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Mexico is taking bold steps to revive a century-old railroad, betting it can compete with the Panama Canal as a critical route for international shipping. With a $2.8 billion initial investment, the Tehuantepec Isthmus Corridor aims to connect the Gulf of Mexico to the Pacific Ocean. This potentially offers shippers a faster, land-based alternative to the iconic canal. But can this ambitious project really become a Panama Canal alternative?

The Tehuantepec Isthmus Corridor: Mexico’s Big Bet

The Tehuantepec Isthmus Corridor is part of Mexico’s broader infrastructure revival. The 303-kilometer railway will stretch across the narrowest part of Mexico, linking the ports of Salina Cruz in Oaxaca and Coatzacoalcos in Veracruz. Ships will be able to unload cargo on one coast, transfer it by rail, and reload it on the opposite coast. It’s an overland shortcut that could cut hours off shipping times.

Currently, Panama is experiencing a significant drought. To reduce the amount of lake water the canal uses to regulate the locks, canal authorities have reduced the number of ships that can pass through the canal by about 25%. This has resulted in cargo ships waiting in line outside the canal up to two weeks at a time. 

Whereas crossing the canal should only take 8-10 hours, it’s now taking much longer. Utilizing Mexico’s railroad system, however, would theoretically take only about 15 hours, including the unloading and reloading process. 

A Strategic Response to Global Trade Shifts

This railroad revival is also a strategic response to shifts in global trade. As Mexico solidifies its position as the United States’ top trading partner, it is well-placed to capitalize on the trend of multinationals relocating manufacturing closer to the U.S. Amid supply chain disruptions and rising tensions with China, companies are increasingly looking to Mexico for its proximity and stable trade relations with the U.S.

Mexico’s Secretary of Economy, Raquel Buenrostro, has called the railway “a real and increasingly important alternative” to the Panama Canal, especially in light of climate change challenges. The government is optimistic that the Tehuantepec Isthmus Corridor could eventually account for up to 5% of Mexico’s GDP.

But can it really compete with the Panama Canal?

Despite the excitement, there are concerns. The railroad’s maximum cargo capacity is estimated to handle only about 10.5% of the goods that passed through the Panama Canal in 2022. While the corridor offers a promising alternative during droughts or congestion, it’s not clear whether it can match the canal’s throughput in the long run.

Panama Canal administrators have acknowledged Mexico’s project as a potential competitor, but they remain confident in their own operations. Ricaurte Vásquez Morales, the canal’s director, noted that while the Mexican solution could pose a threat, it would only become critical in extreme drought conditions, which Panama doesn’t anticipate.

Nevertheless, the Panama Canal Authority is projected to generate revenue in 2024-2025 around $5.6 billion USD. Even a small slice of this revenue would be a boon for Mexico. 

Mexico’s Vision for the Future

Mexico’s broader infrastructure overhaul goes beyond the Tehuantepec Corridor. With plans to modernize railways, highways, and ports, the country aims to become a key logistics hub for global trade. The focus is on reducing transportation times, slashing costs, and offering a sustainable alternative to existing routes.

The Tehuantepec Isthmus Corridor is part of past-President Andrés Manuel López Obrador’s signature project, with sustainability at its core. Mexico has a long history of balancing economic development with environmental protection, and this project is no exception. The government has stressed that local ecosystems will be protected, and sustainability will be a top priority throughout the corridor’s development.

A New Era for Global Shipping?

The real question is whether the Tehuantepec Isthmus Corridor can truly become a viable Panama Canal alternative. While the project has garnered significant attention, there’s still a long way to go. The corridor’s success will depend on its ability to scale up, attract international investment, and prove that it can consistently deliver a cost-effective, reliable alternative to one of the world’s busiest shipping routes.

Already, the interoceanic corridor project has brought in around $6 billion USD in investment from the Mexican government and another $2 billion from foreign investors, including the World Bank. Global trade is shifting, and Mexico’s role in international logistics is expanding. And in this new era, the Tehuantepec Isthmus Corridor could play a key role in shaping the future of shipping in the Americas.

Will Mexico’s ambitious railroad project dethrone the Panama Canal? That remains to be seen. It may occupy a more cooperative role in easing the strain on the historic waterway. But Mexico is certainly making a strong case for why shippers should take notice. 

