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Illegal border crossings from Mexico into the United States continue to draw attention from the US government and calls for reducing the flow. However, in spite of frustration north of the border about perceived risks from an influx of illegal drugs and people of unknown origin, there is also reason to believe Mexico is taking steps to stop this.

The Current Situation

Right now, the United States is experiencing a surge in migration activity from Mexico. Some months, the Border Patrol encounters nearly 250,000 immigrants, mostly from Venezuela and other countries besides Mexico. Mexicans crossing the border make up only a fraction of this total number. Backlog and dysfunctionality in US immigration courts has led to a severe bottleneck in processing these migrants. 

There are several factors contributing to these historic immigration levels. Certainly, the geopolitical instability in countries like Cuba and Venezuela have resulted in many leaving their homes in search of safety, work, and better opportunities. Even Russians and Chinese are fleeing wars and government overreach to enter the United States via Mexico. 

Additionally, the tight labor market in the US is a contributing factor. The cost of labor in the US is very high, providing an incentive for foreign workers to seek better paying jobs north of the border.

However, it’s surprising to note that the number of immigrants living illegally in the United States is at historically low levels. The last data suggests the total number is less than 11 million people, just 3% of the current US population. Still, the millions of fentanyl pills and other contraband making it across the border have caused alarm among people in the US, who are demanding Mexico do something to stop it.

Mexican-US Collaboration

The US government has placed considerable pressure on the Mexican government to reduce this flow of illegal border crossings. And the two countries have been working together to a considerable degree. 

Just one year ago, the two countries met to approve an action plan for the 21st Century Border Initiative.  Representatives from both federal governments agreed on infrastructure upgrades and expenditures along the border, including border crossings, bridges, and ports of entry. The goal was to better facilitate and increase regional trade between the two countries while reducing illegal border crossings.

Both governments agreed to increase communication and share law enforcement information to facilitate better enforcement of immigration law and reduce legal crossing times. They agreed to implement strategies to reduce crime and violence in the region while also simplifying the customs process.

This past December, another meeting was held between US Secretary of State Antony Blinken and Mexican President Andrés Manuel López Obrador. During the meeting, the Mexican government stepped up efforts to remove immigrant camps along the border town of Matamoros near Brownsville, TX. Some 10,000 immigrants were arrested daily at the border, and the Mexican government sent bulldozers to clear out tent cities.

The Mexican government pushed the US to re-open border crossings that had been recently closed by the US in response to an immigration surge. They also sought to link future cooperation in border crackdowns to US measures to relieve pressure on Venezuela and Cuba. They argue that ending embargoes with, and providing aid packages to, these countries, from which many of the immigrants come, would go a long way in reducing the stream of immigrants leaving these countries. 

Mexico holds a presidential election this year to determine Obrador’s replacement. It is thought the frontrunner will likely continue his policies, including on immigration. But there is uncertainty. 

Additional Mexican Steps

Last week, a bipartisan group of Texas lawmakers visited Mexico City to see what the country is doing about the illegal border crossings. The delegation returned with a positive appraisal of Mexico’s efforts. Members of the delegation noted that Mexico is doing several things to meet US demands. Some of these measures include:

• Seeking out fentanyl labs to destroy them
• Deporting migrants ineligible for asylum along the northern border with the US
• Improving security along the southern border
• Stationing large numbers of troops along the US-Mexico border

In fact, the delegation was surprised to learn that Mexico has placed more military personnel along the US border than the number of Border Patrol the US has stationed there. Specific numbers were not shared publicly, but this news came on the heels of one report of 500 Mexican troops being deployed to just two border cities, Matamoros and Nuevo Laredo. By some estimates, there are around 40,000 Mexican troops stationed along the border.

The US is hoping to assist in Mexico’s efforts to seek out fentanyl labs and deport migrants who make it across Mexico’s southern border. This assistance will come in the form of intelligence gathering, technology assists, and partnerships to police both of Mexico’s borders.

Currently, along the Tijuana-San Diego border, Mexico is reportedly replacing old barriers with a new structure along the beach. While construction is underway, Mexico is boosting its military presence there to guard the gaps. In spite of temporary fences in the area, the Mexican government has increased troop presence out of an abundance of caution. 

2024 is a federal election year in Mexico, as in the US. And as a trading partner and neighbor with the US, what happens in Mexico impacts the US. This year seems to be particularly relevant to the existing trade order and developing financial situation. Mexico is set to elect its first female President. And disputes over the border continue to be an issue. Mexico’s 2024 election may have a significant impact on trade relations, depending on which scenario plays out.

Significance of Mexico’s 2024 Elections

Around the world, 2024 is a significant year for elections. But the federal elections in Mexico will be especially impactful for the US. Current Mexican President Manuel Obrador or AMLO is termed out this year, and his successor hopes to continue his controversial policies. 

And these policies affect the United States. Some 5 million US jobs depend on Mexico-US trade. Mexico is largest trading partner with the US, trading $1.5 million USD per minute, relying on the US to buy most of its exports, and providing a cost-effect outsourcing destination for US manufacturers. Because the country boasts a highly skilled workforce, a growing population with a mean age of about 30 years, and strong free trade agreements (including the USMCA), Mexico is highly involved in the every day lives of Americans. 

Mexico is also the source of a large supply of illegal drugs and migration into the Unites States, something the US has been increasingly concerned about. And while the current Obrador administration has taken some steps to decrease these flows north, many believe he has not done enough. 

The federal administration has also implemented steps considered anti-democratic and unfriendly to business. As founder and leader of the leftist Morena Party, AMLO has sought to enact what he calls Mexico’s “fourth transformation.” And his successor, currently leading in the polls, is likely to continue these policies. 

The entire national congress is up for re-election this year, in addition to the presidency, underscoring how important this election is. AMLO has been unable to enact sweeping constitutional reforms due to not possessing a two-thirds majority. But if his party secures this in June of 2024, it is likely major changes would be implemented as a result.

