.

China No Longer the Easy Choice

In the previous century, China offered US manufacturers a nearly endless supply of cheap labor. Oil was down, so transporting goods and materials across the Pacific were negligible compared to the labor savings. China did an excellent job of creating embedded supply chains and processes for consistently producing goods on the cheap. 

However, this hasn’t been the case for years. The world has changed. And China is not the easy manufacturing choice it once was. Let’s start with the largest factor: cost.

The cost of Chinese manufactured goods is rising rapidly. Their economy was already overheated in 2019 prior to global shift that occurred in 2020. The Chinese consumer price index is rising at the fastest rate in decades. And the cost for raw materials is at an all-time high. And at about $6/hour and rising rapidly, China’s low minimum wage is no longer such a bargain. 

Then came the Trump tariffs that increased the cost of goods imported from China. In 2018, tariffs rose sharply on literally billions of dollars in Chinese-made goods. The cost of doing business in China spiked overnight. 

Then COVID hit, and the world economy fundamentally changed. The container crisis, followed by sky-high fuel prices, have made international freight a far less attractive option for manufacturers in the US.  And the costs are still rising. Add to this equation the stifling effects of China’s ongoing “Zero COVID” policy, and it’s a simple calculation that the situation in China is complicated at best.

Shortages and supply chain problems have made the situation even more difficult for companies servicing the US economy. The ability to respond to market changes in real time is paramount. Yet, in this model, relying on unstable supply chains that stretch across the world to Asia just doesn’t make sense.

The Mexico Alternative

So, it comes as no surprise that more and more companies instead choose Mexico these days. Many have recognized Mexico’s advantages since the advent of NAFTA. Yet in recent years, the contrast has become more striking. 

For example, compare Mexico’s low and stable cost of labor. A highly skilled machinist position makes on average about $6/hour. But less skilled manufacturing and assembly positions make around $2.5/hour. And Mexico’s workforce is highly trained and capable, with numerous academia-industry partnerships training thousands of engineers and manufacturing professionals every year. The cost of skilled labor there is just lower.

There’s also the issue of intellectual property (IP). China is known for its knock-off brands and counterfeited goods. Due to lax IP laws, China’s prospects pale in comparison to the aggressive IP protections Mexico offers manufacturers. Proprietary information, technologies, and patents are strictly safeguarded in Mexico. And federal law is clear and well-established.

Another advantage for manufacturers who choose Mexico is their substantial tariff-free access to global markets. Of course, the USMCA offers unfettered access to the United States and Canada, but the Latin American country also has free-trade agreements with over 50 other countries all over the world.  Mexico regularly imports raw materials from the US and exports the finished products back virtually duty-free. 

The advantages of proximity to the US are myriad. Transportation costs are slashed, because most destinations in the US can be reached in a matter of days from Mexican manufacturing plants along the border. In many cases, that transport time is actually measured in hours. And because Mexican factories are in the same time zones as US companies who outsource to them, management is much easier, from phone calling times to on-site visits. 

Stability Vs. Risk

In reality, it’s the risk factor that makes it so advantageous to choose Mexico over China. Mexico’s economy is relatively stable. Wages are rising more predictably and slowly than in China. The country is pouring massive amounts of FDI and domestic investment into infrastructure for long-term economic growth. 

And in a post-COVID world, where markets shift rapidly, shortages are commonplace, and the future looks uncertain, resilience is a key factor in this decision. Mexico’s response to COVID has been among the least intrusive and most consistent in the world. Outsourcing companies know that the ability to adapt to global supply shocks and crises with shorter lead times, a local supply chain, and consistent working conditions is a competitive advantage.  

In spite of economic downturns, companies who choose Mexico trust they will have the wind at their back. This in turn will allow them to focus on maximum product quality and profitability for their business for many years, regardless of what the future holds.

After reaching historic levels, it appears port congestion may be letting up – albeit slightly. Demand levels are approaching pre-COVID levels. And there is less output from China. North American ports are beginning to see improvement in wait times. 