Mexico is not known for leading the world in terms of renewable energy. But a recent partnership announcement may be the signal that this is changing. While Mexico has been a major producer and consumer of fossil fuels, the industry is set for change in the coming years.

A new focus on sustainability and renewable energy may characterize the next decade for Mexico. But the country will need to clarify their priorities in light of real challenges and limitations. But for now, the country’s leading energy companies are looking toward helping Mexico realize a renewable energy strategy that has been years in the making.

Green Hydrogen Partnership

In Mexico, the Federal Electricity Commission or CFE is a state-owned utility that operates as Mexico’s dominant electric company. They recently announced a potential partnership with Mexico’s state-owned oil-and-gas company, PEMEX, that may signal a focus on renewable energy over fossil fuels. 

According to the announcement, CFE wants to create various green hydrogen “synergies” with the country’s largest user of hydrogen, PEMEX. They want to create new technologies to make green hydrogen more affordable and sustainable. And plans to produce it at Pemex’s Salina Cruz refinery represent a commitment to using this alternative component.

The potential partnership revolves around CFE providing green hydrogen to PEMEX to reduce their need for natural gas. Oil refineries like those owned by PEMEX produce low-sulfur fuel with the help of hydrogen, because the process helps reduce contamination. They get this hydrogen from natural gas, which is colorless, odorless, nontoxic, and very combustible. 

But the process of creating hydrogen from natural gas generates carbon dioxide emissions. Making green hydrogen instead would eliminate these emissions, making the process more environmentally friendly. 

And just what is green hydrogen? 

Green hydrogen is hydrogen made through a process that relies not on natural gas, but on the electrolysis of water with renewable energy. So, in the more common scenario, natural gas is burned up to produce hydrogen in a process that generates carbon emissions. Or, in the alternative scenario, water is electrolyzed to produce green hydrogen in a process that generates no emissions. 

However, the cost to produce green hydrogen is currently very high, which has mitigated a switch in industry. Furthermore, the regulatory framework for this shift is lacking, and the previous administration has done nothing to change that.

Mexico’s Energy Priorities

When President “AMLO” Obrador was first elected, he was expected to wean Mexico off of oil and gas. Mexico was to be converted to renewable energy. The new president’s progressive focus and disapproval of privatization in exploration was expected to shut down the country’s traditional energy industry. 

Mexico is a country with vast energy potential in oil and gas. But most of it remains untapped. For many decades, the country’s energy industry has been held under the state’s control. In the past decade or so, public-private partnerships had attempted to crack open this energy potential, but AMLO’s election hurt these prospects. Mexico’s energy challenges were expected to worsen. 

However, AMLO pivoted once in office. He no longer wanted to reverse the pace of privatization, though he certainly did nothing to accelerate it, either. Instead, AMLO set his sights on a new target, a new objective he was sure Mexico needed even more: energy independence. His administration pushed PEMEX to expand production capacity and acquire new refineries to assure energy independence in the near future. 

Mexico is considered an oil and gas country. They pump a lot of it. But they import most of their natural gas from the US. And they rely on US refineries to process their crude. AMLO made independence more a Mexican priority than sustainability. As a result, renewable energy never became a viable priority for Mexico.

But AMLO is on the way out.

New President, New Focus

This past summer, Mexico elected a new president. Claudia Sheinbaum takes office on October 1. And her occupation is environmental engineering and chemistry. She has specifically been concerned with climate change. In fact, her work on the subject helped the IPCC win a Nobel Prize. 

And not surprisingly, she has indicated that Mexico has a new focus, a new priority. According to her appointments and campaign promises, Sheinbaum intends to refocus Mexico on renewable energy. She has said the federal government of Mexico will boost renewable energy investment by $13.57 billion USD. 

Already, a Danish fund is expected to invest approximately $10 billion USD in constructing a green hydrogen plant in Ixtepec, located near Salina Cruz. Perhaps Mexico’s renewable energy vision will become a reality in the coming years.

But skeptics are quick to point out that Sheinbaum has been closely aligned with AMLO and is likely to continue his policies, at least to an extent. She served in his cabinet and campaigned on continuing his legacy. Mexico is still heavily dependent upon fossil fuels. And this dependency will not simply change overnight. 