The Two Presidential Candidates

While the official campaigns have not yet begun, two candidates for the presidency are already competing – both of them women. Claudia Sheinbaum is a member of AMLO’s Morena Party, and AMLO has himself already begun campaigning for her. She was formerly the mayor of Mexico City, where she focused on social reforms and progressive policies. She would likely make combatting poverty a focus of her administration.

Her primary revival, Xóchitl Gálvez, is a member of the Náhuatl people and a champion for the rights of indigenous peoples and various environmental causes. She is viewed as more pro-business and would likely make reducing crime rates a focus of her administration. Crime has increased significantly during the six years of the Obrador administration.

Current polls show Sheinbaum leading Gálvez by 20%. 

Impact of Mexico’s 2024 Elections May Be Rocky

Over the past few decades, Mexico has been moving away from authoritarian and strong-man politics and towards more open and transparent government based on democratic ideals. As a result, the nation’s economy has boomed. However, the Obrador administration has been a departure from this trend. Mexico’s 2024 elections could add staying power to this departure if Sheinbaum is elected. And if her party wins a two thirds majority in the legislature, these could bring about long term changes in Mexico-US trade relations by institutionalizing constitutional reforms that discourage new investment and business.

Additionally, the immigration situation could become a sticking point with the US, particularly if Donald Trump is elected President in November. Both countries are holding federal elections this year. Trump is more likely to press the issue on Mexico hard, having threatened tariffs in the past. 

Sheinbaum is less likely to play ball, however. And an impasse could be detrimental to both countries. Gálvez, on the other hand, could be far more sympathetic to the demands of the US government in limiting the flow of illegal drugs and immigrants. Depending on the scenario, this election could negatively impact Mexico-US relations by sparking a controversy that brings about trade changes.

On the other hand, these spats might be moderated by broader and more entrenched forces currently at work. Carlo Torres Vila, chairman of BBVA, pointed out that Mexico’s 2024 elections may not impact trade relations at all. Thanks to the USMCA, negotiated by Trump, tariffs and trade norms are already well established. And because Mexico-US trade has increased so much since 2020, the US relies heavily on Mexico’s cooperation. The countries have a well-established, highly integrated network of suppliers and manufacturing operations that even Asia is leveraging to access the US market.

While trade between the two countries could potentially be impacted by upcoming elections, there is reason to believe the relationship between them is a long-term reality. Nevertheless, the elections of 2024 bear watching.

With solid trade agreements in place and the strain of global supply chains eating into bottom lines, US businesses are increasingly exploring the costs and benefits of manufacturing in Mexico. 

But this journey isn’t just about lowering costs; it’s a strategic move toward efficiency, agility, and collaboration. In this article, we’ll delve into the compelling reasons behind this shift, exploring key data on economic factors, supply chain considerations, and demand trends that are driving this shift.

Mexican manufacturing is having a substantial impact on US businesses. And with this impact come both challenges and benefits. Let’s explore both to better understand how to navigate this evolving business landscape.

How Mexican Manufacturing Works for US Businesses

When US businesses nearshore to Mexico, they set up manufacturing operations within that country by establishing facilities or contracting with existing facilities to manufacture under more favorable conditions than in the US. In this way, they’re able to leverage the benefits of Mexico. And thanks to the USMCA, they’re typically able to move materials, equipment, and products back and forth across the border with no tariffs.

US businesses utilize various methods to manufacture in Mexico, each with its pros and cons, from contract manufacturing establishing a standalone maquiladora factory to partnering with a shelter service. Each approach suits different needs, capacities, and outcomes.

Potential Challenges and Costs

While US businesses are choosing this option in increasing numbers, there are notable challenges and costs associated with outsourcing to Mexico. Businesses must navigate these potential tradeoffs and determine the best option for their particular situation.

One trade-off involves the complexity of customs brokerage licensing in Mexico. Unlike in the US, the process in Mexico is rather intricate, with a disproportionally lower number of licenses available. This imbalance underscores the importance of partnering with highly competent Mexican customs brokers or a shelter service to ensure a seamless cross-border operation.

Another challenge lies in the potential strain on Mexico’s infrastructure due to increased business activity. The surge in manufacturing plants, including those of major companies like Tesla, Ford, and others, raises concerns about the capacity of highways, railways, and ports. Addressing issues related to site security, transport, and potential misinformation in risk assessments is crucial for informed decision-making. Fortunately, the Mexican government is focused on infrastructure investments to keep pace.

The shortage of trucks and drivers for product and material transport across Mexico and over the border poses another challenge. As more exports move northbound than imports southbound, creating empty hauls, the quality of service from carriers and logistics providers becomes highly elastic to price. This is where partnerships again become vital. Companies seeking low-cost solutions may experience the most significant impact, necessitating strategic collaboration with busy companies to avoid transportation predicaments.

Furthermore, Mexico’s regulations and laws often change, making compliance a concern. Customs laws, environmental laws, labor laws, and others can be confusing for a foreign entity. Customers are advised to stay informed about government regulation updates to maintain ongoing compliance, but the best route is again to consult a shelter partner.

Navigating these challenges requires careful consideration and strategic planning to fully capitalize on the benefits of manufacturing in Mexico. The many cost savings and benefits of outsourcing can be minimized by penalties, fines, and paying unnecessary fees. US businesses should do their due diligence to guarantee the most profitable outcome.

Benefits Afforded by Manufacturing in Mexico

In spite of the potential costs and trade-offs, there are far more numerous benefits. The costs and benefits of manufacturing in Mexico are grossly disproportional. US manufactures who invest in Mexico typically enjoy incredible advantages over their domestic-only competitors.

The most obvious benefit is the cost savings. Because of Mexico’s maquiladora program, US companies may establish a local factory without the hassle of purchasing a wholly-owned subsidiary. This option allows proximity without compromising oversight. Maquiladoras operate on a tariff-free basis, offer advantages like ease of access, lower labor costs, and regional collaboration.