But are we there yet?  While some are optimistic about the future container prices and congestion levels, port congestion is far from over. And we may see a spike in shipments in the near future. Here’s the breakdown of this developing situation.

Chinese Shipments in Decline

According to recent reports, Chinese orders are down 20-30% month-over-month. US demand is diminishing, and logistics sources responsible for moving these products are reporting that new orders have dropped off significantly in recent weeks. Shortages in raw materials may also be a cause in this trend.

Another factor leading to reduced shipments from China is the COVID lockdowns that continue to plague the Chinese supply chain. The country’s Zero COVID policy has crippled factories and their ability to generate finished products for export. As a result, the number of cargo ships leaving Chinese ports is suppressed. Indeed, China seems to be in a deepening economic contraction at present. Export growth slowed to just 3.9% last April, down from 14.7% the previous month.

However, new orders are still higher than pre-COVID levels. But the furious growth of new orders over the past years seems to have finally ended. What we are now experiencing is not so much a cliff as it is a gradual return to 2019 norms.  The way one expert described it, the industry is no longer shipping at any cost, but rather shipping at a cost our inventory can accommodate. 

Current Port Congestion Levels

In December of 2021, container shortages and port congestion were at an all-time high. More than 100 ships were drifting in open water at the Ports of Los Angeles and Long Beach with average wait times hovering around 18 days. And experts predicted the crisis would not quickly dissipate. To a large extent, this still holds true. Yet there are promising signs that the worst may be behind us. 

Insights from Drewry Shipping Consultants reveal that North American port congestion has dropped from 20 times normal levels to just 10 times. Currently, “best case” transit times between China and North America are down to 20 days from 34 in January. Around the world, port congestion remains high – very high, even. But levels are clearly improving overall – especially on the North American West Coast.

However, many Gulf Coast and East Coast ports are struggling with the newfound activity, as many ships circumvent California to avoid the long wait times. New York berthing times are up to five days now – still much better than California ports. Savanah is experiencing delays amid a surge in traffic. The East Coast port is expecting 108 container vessels arriving in the next two weeks. In January, they averaged just 35 per week. Containers at the Port of Houston in the Gulf are up 20% year-to-date. 

A New Wave Coming?

Some warn that the current easing of container vessel levels is causing only a temporary reprieve at the ports and that a new wave of port congestion is coming. One of the arguments for this position is that the US is sitting on elevated inventory leftovers that were ordered for the 2021 Christmas season but did not arrive until spring. This would explain why the Ports of Long Beach and Los Angeles reported only a line of 20 ships waiting for a berth last month, since inventories are already stocked.

It stands to reason that with inventory levels flush and Chinese ports being artificially held back by lockdowns, port congestion is temporarily experiencing some relief.

But with Chinese lockdowns beginning to ease up, this relief may turn to a tidal wave of new shipments. Currently, there are around 300 container ships waiting to be loaded in Chinese ports. Meanwhile, US warehouses are full. When China releases those 300 ships to the US where inventory levels are already high, the glut of freight could bring back the port congestion and container crisis of December, 2021. 

However, if US companies are able to reduce existing inventory levels – during a downturn in demand – and if China’s new orders continue to drop at 20-30% levels as they are now, this new wave just might be blunted. The current easing of port congestion may continue to return to normal. Or it just might return to the highs of last year. Only time will tell.

Mexico offers many options for manufacturers. Not every company in need of outsourced help wants to invest in opening a foreign factory. Yet contract manufacturing in Mexico affords many of the same benefits without the long-term commitment or startup hassle. 

Nevertheless, it can be a daunting task to navigate the process of outsourcing to another country, even with something as simple as contract manufacturing. For this reason, we will explore the various aspects of this popular choice to help you better understand your options and what to expect.

What is Contract Manufacturing?

Simply put, contract manufacturing is when one company contracts with another to manufacture components or parts on their behalf over a specific timeframe and for an agreed-upon price. Also known as subcontract manufacturers, these providers are essentially subcontractors or third-party providers. They provide the parts needed for a company to assemble their finished product, or they can manufacture the finished product entirely.  