However, the new partnership between CFE and PEMEX to use green hydrogen is a significant first step. And it potentially signals a shift in focus. The new president of Mexico has a sizeable legislative majority, and may be about to push through substantial changes to Mexico’s energy industry. But such change may be far more gradual than she’d like to say. For now, Mexico’s relationship with renewable energy is still in negotiations. 

If you’re considering relocating manufacturing operations south of the border, then understanding where to manufacture in Mexico is a key consideration. Mexico is a large country, and many parts are downright remote and isolated. Others are simply unsafe and risky. 

Still, relocating to the Latin American country is highly successful for many small-medium companies when done right. But it requires choosing one of the best locations to manufacture in Mexico in order to make the most of this incredible opportunity.

Why Manufacture in Mexico

Put simply, if you want to reduce costs, manufacture in Mexico. Relocating some or all of your assembly and fabrication work to this country is a great way to reduce costs like labor, transportation, etc.

Labor, for example, is incredibly competitive in Mexico, on par with wages in Asia. In fact, over the past few years, China’s rapidly rising wages have overtaken Mexico’s. Mexico’s wage growth has been much more stable and moderated. As such, US firms can make their products in Mexico for a fraction of the cost it would take in the US and for about as much or even less as it would take to pay for Chinese labor. 

And thanks to the USMCA, manufacturing in Mexico also cuts down on direct material and equipment costs. Inputs and machinery can all be imported and exported back and forth across the border duty free under qualifying conditions. Because these materials and equipment are being used to manufacture for export to another USMCA country, the parts and tools that contribute are free from tariffs. 

And manufacturing overhead is also lower in Mexico. Utilities, factory maintenance, and administrative salaries are all areas you can save by nearshoring to Mexico. 

And as long as you choose from prime industrial locations, you can manufacture in Mexico stress-free with cost-saving access to vendors, a deep supply chain, and highly skilled labor. We will explore three of the best, most popular manufacturing locations south of the border out of a longer list of manufacturing cities, including:

• Tijuana, Baja California
• Mexicali, Baja California
• Nogales, Sonora
• Ciudad Juarez, Chihuahua
• Nuevo Laredo, Tamaulipas
• Reynosa, Tamaulipas
• Hermosillo, Sonora
• Chihuahua, Chihuahua
• Monterrey, Nuevo Leon
• Saltillo, Coahuila
• Torreon, Coahuila
• Mexico City, Mexico

1. Monterrey, Nuevo Leon

With the largest inland port in all of Mexico, Monterrey offers manufacturers a competitive advantage in terms of supply chain benefits and access. The industrial powerhouse is located just about 125 miles from the Texas border. And it offers transport options like air, rail, truck, or ship, as well as boasting state-of-the art communications and transportation infrastructure. 

Monterrey is located along the border with the United States in the Mexican state of Nuevo Leon. With its over 50 major industrial parks, it is a major manufacturing hub. The city is soon to be the home of Tesla’s new EV gigafactory as well as at least 1,000 other companies currently manufacturing there.

Some of these companies with sizeable footprints in this Mexican border city include:

• Johnson and Johnson
• Pratt & Whitney
• John Deere
• Mercedes Benz
• Caterpillar

Monterrey churns out qualified talent with approximately 30 colleges and technical training centers. The abundant and diverse labor market there is considerably more affordable than US labor and boasts a turnover rate of only about 5%. 

2. Tijuana, Baja California

Also located along the US-Mexico border, Tijuana is located in the industrial mega hub of Baja California. This major manufacturing center is also growing rapidly. Within the next decade, it is expected to surpass Guadalajara as Mexico’s 2nd largest city, thanks in part to the surge in manufacturing there over the past few decades. 

The bustling industrial metropolis is home to the world’s largest international border crossing and most significant trade corridor in all of North America, the San Ysidro Port of Entry. With 34 lanes, the port sees 15 million vehicle crossings and billions of dollars in cargo annually.

Tijuana is one of the prime locations to manufacture in Mexico, not only because of its proximity to San Diego, California and world-class border crossing infrastructure, but also because of its highly integrated manufacturing hubs, industrial parks, and evolving technological innovation. The production technology and infrastructure there have allowed US companies to integrate seamlessly with Mexican factories or maquiladoras, which number about 600 in the city. 