The cost savings are substantial, encompassing reduced shipment costs, quicker startups, lower skilled labor expenses, and significant tax savings. To further amplify these benefits, successful companies often integrate with shelter services, streamlining operations and saving up to $1.5 million USD annually. Embracing Maquiladoras in Mexico becomes a strategic and cost-effective manufacturing solution.

Contract manufacturing is another way US businesses can benefit from Mexico. Contract manufacturing in Mexico, also known as private label manufacturing, offers flexibility for companies seeking efficient production. And it’s particularly beneficial for smaller companies, enabling incremental expansion without major investments. Some of the many benefits include economies of scale, quick startup processes, and the ability to explore new niches. While lacking hands-on control, this option proves attractive for companies prioritizing short-term savings and agility in the competitive manufacturing landscape.

Additional perks include intellectual property protection, proximity to the US supply chain and consumer markets, enabling seamless management with shorter lead times, and extensive free trade agreements, providing preferential access to over 60% of the global market.

Each company must weight the costs and benefits of manufacturing in Mexico for their unique situation. Mexico has many advantages to offer US companies, but it is still a foreign country. And there are pitfalls to avoid. On the other hand, when a company decides Mexico is right for them, there are incredible strategic advantages to exploit. 

One of the key industries Mexican manufacturing serves is undoubtedly the aerospace and allied industries. Serving not only the defense industry, private aircraft demand, and the commercial airliner market, Mexico’s aerospace industry is diverse, robust, and growing.

In spite of facing legitimate challenges and a severe setback in 2020, ultimately, the market is rebounding and demonstrating profound resiliency. With a diversified supplier network and deep pool of skilled labor, aerospace manufacturing in Mexico presents a unique opportunity.

The Current State of Mexico’s Aerospace Industry

Mexico’s aerospace industry has played a major role in the country’s economic development. This is true both as an industrial sector and in terms of its connection with commercial, private, and defense aviation growth. Mexico is host to a wide array of aerospace manufacturers in all three of these subsectors.

According to the Mexican Aerospace Industry Federation (FEMIA) and US trade data, the industry experienced 15% average annual export growth in the decade, 2010-2020. Additionally, it created upwards of 60,000 jobs among the country’s skilled workforce. Most of these laborers were trained to order by an alliance between industry and academia built on the German model. 

Mexico has continued to attract extensive foreign direct investment (FDI) in the aerospace manufacturing field. This one industry alone accounted for around $5.5 billion USD in total foreign investment in 2020-2021.

Aerospace manufacturing is actually relatively young in Mexico, though its dominance in this industry doesn’t show it. The Latin American country has been on the cutting edge of aerospace innovation and assembly for decades. The manufacturing-dense state of Baja California provides one example of an industry hub, where one company has been turning out products for this market for over 60 years. With key infrastructure supporting the manufacture of large and small craft, the region boasts numerous companies in aerospace.

In Mexico, aerospace is one of leading business sectors, supporting continued economic growth, ever increasing levels of foreign investment, and creating new jobs as the demands and technology for this market evolve. Despite the 2020 crisis, the industry has continued to grow over the past few years and is expected to continue to do so. This is in large part thanks to global demand for new services and aircraft.

• Mexico’s total 2020 exports were $6.6 billion USD (up to $6.7 billion in 2021).
• Total imports were $5.3 billion (up to $5.4 billion in 2021).
• Imports from the US made up $4.4 billion (up to $4.9 billion in 2021).

Industry Challenges 

Mexico’s aerospace and aviation industry continues to face several notable challenges – one of which is the downturn in passenger travel the world saw after 2020 and the fear of contagion. Some reports suggest the industry should focus on redevelopment and renewal to support long-term needs and on identifying opportunities for improvement. Supply chains must be analyzed and optimized.

While the industry experienced a severe blow with the global downturn from 2020, the recovery phase is well underway.  The turbulent times experienced in 2020-2022 seem to be behind us, and the industry has experienced more vigorous growth recently.  

Mexico is also seeking to accelerate this growth and enhance its standing as an aerospace manufacturing destination of choice by acquiring reclassification from the US Federal Aviation Administration (FAA) as a Category 1 air space. This reclassification combined with the inauguration of Felipe Angeles International Airport (AIFA) in early 2022 are bolstering aviation in Mexico.

Why Aerospace Excels in Mexico

Mexico is a vibrant hub for the aerospace industry. With numerous world leaders in this industry investing heavily in Mexico, there are a growing number of aerospace factories supplying these OEMs with parts and materials. Some of these leaders investing in Mexico’s aerospace industry include:

• Bombardier
• Boeing
• Honeywell
• Airbus
• Beechcraft
• GE
• Collins Aerospace

Why are so many aerospace companies manufacturing in Mexico? There are many factors contributing to Mexico’s emerging status as one of the world’s leading manufacturers for aerospace. Some of the main advantages that make this Latin American country such an attractive destination for aerospace manufacturers include the following:

• 30,000 Mexicans currently employed in the aerospace industry
• 16 of the nation’s 31 states boast sizeable industrial parks and factories supporting this segment
• Investment from the Mexican government
• Ongoing establishment of training schools and new university programs designed to deliver skilled aerospace workers, plant managers, and even designers; more engineering graduates per capita in 2012 than Germany
• Over 40 free trade agreements giving preferential trade access to most of the world
• Low and stable cost of labor
• Proximity to the established aerospace markets of the US, Canada, and Latin America
• A tax exposure comparable to US suppliers through the USMCA coupled with lower production costs

The state of Mexico’s aerospace industry is both emerging and well established. Its roots run deep, yet there is ample room for future potential. While it continues to face certain headwinds, there are concurrently significant advantages propelling its growth. Numerous leaders have already established supply chains in about half of Mexico’s states, yet there is still untapped potential. There is reason to believe Mexico’s growing status as an aviation and aerospace manufacturing powerhouse is just getting started.

China’s electric vehicles market is a dominant force in the industry. But plans to open Chinese EV factories in Mexico have recently produced shockwaves for many involved. 