There are different kinds of contract manufacturing in Mexico:

Private Label

Under a private label manufacturing agreement, the contract manufacturer will deliver a finished product to the client’s warehouse for sale under their own brand. In this way, the entire manufacturing process is outsourced, and the client is free to focus on design, marketing, and other business considerations.

Individual Component

In contrast, a client can contract for the manufacture only of an individual component of the finished product. They may contract with other providers to manufacture the other components or manufacture some of the components, themselves. Further, they may assemble the finished product from contracted components, or this part of the process can also be contracted separately. 

End-to-End

As in private label manufacturing, an end-to-end manufacturing arrangement involves outsourcing the production of a finished product. However, it leaves more control to the client company in regards to design, quality control, and other details. 

Some of the many benefits of working with a quality contract manufacturer include:

• Benefit from lower labor costs
• No hiring and training direct employees
• No hiring and training of supervision
• No need to understand complex import and export regulations
• Fast start-up of manufacturing
• Test manufacturing in Mexico without a full commitment
• Risks are assumed by the contract manufacturer

When to Choose a Contract Manufacturer

The value of manufacturing in Mexico is well established. And many companies are looking for an entry into the competitive labor market south of the border. Yet contract manufacturing in Mexico is only one option. So, how do you know when choosing this option makes sense for your company?

1. When your company is small. Smaller organizations may have limited resources and equipment, and contract manufacturing allows them a swift and relatively simply start-up process for their next product.
2. When you need simplicity. Streamlining and simplifying is easy when you can place an order with a contract manufacturer across the entire value chain.
3. When demand for your product varies. If you need flexibility to meet changing demand patterns, contract manufacturing allows a more efficient option for managing inventory levels and transportation.

When choosing a contract manufacturer, be sure to carefully consider the match. Not all providers are right for your operation. Choose the right contract manufacturer by:

• Dealing directly with multiple potential providers
• Comparing capabilities
• Considering qualifications
• Checking capacity
• Examining personnel capability
• Discussing location
• Choosing stability

Why Choose Contract Manufacturing in Mexico

Companies with demand for a developed product but lacking infrastructure to meet this need are smart to consider Mexico. The advantages of manufacturing in Mexico are numerous, whether through a maquiladora factory operation or simply through contract manufacturing.

But contract manufacturing enables companies the flexibility to meet changing customer demand rapidly and without the capital commitment required of a full-scale manufacturing facility in Mexico. These clients are not responsible for producing the end product. Instead, they leverage the contract manufacturing partner to source all parts, vendors, etc. The process is simple and stress-free. 

While late-stage companies may prefer the control and long-term benefits of owning a Mexican maquiladora operation, smaller or newer companies may compensate for a lack of infrastructure or capital with contract manufacturing. Thus, they can enjoy more flexibility with less commitment, because contract manufacturing is a very low-risk, cost-effective, and short-term investment. 

The learning curve is much shorter with contract manufacturing. And efficiency is maximized. Furthermore, US firms have no regulatory or compliance issues, because Mexican law places all liability on the contract manufacturer. And a company can have infinite scalability in a matter of weeks, simply by expanding the scope of work for existing agreements or opening up new agreements with contract manufacturers. 

In this way, all the benefits of Mexico – from low-cost, skilled labor to global free-trade access to shorter transportations times – are open to the company that exploits this option. No new factories. No relocation to foreign territory. No staffing or sourcing concerns. Just instant results. 

Making the decision to manufacture in Mexico is not a light one. So, in weighing the pros and cons of Mexico-based manufacturing, it is important to fully understand what has made Mexico so attractive to so many companies. 

Sure, it’s a popular option. But why? Is nearshoring just a fad, a trend that will come and go? Or is there something much larger underlying the shift? We at TACNA have seen this trend grow for many years, and we understand the drivers behind this movement to nearshore. 