• There are approximately 20 countries represented in Tijuana’s manufacturing scene.
• Industry is supported by well over 180,000 skilled manufacturing workers. 
• Since 2012, industrial development in the city has attracted nearly $6 billion USD in FDI.
• Tijuana is Mexico’s largest manufacturing base and likely will retain this title for many years to come.
• Half of Tijuana’s growing population speaks English fluently.

3. Mexicali, Baja California

Also located in Mexico’s most northwestern border state, Mexicali is one of the hottest locations for foreign companies to manufacture in Mexico. Serving as Baja California’s capital city and just across the border from Calexico, California in the US, the Mexican manufacturing giant is home to over one million residents. 

It is also considered one of the safest border cities in Mexico and Mexico’s 13th largest city. But it is the strategic location that makes Mexicali such a prime spot for export manufacturing. Over the past decade or so, the city has transformed from a predominantly agricultural economy to a hub for major manufacturing companies. Some of these companies leveraging Mexicali’s diverse and affordable skilled labor pool include:

• Gulfstream
• UTC Aerospace Systems
• Honeywell
• Collins Aerospace 
• Mitsubishi
• Kwikset
• Daewoo Electronics
• Nestlé, 
• Coca-Cola
• Bosch
• Goodrich Corporation
• LG Electronics

Modern infrastructure, cutting-edge telecommunications, multiple transportation modes, a vibrant workforce, bilingual proficiency, and world-class industrial parks now characterize the new Mexicali and make this city one of the best locations to manufacture in all of Mexico. 

These and other cities compete with one another for billions in investment from the US and other countries. And thanks to Mexico’s numerous free trade agreements, exports flow freely to the US and many other major global markets. While the majority of Mexico’s choice locations are along the US border, other cities in the central part of the country, like Mexico City, also offer incredible opportunity for serious manufacturers to leverage all that Mexico has to offer. 

So, whether you set up just south of the border or somewhere in the interior, you can find an ideal manufacturing location to establish your nearshoring operation and ensure your company’s successful future.

Many businesses who rely upon manufacturing have considered offshoring as a way of reducing costs. But they might be simultaneously asking, just what is nearshoring, and is it right for my business? After all, offshoring has been the smart choice for growing companies since the previous century. So, why change now?

But on the other hand, if nearshoring can be shown to be an improvement on the concept of offshoring, then why not choose to nearshore? It all comes down to understanding just what nearshoring is, how it works, and what challenges to avoid to do it right. And that’s precisely what we’re about to dive into.

Nearshoring Defined

So, what exactly is nearshoring? Simply put, nearshoring is when a company relocates or outsources a business function – typically manufacturing – to a foreign location near their home country. 

By performing this business function in another country, you take advantage of that country’s tax benefits, lower labor costs, etc. And because the country is relatively close to the country in which the company is based, communication between the two facilities is not as challenging it would be across the world.

By way of contrast, offshoring is relocating to a location offshore or across the ocean. In the 1990s, US manufacturers found they could counter rising wages at home by outsourcing their manufacturing operations to China and other Asian countries where labor was extremely inexpensive. Back then, the global economic situation was relatively predictable and fuel costs were low. 

But the situation has changed over the years. So manufacturers have begun looking for ways to bring that outsourced manufacturing closer to home.

Resiliency: What Nearshoring Can Do

This brings up a considerable point that must be mentioned when answering the question of what nearshoring is. Because it’s not just a process to relocate closer to home. It’s also a strategy many companies use to build resiliency into their business model.

The fact is, bringing your supply chain closer creates resiliency. And these days, resiliency is quite valuable. A few years ago, when the world was swept up in a supply chain crisis that caused backorders, shipping delays, and rigidity in the face of rapidly changing market factors, companies began questioning their global business model.

Geopolitical tensions and the COVID crisis strained supply chains that stretched around the globe. When time to market mattered most, many companies found they just couldn’t keep up. Their offshore operations were too far away, and their supply chains were spread too thin. Decades of overemphasizing lean manufacturing only exacerbated the situation even further. 

As a result, those companies that had nearshored operations to Mexico or Canada found they had a strategic advantage. They were still taking advantage of other benefits like lower labor costs and reduced materials costs, but their products were located just across the border and well within reach. And through shelter and contract manufacturing, they were also able to scale up and down as the market fluctuated. 