Mexico, too, stands as a dominant player in the automotive industry – and increasingly so in EVs. But while many have seen these two countries as competitors, China is willing to make nice to gain better access to the US market. 

It’s easy to understand why China considers the Latin American country such fertile ground for expansion. Mexico has a lot to offer the automotive industry at large. But the potential partnership in the EV space has nevertheless caused surprise for many and concerns for some.

The Chinese EV Factories

China has long since been the reining leader in global production of electric vehicles and the lithium-ion batteries that run them. For 2023, their total market value is expected to be around $260 billion USD. And in five years, it is expected to more than double as world demand increases. Overcapacity has allowed the Asian giant to produce electric vehicles at substantially lower rates than US-based competitors.

However, the country is mired in a trade war with the United States, among other ongoing manufacturing woes. Declining populations and a swiftly rising cost of labor have made China less and less attractive for manufacturing in general. But the Trump-era tariffs have made even Chinese companies increasingly interested in finding creative ways to supply the US market from elsewhere to maintain their industry dominance.

This month, unnamed sources from the Financial Times reported that at least three of China’s largest electric vehicle companies are planning to build factories in Mexico. These three companies comprise the lion’s share of China’s vehicles output, including:

• MG, planning a $2 billion car plant
• BYD, Tesla’s Warren Buffet-backed rival
• Chery (known as Chirey in Mexico)
• An unnamed battery company, planning a $12 billion plant

No details have emerged yet about when or where these Chinese EV factories will be built. The plans are still in the investment and negotiation stage. However, US officials have already expressed concerns about the move.

Concerns About China’s Investment in Mexico

Over the past year, the United States has taken measures to protect the US EV industry from Chinese competition. Both the “Inflation Reduction Act” and new rules from the White House this month have aimed to make it harder for EVs made with Chinese parts to qualify for tax breaks.

But according to a recent report, lawmakers in the US are concerned that China’s potential investment in Mexico will create a backdoor to the US market. Through its trade agreements with Mexico, the US trades goods made in Mexico with little to no tariffs. 

And the US is a competitor in the electric vehicles market, too. China and the US have been vying for supremacy in this space for years, and there are numerous rules in place to keep China out of the US lane. However, as a favored trade nation, Mexico is an integral part of the US supply chain and trade reality. China stands to benefit substantially from its position and numerous manufacturing advantages.

Why China Wants Mexico

In some sense, Chines EV factories in Mexico were inevitable. Nearly every other country competing in the automotive industry has found Mexico a haven for its strategic manufacturing advantages. Mexico comprises one of the strongest automotive industry hubs in the world. 

Mexico currently hosts around:

• 300 R&D centers
• 50+ auto brands
• 500+ models
• 1.7 million skilled automotive workers

Mexico:

• Is the 2nd largest automotive manufacturer in the western hemisphere (7th largest in the world).
• Makes approximately 3-4 million vehicles per year (25,000+ EVs).
• Is the 6th largest manufacturer of heavy-duty cargo vehicles.
• Is the 4th largest producer of automotive parts worldwide.

Any automotive manufacturers operating in Mexico – including Chinese EV factories – may export duty free so long as their product is at least 75% made in North America. As a result, automotive investment in Mexico is rising rapidly. 

• General Motors in pouring $1 billion in new investment there.
• Ford reversed a $900 million pledge to their Ohio plant, instead increasing spending on its Mexico plants.
• Bosch of Germany recently re-committed to Mexico with another $100 million investment.
• And earlier this year, EV giant Tesla announced they are entering the Mexican market, with a $5-10 billion USD “gigafactory” being built near Monterrey to produce their “next-gen EV.”

Electric vehicle production is quickly becoming a major segment of Mexico’s automotive manufacturing portfolio. And EV manufacturing is growing there. According to some estimates, EV and hybrid auto manufacturing should increase by a sustained rate of 25% for the rest of this decade, eventually producing two thirds of Latin America’s EV output.

As China has figured out, Mexico’s lower and more stable cost of labor, 40+ trade agreements, highly integrated supplier chain, maquiladora factory system, modernized infrastructure, highly skilled workers, and proximity to the US market make this nation a powerhouse for anyone in the EV manufacturing space. These projected Chinese EV factories are likely to be only the latest addition to the scores of companies from around the world leveraging what Mexico has to offer. 

Over the course of 2023, the Mexican peso (MXN) has traded higher and higher against the US dollar (USD). There are several monetary factors driving this shift. But the peso forecast for 2024 is a mixed bag. Analysts and institutions aren’t quite sure where the end of next year will see the MXN peso, but they are agreed on several key factors to watch. 

Below we will explore the dynamic of Mexico’s currency viz a viz that of the US and identify key drivers currently at play as well as events to watch in 2024. We will discuss the most likely projections for the strength of the peso and offer insights into the likely course for one of the most popular currency pairs in Latin American financial markets.

MXN v. USD

With the USD as the base, the Mexican peso is often paired up to create the USD/MXN currency pair. This pair is used widely Latin American transactions and worldwide, giving the Mexican peso its highest trading volume in the international foreign exchange market. Because the US dollar is the world reserve currency, it provides strength and stability as a benchmark currency, boosting demand for the peso.

The USD/MXN exchange rate is a measurement of how many pesos the market will trade for one US dollar. In recent years, this exchange rate has hovered around 20 pesos to 1 dollar, but there has been a slide over the course of the past year. 

Naturally, fluctuations in the pair’s exchange rate stem from the strength or weakness of the economies in the two respective countries. When the USD/MXN exchange rate rises, meaning more pesos go for one dollar, the dollar is said to be strong and the peso weak. Less pesos for a dollar, or a lower exchange rate, means the opposite – a weak dollar and strong peso.

Why the US Dollar is Weakening

Before exploring the Mexican peso forecast for 2024, let’s analyze the weaking of the US dollar over the course of 2022-23, since USD constitutes one half of this equation. 