If you’re looking for more cost-effective alternatives to manufacturing in the US, you’ve probably investigated other countries like China. But as you’ll come to find, Mexico offers several fundamental advantages over other popular offshoring destinations. These distinguishing factors provide clear reasons to invest long term in Mexico as a manufacturing destination for decades to come.

Reason #1: Access to Skilled Labor

The US is currently experiencing an unprecedented labor supply shortage that has left US producers scrambling to keep their operations staffed. This difficulty to find personnel has resulted in ever-increasing labor costs and challenges meeting deadlines. 

For a manufacturer, flexibility and agility are paramount. Operations must have a deep labor pool from which to draw. And for those manufacturers requiring more than simple assembly, skilled manufacturing labor is a priority. Fortunately, one reason to manufacture in Mexico is their vast supply of well-trained engineers and technicians.

Mexico’s economy is built around manufacturing. Its universities focus on industry needs. And students often have job offers lined up before graduation day. Mexico’s federal and state governments prioritize manufacturing skill and invest heavily in training programs and focused education to meet industry requirements. More than 100,000 engineers graduate in Mexico per year. And Mexican skilled labor is increasing in its capability, sophistication, and innovation.

Reason #2: Free Trade Opportunities

Tariffs are a significant concern for international manufacturers. The ability to trade between nations while minimizing tariff exposure is critical. Fortunately, Mexico has free trade agreements (FTAs) with more than 50 nations, making Mexico the global leader for duty-free manufacture for export. Approximately 14 agreements have opened up preferential trade access to approximately 60% of the world’s gross domestic product. 

This means US companies that choose to manufacture in Mexico can open up a greater market to export goods to. Mexico is a leading exporter to Asia, South America, and Europe. But with the USMCA, Mexico also enjoys free trade with the United States and Canada. Under the terms of this agreement, US companies may open a maquiladora manufacturing operation in Mexico and import materials from the US and export finished goods back to the US duty free. Indeed, over 75% of Mexico’s goods are currently exported to the US.

Reason #3: Cost Savings

Perhaps the most important factor manufacturers consider relocating to Mexico and the biggest reason they should consider doing so are the cost savings. Mexico offers manufacturers several ways to save, some of which include:

• Reduced Shipment Costs: Mexican factories, known as maquilas or maquiladoras, can truck most products to the US within hours or days. This reduces the cost of shipping trans-oceanic for weeks. Further, it allows for faster market response and lower inventory levels. 
• Faster Startup: Mexico’s maquiladora program (IMMEX) has been around for decades, so the process is well established and fast. Using a shelter service, most US manufacturers can be up and running in 4-8 weeks. 
• Lower Labor Costs: While Mexico’s workers may be highly skilled, the cost of that manufacturing labor is surprisingly low – on par with or in many cases lower than Chinese labor.
• Tax Savings: Maquilas can greatly reduce or even eliminate tax liabilities like VAT, raw materials import duties, duties on equipment and machinery, etc.

Reason #4: Flexibility

If COVID has taught us anything, it is the need for flexibility and preparedness. Markets change rapidly. What sets apart truly successful companies is their ability to respond quickly to market demands in a timely fashion. Making the decision to manufacture in Mexico means simplifying and shortening supply chains. This means faster time to market and better responsiveness to shifting demands.

Further, Mexico offers flexibility in product type and industry. The country is home to numerous industry clusters, hubs, and niche manufacturing facilities for a wide variety of products. And US firms may take advantage of Mexican real estate virtually anywhere – whether along the US border or in specialized industrial regions like the Bajio. 

These and other fundamental advantages provide US manufacturers reason to manufacture in Mexico over other popular destinations. From cost savings to agility to long-term resilience, Mexico has much to offer the strategically minded manufacturer. 

Still reeling from the impact of the 2020 crisis, Mexico’s cosmetics industry is nonetheless making a recovery. The sector is firmly entrenched in the Latin American country. And signs point to future growth. 