The Pros and Cons of Nearshoring

Without a doubt, when asking what nearshoring is and if it’s right for your company, it helps to understand its unique challenges and potential benefits. Because this form of outsourcing has them both.

Some of its challenges include:

• Supply Chain Disruptions: Even nearshored operations can suffer from natural disasters, geopolitical events, or other disruptions.
  
• Regulatory Issues: Outsourcing to another country with its own unique laws and regulations is challenging in any event.
  
• Cultural Disconnect: Cross-cultural communication is important when outsourcing, making the cultural compatibility a major factor when choosing an outsource location.
  
• Transportation & Infrastructure: Border crossings and reliable infrastructure for your operations can be challenging when working in a foreign country.

But nearshoring to a place like Mexico is also full of benefits, too:

• Lower transit times
• Comparable time zones
• Greater supply chain control
• More flexibility/scalability
• Improved cost effectiveness
• Increased cultural compatibility
• More favorable tariffs

How to Nearshore Right

So, once we answer the question, what is nearshoring (and is it right for my business), the next question that follows is how to do it right. So, here’s a quick idea how to get started with nearshoring.

The first step is to define your goals. Clarify what you want out of a nearshoring arrangement. This will help you as you analyze wages, talent pools, distance, infrastructure, etc. Then home in on a location. Find the country, state, and city that make the most sense for your goals. 

This is where you get serious. If you’re all in with nearshoring, then now is the time to choose a mode of entry and compare nearshore providers. These are the people who help companies settle into a new country. You can work with them on contract manufacturing or setting up your own maquiladora through a shelter corporation. Be specific in your selection process and ask the right questions. Consider their track record, time in the country, and how well they understand the nearshoring process.

Hopefully, you now know how to answer the question, what is nearshoring, and you’re better prepared to make a decision for your operation. Some helpful homework and a few key questions are all that stand between you and outsourcing success!

Due to several factors, many US businesses find the profitability of manufacturing in Mexico high enough to justify the trouble. But what many don’t realize is that the US market is not the only way to profit from manufacturing south of the border.

Due to Mexico’s unparalleled number of free trade agreements (or FTAs), companies operating production plants there are able to export to a whole host of nations in every major global market. In fact, FTAs are a key dynamic driving its export manufacturing success. 

Manufacturers come to Mexico because they are seeking lower labor costs while still being able to export to the United States. But whereas the US has complicated trade relations with many countries, Mexico has aggressively courted major consuming nations in every corner of the world. Even China is doing massive business there. 

With so many things to offer – from a strategic location, a highly skilled workforce, and a range of trade agreements – manufacturing in Mexico means profitability on a much wider scale than you might have realized. Low-cost manufacturing for export makes so much more sense in Mexico when you take into consideration the extent of their market access.

Mexico Leads the World in Free Trade

Mexico one of the world’s most open economies with active FTAs in place with over 50 countries. No two ways about it, Mexico leads the world in international trade. Not only are they a signatory to the massive USMCA (formerly NAFTA), which gives them duty-free access to all of North America and a market of about 400 million consumers, but they also have agreements on other continents.

These multilateral agreements make profitability for manufacturing considerably higher than in other countries by offering preferential access to global markets like Europe, all of North America, most of Asia, South America, and nations in Africa as well. But it’s not just access for export. These agreements also allow importing global materials with little to no tariffs. Components, technology, equipment, raw materials – these supplier networks are vast and affordable. 

• Mexico now exports around $400 billion annually.
• New foreign direct investment (FDI) is attracted each year by these agreements.
• Mexico has replaced China as the leading US trade partner.
• Mexican free trade with the United States typically exceeds $50 billion USD (and is rising).

Manufacturing In Mexico with FTAs

When manufacturing in Mexico, understanding their free-trade partners is crucial to strategically boosting profitability. Mexican free trade agreements make expansion and a much broader market possible. Some of these FTAs are more valuable to US companies than others. But they all present unique opportunities to build a more profitable export manufacturing business.

Mexico also offers manufacturers participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), formerly known as the Trans-Pacific Partnership (TPP). The United States is not a signatory on that agreement. But opening a factory in Mexico gives US companies the opportunity to do business with the Pacific Rim countries, as Mexico joined the agreement in 2018. 