During 2022, the dollar declined in value against the peso by nearly 7%. This trend has followed into 2023, and appears likely to continue into 2024. A looming recession is a big factor in this weakness. Multiple forecasters have been projecting a US recession within the following year for a few years now. In spite of printing record and multi-decade highs against emerging and developed markets currencies, the demand for the dollar has waned.

Also driving this trend is persistent inflation. Investors seeking exposure to further rate hikes have been averse to buying dollars during a time when the Fed chair has pulled back from increasing interest rates further. It is likely that if the rate of inflation continues to decrease in the US, the dollar will continue to weaken as demand for higher risk will prompt accelerated US dollar outflows.

Factors Driving MXN Peso Strength

Conversely, there are several reasons the peso forecast for 2024 seems more optimistic. As least for the previous two years, these elements have contributed to a gradual but consistent strengthening of the MXN. 

In general, Mexico’s economy has demonstrated resilience and stability. Their GDP is growing steadily, rising by 3.3% in October 2023 year over year. This economic vitality is boosted by:

• Export revenues: as an oil producer and exporter, the rise in oil prices has strengthened the economy.
• Trade balance: as oil export revenues exceed import expenditures, the improved trade balance bolsters Mexico’s economy.
• Inflation: while not a benefit in and of itself, inflation leads to increased interest rates, which has strengthened the MXN peso.
• Nearshoring: An influx of foreign direct investment into northern Mexico from US businesses drives up the peso.

Interest rates in particular play a unique role in this disparity between the peso and dollar. The US interest rate is now up to 5.5% while Mexico’s is up to 11.25%. This means it’s better to buy pesos against other less income-bearing currencies, like the dollar. 

Over the course of 2023, the peso has increased against the US dollar 12%. And the Bank of Mexico’s report for Q2 2023 forecasts a similar upward trend.

Peso Forecast for 2024 Mixed

Currently the MXN peso is trading at just over 17 to one USD. This is up from the spring of 2020 when the ratio reached nearly 25-to-1. If oil prices continue to rise, interest rates remain high, and Mexico’s economy remains strong, analysts predict a further strengthening of the peso. 

Economy Forecast Agency (EFA) specialists believe we will see 15-1 territory in 2024. And the Wallet Investor portal predicts next year will close out around 16-to-1. 

However, others are more bearish in their forecasts. BBVA bank’s peso forecast for 2024 puts next year’s rate squarely at 18-to1. Citibanamex analysts project 2024 to close out around 19-to-1. And Commerzbank analyst Esther Reichelt has recently pointed to two factors to justify her forecast of 18-to-1 by the end of 2024:

• Upcoming Mexican elections 
• And Mexico’s energy policies

In June, Mexico holds their national election to decide the new leader of the federal government. This holds massive potential for changing things up and infusing uncertainty in the currency markets for the peso. Of the two women most likely to take over in June, one represents a continuation of the current policies, while the other seeks to bring about substantial change. 

Regardless of which side wins out, continuing the country’s current policies toward energy could put a damper on nearshoring investment and slow down the peso’s rise. And this could be compounded if Mexico’s central bank starts dropping the interest rate in the near future. 

As of right now, there is no agreement on the forecast, but most believe the peso will continue to strengthen, at least through the first half of 2024.

Whether your business is in need of greater capacity or just wanting to cut costs, chances are, you’ve considered outsourcing. Yet, however popular Asian destinations may be, Mexico’s advantages for business emerge as an attractive alternative.

In this article, we’ll discuss why so many US companies are turning to Mexico to give their business a strategic advantage and what some of the primary benefits are. As global competition increases and economic factors exert downward pressure, it is vital to consider every potential improvement and advantage to remain competitive and profitable.

Mexico is Great for Business

For years now, US companies seeking a competitive edge have been repeatedly turning their gaze southward to Mexico. And why not? Since the dawn of NAFTA, this Latin American country has offered US manufacturers incredible opportunities. Amidst the challenges faced at home, Mexico continues to provide unique advantages and benefits for savvy businesses willing to think outside the box.

Unlike the US and other popular locations, Mexico follows the German labor model, fostering a highly-trained workforce through academia-industry partnerships. This synergy results in a robust pool of specialized engineers graduating annually. And this labor supply stands in stark contrast to the current US labor shortage dilemma.

But it’s not just skills; it’s economics, too. Mexico boasts a manufacturing-centric economy, offering US producers state-of-the-art facilities and infrastructure for a fraction of the cost. Leveraging these advantages allows businesses to manufacture for export duty-free to the US. The entire Mexican economy is built around international business and manufacturing.

As fewer Americans seek out manufacturing jobs, and as training workers for highly specialized roles becomes more costly and impractical, Mexico stands out as a strong alternative. And there are many reasons this is so. In fact, there are several reasons businesses thrive in this country. And below, we’ll discuss five of these most significant of Mexico’s advantages for business. 

Advantage #1: Proximity

Mexico’s closeness to the US is one of Mexico’s greatest advantages for business. American manufacturers nearshoring there enjoy swift transit times, easy oversight, closer supply chains, minimized risk, and better direct communication with plant management.

The geographical adjacency and efficient transportation links mean Mexican shipments can span the US in just 1-4 days — unlike the 3-5 weeks from Asia. This agility allows companies to maintain leaner inventories, cutting transportation costs and enhancing overall supply chain resilience.

Proximity becomes a key ally in achieving heightened supply chain agility, ensuring that businesses can adapt and thrive in a rapidly evolving market environment.

Advantage #2: Free Trade

Mexico’s strategic advantage lies not only in its geography but also in a web of free trade agreements. Their commercial focus is amplified by Mexico’s participation in at least 14 free trade agreements, like the USMCA, granting seamless access to global markets. These agreements span Latin America, Europe, and the Asia-Pacific region, providing free-trade access to over 50 countries and approximately 60% of the world’s gross domestic product. 

This break from traditional trade barriers propels businesses into a realm of expanded opportunities and reduced tariffs, fostering an environment where US manufacturers can thrive. The strategic symphony of trade agreements positions Mexico as an international manufacturing hub, offering American businesses not just proximity but a passport to a world of economic possibilities.