Mexico offers a diverse blend of specialties, technologies, and sub-sectors relating to beauty products and cosmetics production. The manufacture of these products supports a robust domestic market as well as a growing export market abroad. 

Cosmetic Industry in Mexico

The cosmetics industry is considered a best prospect industry sector by Export.gov. Due to growing domestic demand and expanding global access, Mexico is the 2nd largest market for cosmetics in Latin America and is among the top 10 in the world.  In 2019 alone, Mexico imported about $1.3 billion USD of beauty and personal care products. But with more than $570 million USD worth of exports, Mexico is also the world’s 5th largest cosmetics exporter.

Mexico’s cosmetics industry is a mature one, with numerous sub sectors like:

Skin Care

Approximately 20% of the personal care market is devoted to skin care products to help consumers avoid or repair solar damage, maintain youthful skin from a young age, and to cultivate a well-groomed look. This latter emphasis has greatly expanded the market for men.

Hair Care

Also representing 20% of the overall market, this sub-sector greatly benefits from targeting men – their beards, particularly. Extensions among women have also become a popular Mexican cosmetic product.

Fragrances

Representing approximately 14% of the market, this sub-sector is growing in popularity. Online retailers like Amazon Mexico and Mercado Libre have made perfumes and body splashes a very profitable segment for Mexican cosmetic producers. 

Makeup/Nails

15% of Mexico’s cosmetics industry is comprised of makeup and nails and related accessories. These are marketed directly to the domestic market primarily through local retailers. 

Major Cometic Brands in Mexico

Mexico’s domestic consumer market has greatly expanded due to free trade relationships with over 50 nations. Brands from Europe, Asia, and South America remain popular there, in addition to Mexican-based brands. 

Some of the largest cosmetics brands in the world invest millions of dollars annually into Mexican research and development facilities for the creation of new beauty products. Some of these heavy hitters include the following:

• L’Oreal invested more than $25 million USD in 2017 alone.
• Avon invested about $2.6 million USD in 2017.
• Estée Lauder invested nearly $9 million USD.
• Mary Kay has invested extensively in Mexico and currently owns about 18% of the Mexican market.

Many others of the world’s largest multinational cosmetics companies operate distribution and manufacturing facilities in Mexico. Some of these major cosmetics manufactures and retailers doing business in Mexico include:

• Revlon
• Sephora
• Procter & Gamble
• Unilever
• Beiersdorf

Road to Recovery

The 2020 crisis was a real blow to Mexico’s cosmetics industry. In that year, the industry reported a 5.3% contraction. However, this was better than the total global contraction of 8% felt by the world cosmetics industry that year. And in spite of mass store closures by major cosmetics and personal care retailers, these same stores have adapted to online shopping. Demand for Mexico’s personal care products is climbing post-COVID, too.

And in 2021, Unilever doubled down on their Mexico investment with a 3-year plan to invest an additional $277 million USD to increase production at their four Mexican plants. This greater production is aimed at increasing exports out of Mexico for the company.  

In addition to the United States – a top trading partner – Mexico exports cosmetics products to around 100 other nations. It is this diversified export base, coupled with a strong and growing domestic base, that will help Mexico recover from the recent contraction and continue to exceed pre-COVID numbers. 

According to recent projections, Mexico’s beauty and personal care market will grow at 3.53% CAGR 2022-2026. 11.8% of that increased revenue will come from online shopping. Mexico’s cosmetics industry has taken a hit. But through renewed investment from global stakeholders and increased innovation and adaptation, the market is set for sustained growth in the near future.

As the global fuel supply crisis continues and gasoline prices spike, the subject of Mexican oil and gas is often brought up. Mexico has vast potential and a long history of involvement in the global petroleum market. 

But their situation is a complicated one. Political pressures have frustrated attempts to sufficiently leverage Mexico’s petroleum. Yet Mexico remains one of the richest sources in the world for petroleum products. Below is a look at the Mexican oil and gas industry, its potential, and its challenges.