This landmark agreement integrates major markets in the Pacific in areas like intellectual property protections, e-commerce, and labor standards, and is expected to significantly boost trade and investment in the Asia-Pacific region. 

Through 15 free trade agreements or FTAs, companies manufacturing in Mexico can boost profitability through preferential trade access to 60% of the world’s gross domestic product. Some of these include notable agreements like:

• EU-Mexico Trade Agreement
• UK-Mexico Trade Continuity Agreement (TCA)
• Central America-Mexico Free Trade Agreement 
• Chile-Mexico Free Trade Agreement
• Japan-Mexico Economic Partnership Agreement
• The Mexico-Israel Free Trade Agreement

Boosting Profitability in Mexico 

US companies are able to take advantage of better profitability by manufacturing in Mexico thanks to a number of benefits. Doing business in Mexico eliminates or reduces tariffs on goods traded between countries, making manufactured exports more competitive and affordable. Likewise, the benefit of having a larger customer base without quotas or restrictions means more profit potential. 

Another key benefit is Mexico’s renowned protection of intellectual property rights. Manufacturing in Mexico means that importing from and exporting to other countries is securely backed by protections against theft of patents, trademarks, and copyrights that are codified in law. And the cooperation and collaboration between countries doing business with Mexico creates a healthier exchange of knowledge and skills, which in turn drives creativity, innovative solutions, and sustainable economic growth.

Mexico’s commitment to free trade is an opportunity for US companies to expand to other markets, using approximately the same preferential tariff norms they’re accustomed to within USMCA. Many of those same protections are available around the world when manufacturing in Mexico. In turn, foreign investment is on the rise, supplier networks are strengthening, and infrastructure in the manufacturing centers is state of the art. 

When manufacturing in Mexico, profitability is a matter of not just lower costs, but also greater access. While Mexico is known for its cost savings, the access to global markets and resources is an often-overlooked advantage. But because of their commitment to free trade, they offer companies the chance to grow, innovate, and create new opportunities by taking advantage of preferential access to the global economy at large.

For several decades, the principles of lean manufacturing have dominated productive industry around assembly lines to ensure maximum profitability. 

But in the past several years, the question of lean vs. resiliency has arisen. How lean should a manufacturing operation be? How much inventory and inputs should be kept on hand in order to be prepared for unforeseen circumstances? How much inventory on hand is too much? 

the world. Six Sigma and other lean logistics programs have revolutionized the efficiency of factories and The post-COVID world is a very different place now. And the supply chain crisis of 2021-2022 has given us occasion to step back and re-evaluate the place of lean in the current economic reality. Is lean manufacturing still relevant? Does it still make sense?

What Is Lean Manufacturing?

In the post war years of the 1950s, Japanese manufacturers introduced the concept to the rest of the world that excess is waste and waste is unprofitable. Primarily built on two pillars of automation and Just-In-Time (JIT) manufacturing, lean manufacturing sought to reduce waste (or “muda” in Japanese) to boost efficiency. 

As initially laid out by the Toyota Way or model, there are several primary wastes that hurt productivity:

• Superfluous inventory of raw material and finished goods
• Overproduction (more than what is needed now)
• Over-processing (making parts beyond the standard expected by customers)
• Transportation (unnecessary movement of people and goods inside the system)
• Excess motion (automating before improving the method)
• Waiting (inactive working periods due to job queues)
• Defective products (reworking to fix avoidable defects in products and processes).

Therefore, by reducing these wastes, eliminating redundancies, and operating with precision and continuous improvement, manufacturers cut out the fat and work on extremely thin margins to meet demand. They receive goods only as they need them for the production process so that nearly 100% of the operation goes to profit making.

The Shift

There is one little problem with this model that has become more obvious in recent years. And that is that it requires producers to forecast supply and demand accurately to avoid wiping out benefits by minor delays in the supply chain. Lean operations require high levels of predictability in outputs, processes, supply, and demand. And none of these were available in the wake of the COVID crisis.

So, when the recovery began, the companies who kept minimal inventory on hand simply weren’t prepared to scale up. And suddenly, attitudes about lean began to shift. 