Advantage #3: Low-Cost Skilled Labor

Another of Mexico’s advantages for business is its deep pool of affordable skilled labor. Unlike the US, Mexico boasts a skilled labor force at a compelling low cost. This stems from Mexico’s dedication to cultivating a highly-trained workforce through industry-academia partnerships. While the cost of labor is rising rapidly in other countries, the cost of labor in Mexico remains relatively stable.

As a result, Mexico’s skilled labor pool offers a practical blend of expertise to US businesses without the hefty price tag. This strategic advantage not only trims operational costs but also enhances the competitive edge for US manufacturers globally. Companies find themselves aligning with the cost-effectiveness of Mexican talent, making it a pivotal element in the operational playbook.

Advantage #4: IP Protections

Whenever a company establishes operations in a foreign country, there are always concerns about theft of intellectual property. Fortunately, Mexico stands as a robust ally for US companies in the realm of intellectual property (IP) protections. 

Among global competitors, Mexico’s legal framework provides a striking and solid foundation for safeguarding innovation. Mexico’s alignment with international IP standards and its 16th global ranking for IP protections reinforces this point. 

This strategic positioning not only underscores Mexico’s commitment to fostering innovation but also serves as a crucial asset for US companies navigating the intricate terrain of global business. With a focus on clarity and tangible data, Mexico’s IP legal framework becomes a reliable cornerstone, offering US businesses a secure and advantageous environment for the protection of intellectual capital.

Advantage #5: IMMEX

Perhaps the most powerful of Mexico’s advantages for US business is their IMMEX program, which allows foreign companies to operate maquiladoras or factories not subject to most duties or tariffs. This key strategic advantage offers US manufacturers substantial benefits and savings. IMMEX’s reduced or eliminated duties and taxes, coupled with streamlined customs procedures, enhances operational efficiency.

And the system benefits both countries, too. Approximately 40% of inputs in Mexican-made products originate from the US, supporting American industry. Maquiladoras offer flexibility in location and product diversity. Notably, cost savings result from reduced shipment costs, streamlined startups, lower skilled labor expenses, and significant tax savings. 

In an era of global competition, these advantages position Mexico’s maquiladoras as a strategic asset for US businesses across numerous industries. And combined with the country’s other strategic benefits, these options help US business stay viable and successful in an increasingly competitive landscape.

Exploring the packaging industry in Mexico reveals a landscape rich with opportunity and growth. While certain challenges exist – from the need for automation to the push for sustainability – Mexico is rising to meet these challenges. 

Foreign businesses and investors looking for a packaging market to leverage will find that Mexico’s industry includes strong sub-sectors, supply chains, labor pools, FDI, innovation, and more. And perhaps most importantly, the country is experiencing sustained and significant growth rates in the plastics and packaging industry that ensure continued profitability and success.

Surging Industry Growth

According to data from the US Department of Commerce, the packaging industry in Mexico, encompassing both equipment and materials, is currently experiencing unprecedented demand, reaching record highs. In 2022, Mexico’s market for packaging machinery and materials reached a remarkable $906 million USD, following three consecutive years of stagnation. This reflects a surge of 25%. 

There were several factors contributing to this growth. Consumption habits, both locally and internationally, certainly shifted. There was also a substantial increase in remittances from abroad totaling $58.5 billion USD in 2022. Additionally, the country benefited from significant government social programs that totaled over $32.8 billion USD. These programs have notably boosted the consumption of beverages, processed foods, medical products, and personal care items. 

But the rise of e-commerce also played a pivotal role. As a result of the 2020 lockdowns, online shopping from home skyrocketed in Mexico. Indeed, 2022 alone saw a remarkable 23% increase, alongside a double-digit increase in retail sales (around 18% annually). Additionally, exports of agriculture-related products from Mexico increased by 12% in the same year. 

This historic shift in shopping patterns boosted the packaging material production industry to represent approximately 1.8% of Mexico’s overall GDP in 2022. This contributed 5.5% to the industrial sector GDP and 8.6% to manufacturing GDP, boosting Mexico’s economy prospects overall.

This sector in particular offers promising opportunities for US involvement in Mexico, given their reputation for innovative technology and geographic proximity. And according to the Packaging Machinery Manufacturers Institute (PMMI), Mexico now stands as the second-largest buyer of US packaging equipment (in addition to being the largest US trading partner). Mexico also sources a large quantity of supplies from Germany and Italy.

Growing Demand Post COVID

The dramatic surge in demand for packaging and processing machinery in 2022 was attributed to improved political stability post-COVID-19, coupled with the necessity to increase installed capacity to meet the growing demand for packaged products. Early numbers for 2023 indicate more of the same. 2023 is expected to record an expected growth rate of 5.5%, with machinery and equipment purchases expected to increase 7-12%. 

There are several drivers for this growth. Some of which including investment in:

• Agribusiness
• e-commerce
• pharmaceuticals
• personal care products
• environmentally friendly packaging solutions

Despite the positive outlook, US exporters face challenges, including stiff competition from European equipment, perceptions of US-made equipment as suitable only for large-scale production, and concerns about higher energy consumption.

Opportunities in Multiple Sectors

The packaging industry in Mexico is varied. And several sectors may afford opportunities for foreign investors and outsourcing companies. 

Plastics, in particular, emerge as the most dynamic sector, consistently gaining market share. Mexico’s plastics sector holds a significant 29.3% market share, closely followed by paper and cardboard at 32.7%. Other materials like glass, metal, and wood contribute to the remaining market share.

Major opportunities for US businesses and investors in the Mexican packaging machinery market lie in processing equipment and materials for the food and beverage industry. Notably, these areas cater to the 50% of Mexican packaging machinery imports. But there is also a sizeable demand for plastic container manufacturers targeting the personal care industry, as well as opportunities in cleaning and sanitizing products.