The Potential

Mexico’s economy depends on oil and gas for a large share of its activity. So much of the economic activity in Mexico is either directly or indirectly related to its petroleum. An estimated 58% of Mexico’s federal government revenue comes from this industry. Mexican oil and gas has incredible potential. And this potential, while not yet fully exploited, is already paying great dividends to the Mexican people. 

In fact, while Mexico is fighting to curb inflation like most developed countries, President Andres Manuel Lopez Obrador recently announced a plan to use the nation’s petroleum to help. Since the beginning of 2022, Mexico has been subsidizing gasoline and diesel to curb rising prices and combat inflation. The source for these subsidies? The rising sale prices on exported crude.

Mexico exports approximately one million barrels a day. And because the price of crude has risen much higher than the $55/barrel they anticipated in the national budget for 2022, the Obrador administration is diverting this windfall to the consumer to offset rising gasoline prices at the pump. So far, the subsidies have cost the nation about $4.4 billion USD – approximately half of their oil revenue received so far this year.

By the Numbers

Mexico is one of the largest oil producers globally. Indeed, Mexican oil and gas as an industry ranks among the highest in the world. This is evidenced by the following statistics:

• Mexico produced 1.9 billion barrels of oil per day in 2020.
• The country is the 4th largest oil producer in the west and 13th in the world.
• Refined capacity is ranked 16th.
• Logistics infrastructure is 5th in the world.
• Mexico exported 240 million barrels of crude to the US in 2020.
• The country has the 17th largest reserve of oil, at 9.71 million barrels.
• Mexico has proven reserves equivalent to 13 years of annual consumption at current rates.
• Mexico exports 50% of its oil production.
• More than 10% of Mexico’s export earnings come from oil production.
• Mexico has approximately 17 trillion cubic feet of proven natural gas reserves.

Challenges to Mexican Oil and Gas

In spite of Mexico’s vast wealth and economic activity in the oil and gas sector, the country could be doing so much more. But the country’s history of exploration and regulation is fraught with setbacks and reversals. 

For much of Mexico’s recent history, the country’s oil and gas industry was entirely shut off to private enterprise, foreign or domestic. In 1938, all oil resources were nationalized under the newly created, state-owned company, Pemex. Over the next several decades, oil output expanded by about 6% annually on average, and numerous fields were discovered. In 1983, Mexico’s proven hydrocarbon reserves had expanded to 72.5 billion barrels. By 2007, Mexico was exporting a net of 1.8 million barrels per day. Yet foreign investment was not allowed to multiply this latent potential.

However, things began to change in 2012 with incoming President Peña Nieto. Energy reform was one of his major campaign promises, and in 2014, the Mexican Congress approved the president’s plan to re-open Mexican oil and gas to private and foreign investment. But the first rounds of bidding on oil exploration contracts didn’t generate as much activity as hoped. And in spite of some private wells and contracts, Mexico has largely closed the oil industry back down. 

Current President Obrador immediately suspended bid rounds upon taking office. He has since enacted regulatory changes to greatly hinder private sector involvement, particularly in midstream and downstream. In 2021, the Mexican Congress gave the federal government greater authority to suspend existing permits. 

The Future of Mexican Oil and Gas

Currently, the country is pushing for greater energy independence. The country is expanding refinery capacity and seeking to phase out all exports in the next few years. This plan rests on the ability to increase crude production. But with private investment all but shut out, this seems unlikely. And the country currently sources approximately 90% of its natural gas from other countries (76% from the US alone). 

There are opportunities for Pemex to better exploit Mexico’s potential in this sector. Their plan for the next five years is an ambitious one, with 399 new projects listed for shallow water, deep water, and on shore. They aim to upgrade 25 platforms, install pipelines connecting ports in Veracruz to ports in Oaxaca, and install eight interconnections for the existing shallow water platforms in the Gulf of Mexico.

There are also measures in place to open up the upstream market to foreign investment. This should attract US suppliers and greater foreign investment. But how this actually plays out remains to be seen.