Domestically, Mexican users demand higher-quality materials. This, combined with the need for compliance with advanced production standards mean there is a specific focus on flexible packaging. This area constitutes over 60% of food product usage, and has been experiencing growth rates exceeding 10% annually. Mexico is a very environmentally conscious country. And the push for environmentally friendly solutions creates avenues for innovation and flexibility in packaging machinery sales. There is a clear emphasis on the need for higher quality and greener packaging materials to meet evolving market demands.

As major investments from companies like Constellation Brands, ARCA Continental, Grupo Bimbo, Diageo, Brown Forman, and others are announced, the packaging industry in Mexico becomes increasingly attractive as a foreign direct investment opportunity. These projects signal near-term demand for processing and packaging equipment, presenting lucrative prospects for US businesses in the Mexican market.

US economic experts are sounding the alarm as they predict the likelihood of a US recession striking by 2024, specifically in the second quarter. This warning comes as concerns over soaring debt levels and a precarious job market cast shadows over the nation’s economic outlook.

But the matter is far from settled. And there are still more economists and experts increasingly optimistic about the US economic outlook for 2024. Backed by a wealth of data and specific statistics, these experts challenge the notion of an impending recession, opting instead for a mild forecast of slow growth.

Whether or not the US will experience a recession in 2024 is impossible to predict with certainty. But below, we’ll detail the factors pointing each way so you can decide for yourself.

Indications a US Recession May Be Coming Next Year

Jeff Gundlach, known as the “Bond King,” emphasizes that the growing debt burden is a significant indicator of an impending economic downturn. The United States is grappling with record levels of debt, and the situation appears to be spiraling. The national debt, currently exceeding $29 trillion, continues to rise. Meanwhile, ongoing inflation compounds the problem.

Bill Gross, another prominent voice in the financial world (and another “Bond King”), also raises red flags regarding the US economy. Gross highlights the shaky job market as a key factor contributing to the looming recession. Despite recovery efforts and economic stimulus programs, the labor market remains fragile, with fewer Americans seeking manufacturing jobs and skills. And rising costs and  the impracticality of training workers for the specialized roles demanded by modern manufacturing only exacerbates this challenge further.

Gundlach’s warning is particularly unsettling in light of the $1 trillion that a potential recession could cost the United States. This would have a significant impact on GDP and productivity. But Gross’s concerns about the job market also indicate a deeper issue—finding qualified labor is becoming increasingly difficult. In fact, according to a recent survey of US manufacturing executives, it’s now 36% harder than in 2018 to find adequate labor.

While there are alternatives to tackle the imminent labor shortage, such as nearshoring options in Mexico with its skilled labor force and state-of-the-art facilities, this doesn’t change the fact that  US recession may be imminent. These warnings suggest that unless substantial measures are taken, the next year could bring a challenging economic climate for the United States. 

Signals US Won’t Experience Recession in 2024

But there is also optimism in the data. According to a recent survey reported by Benzinga, close to 60% of economists believe the Federal Reserve has concluded its current cycle of raising interest rates, after hitting a 22-year peak of 5.5% in July. This would indicate a stable monetary policy that is conducive to economic growth.

Furthermore, this data highlights that economists forecast a drop in inflation, with expectations of it decreasing to 2.4% by the end of next year and 2.2% by the end of 2025. So, is a recession really imminent? This data suggests not. It may well be that the US economy is on a sustainable path for 2024.

In fact, in spite of a recent poll of America’s CEOs predicting an 84% chance of a recession in 2024, a growing number of economists agree this just isn’t so.  In response to this pessimism, Fed officials insisted on a 0% likelihood, emphasizing a robust economic outlook in accordance with a growing consensus among economists.

These specific numbers and data points create a compelling case for optimism. The combination of low-interest rates, declining inflation expectations, and the Federal Reserve’s confidence points against a US recession in the near future. 

Meredith Whitney, Founder & CEO of Meredith Whitney LLC, recently gave a Yahoo interview explaining why a recession seems unlikely for 2024. Her 5 arguments for optimism were:

1. Home Equity: homeowners, especially those aged 50 and above, have a substantial amount of equity in their homes, with over 70% of US housing owned by this age group.
2. Low Mortgage Rates: many homeowners are sitting on fixed-rate mortgages of 5% or lower, which could make the economy more immune to changes in interest rates.
3. Cash Deals: Recently there were record all-cash deals in home purchases, indicating that many homeowners have significant equity and are likely to buy smaller homes for cash when they sell.
4. Home Sales Trends: there is a shift in the housing market dynamics, with an increase in the supply of homes as more homeowners, especially those over 50, decide to downsize and sell their properties.
5. Slower Growth, Not Recession: this suggests that the economy is experiencing slower growth, but not a recession. Consumer spending remains supported, and there’s optimism for the near future.

Manufacturing for the Future

Whichever course the US economy takes, US manufacturers and businesses should hope for the best while preparing for worse. While both sides have good evidence for their outlooks, the most likely outcome may fall somewhere in the middle. 

Things aren’t great for the US economy right now. We’ve been in a manufacturing recession for several months now. And downward pressures may push the markets into negative growth for a short period. But companies can take steps now to weather downturns and capitalize on market shifts. 

In fact, manufacturers who focus on innovation and future growth tend to thrive even in a recession. And these are good practices to prioritize no matter which way the winds of Wall Street are blowing.

When it comes to helping businesses streamline processes and save money, Mexico’s maquiladora or IMMEX program is a hugely popular option. Businesses simplify operations and save a substantial amount of money by outsourcing to a foreign factory. This greatly reduces or eliminates their tariff burden when manufacturing for export.

But quite naturally, when considering this option, a lot of questions come up. Here at TACNA, we field quite a few of them. And over the years, some stand out as being more common than others. 

So, in the interest of informing manufacturing executives about Mexico’s unique advantages, the following list answers the top maquiladora questions most commonly asked. In no particular order, we’ll explore 10 questions about maquiladora manufacturing in Mexico and get a better understanding of the what, why, and how.

Let’s dive right in.

1. Just what is a Maquiladora?

Probably the first question that comes to mind is, what exactly is a maquiladora? Simply put, a maquiladora is a Mexican corporation operating under the IMMEX program, allowing up to 100% foreign investment, duty-free temporary imports of machinery, equipment, and materials. Sometimes called a twin plant, the maquila option allows US companies to maintain an administrative facility in the US while conducting manufacturing at the maquiladora facility in Mexico. 

As of 2021, there were over 5,000 maquiladoras in Mexico, employing approximately 2.5 million people and generating more than $200 billion in annual revenue. These facilities play a crucial role in cross-border trade, especially between the United States and Mexico.

2. Are there limitations on where a Maquiladora can be located?

Except for major urban areas like Mexico City, Guadalajara, and Monterrey, the location choice is at the company’s discretion. This flexibility in choosing locations has led to a significant dispersion of maquiladoras throughout Mexico. However, regional factors, such as available labor force and infrastructure, can influence the decision to establish a maquiladora in a specific area.

3. What restrictions are there on foreign companies owning or leasing Mexican real estate?

Foreign-owned maquiladoras in restricted areas can acquire trust rights to real estate, which allow full use and disposal. Leases have no location restrictions. As of 2021, the 100-kilometer strip along the borders and the 50-kilometer strip along the coasts were the main restricted areas. But these restrictions still don’t significantly hinder foreign-owned maquiladoras since they can obtain trust rights to acquire the necessary real estate.

4. What can be manufactured in a maquiladora?

Maquiladoras can manufacture any product, with some exceptions, such as firearms and products with radioactive content. However, the choice of what to produce depends on the parent company’s business considerations. US customs rulings can also affect what a company produces or where its components come from. Understanding these factors is crucial for successful maquiladora operations.

5. What are the strategic benefits of opening a maquiladora?

• Cost-Efficiency: maquiladora manufacturing offers cost savings through lower labor costs, reduced taxes, and affordable overhead expenses, enabling businesses to produce goods at a competitive price.

• Skilled Workforce: access to a skilled labor force in maquiladora zones ensures efficient production, as workers are trained and experienced in various industries.

• Proximity to the US Market: maquiladoras in Mexico are strategically located near the U.S. border, reducing transportation costs and time-to-market for American companies.

• Customs Benefits: the program allows for duty-free imports of machinery, materials, and components, leading to cost reductions for manufacturers.

• Supply Chain Integration: maquiladoras facilitate seamless supply chain operations, enabling just-in-time manufacturing and reducing inventory holding costs.

• Quality Control: rigorous quality control measures ensure high product standards, enhancing brand reputation and customer satisfaction.

• Strategic Partnerships: collaboration with Mexican suppliers and service providers leads to cost-effective sourcing of materials and services.

• Market Diversification: maquiladoras open doors to the Mexican and international markets, offering companies opportunities for growth and market diversification.

6. What may a Maquiladora import into Mexico?

Maquiladoras can import in bond whatever is needed to support the production process, including machinery, equipment, raw materials, parts, and administrative items. Equipment and machinery can remain in Mexico as long as the Maquila Program continues, while materials and parts consumed in the production process are allowed to stay for up to six months.

7. How do maquiladoras reduce manufacturing costs?

Probably the most common of all maquiladora questions comes down to one thing: show me the money. How will this benefit the bottom line? In what specific ways does maquiladora manufacturing actually reduce manufacturing costs? So, let’s run through the main savings:

• Lower Labor Costs: utilizing Mexican maquiladoras allows businesses to access a skilled labor force at a fraction of the cost compared to the U.S., reducing overall labor expenses.

• Tax Incentives: maquiladoras benefit from tax incentives, including reduced corporate tax rates, VAT exemptions, and more, resulting in significant cost savings.

• Duty-Free Imports: maquiladoras can import machinery, materials, and components duty-free, minimizing expenses and streamlining production.

• Reduced Overhead: operating in Mexico leads to reduced overhead costs, including lower energy and real estate expenses, contributing to overall savings.

• Efficient Logistics: proximity to the U.S. market ensures faster and more cost-effective transportation, enabling just-in-time inventory management and lower shipping costs.

• Skilled Workforce: access to a skilled and adaptable labor force in maquiladora zones enhances production efficiency while maintaining competitive wages.

• Quality Control: maquiladoras focus on stringent quality control measures, ensuring product excellence, reducing rework costs, and enhancing brand reputation.

8. What about Mexican labor laws?

Labor laws in Mexico apply equally to maquiladoras and other Mexican corporations. These laws cover various aspects, such as employment contracts, working hours, wages, and benefits. For instance, the permissible work week is 48 hours, and wages are based on a daily rate. Severance pay is required for employees dismissed without cause, and rights guaranteed to Mexican workers cannot be waived. Unionization is constitutionally guaranteed, and existing unions often work closely with management to advocate for workers.

9. How does one open a maquiladora in Mexico?

To open a maquiladora in Mexico, start with a clear idea what you would like to achieve. Register your company, obtain import/export permits, and secure maquila program approval. Choose a strategic location, preferably near the US border, set up your facility, and hire skilled workers. 

Comply with Mexican regulations and tax laws. Efficiently manage your supply chain, implement quality control, and reduce manufacturing costs through lower labor expenses, tax incentives, and duty-free imports. Leverage the proximity to the US market for efficient logistics. This can expand your market presence and enhance your competitiveness.

10. How can I successfully manage a profitable maquiladora?

Successfully managing a Maquiladora in Mexico involves embracing the cultural nuances and carefully navigating regulatory conventions. This is a different country with different ways of doing things. Understand that generous benefits, including extended vacations and maternity leave, are the norm. Recognize the significance of workplace hierarchy and official titles. 

While punctuality is somewhat fluid, it’s essential to respect authority levels. On business trips, blend work and personal conversations during lunches, maintain formality in attire, and travel safely using registered taxi services. Prioritize security by choosing a secure factory location and employing a reputable security firm. Comply with local laws to mitigate risks. 

And for a simplified approach, consider a shelter services provider, streamlining management and outsourcing much of this administrative hassle so you can focus more on core activities.