The need for real-time information, highly integrated digital systems, and inventory reserves to fall back on to keep operations running was excruciatingly obvious. And in the recovery, this was exacerbated further by the inability to deliver both inputs and finished products on time. The rapidly rising demand strained the supply chain to the point of leavings hundreds of container ships drifting in deep water outside of ports.

Just-In-Time manufacturing is profitable only when the materials arrive on time. 

Is Lean Manufacturing Dead?

In 2022, shippers and manufacturers began holding noticeably more inventory. The reaction was an obvious swing to increasing in-house inventory to be prepared for whatever other problems might arise. This swing was called the “Just-In-Case” approach rather than Just-In-Time. And it caused some to argue that lean manufacturing just might be dead. Perhaps lean had ended and was no longer relevant. 

The “management-by-stress” methods were overtaxing workers. The Great Resignation was underway. And manufacturers were looking for answers to meet the challenges of the “new norm.” As a result, inventories rose 7.1% annually from 2019 to 2022, sacrificing efficiency for sustainability and resilience.

The ideas of relying on just one supplier source, receiving parts only as they were going to the assembly floor, producing products only as they were needed, and maintaining supply chains that stretched across the globe no longer looked like such a good idea. And with geopolitical uncertainty in the middle East and eastern Europe, rising fuel costs, and rapidly evolving demand patterns, lean manufacturing has certainly taken a back seat to resilience. 

But it’s not out for the count.

The Evolution of Lean

Some are arguing that the beauty of lean manufacturing is that its principles allow for an evolution in response to external stimuli or global changes. In spite of the new uncertainty and economy instability which characterizes the world today, it will always make sense to streamline manufacturing logistics. 

While nearshoring has clearly won out in the world of manufacturing, and producers are streamlining supply chains by operating and sourcing closer to their target market, modified lean principles can still apply. However, some necessary changes rise to the surface:

1. Digital Adoption

Lean companies must embrace and adopt Industry 4.0 digital technologies like AI, Machine Learning, the Industrial Internet of Things (IIoT), cloud computing, and augmented reality.

2. Real-Time Supply Chain Resolution

Manufacturers must transform and evolve to identify and address supply chain problems in real time. They should come together to share updates, analyze changing supply and demand trends, provide perspective, and brainstorm alternate solutions and workarounds.

3. Reduced Inventory Through Pull Systems

Relying on a pull-based system can help manufacturers meet actual rather than projected demand. In this way, lean companies can still minimize excess inventory while better understanding customer preferences and needs to be better prepared. Amazon uses this system to better balance inventory with demand.

4. Increased Partnership

One of the most powerful lean principles is to partner with others to avoid having to take on what is needed to do everything, yourself. In this way, your company can achieve scalability and efficiency by partnering with a shelter service, contract manufacturer, and other selective and strategic partners. 

The world has fundamentally changed. There is no denying that industry and manufacturing must change with it. 

Highly strict lean principles may not fit in the new global marketplace, but modified lean principles still remain relevant in reducing wastes and in continuous improvement. By embracing new technologies and logistical efficiency, manufacturers can be prepared to meet the challenges of tomorrow with streamlined and adaptable systems for the future.

If you’ve ever considered moving some or all of your manufacturing process to Mexico to reduce costs and strengthen your company’s bottom line, then you’ve probably thought of working with a shelter service or at least heard of the popularity of this option.

And there’s a big reason shelter providers are so popular for US manufacturers. Well, actually, there are at least five reasons. Shelters make all of the benefits of Mexico more accessible to US companies – especially small-medium-sized companies.

And just what are these unique advantages that can only be enjoyed through a shelter partner? Why are so many companies turning to the shelter option rather than saving that money to just go it alone? Isn’t the primary benefit of manufacturing in Mexico the duty-free imports and exports? 

If you’re wondering just what a shelter is and how working with a shelter partner provides unique advantages over flying solo, stick around. Below we are exploring five of the many strategic advantages outsourcers get only by going the shelter route.

What Is Shelter Manufacturing?

US and foreign producers who want to manufacture in Mexico have different options: 

• They can open a wholly-owned subsidiary in Mexico. This is particularly popular with large, multi-national firms who want total control and long-term investment in the country and have the wherewithal to navigate the complexities of owning a subsidiary in a foreign country.
• They can place orders with contract manufacturers already established in Mexico. Contract manufacturing is very popular with small companies who need the flexibility to scale up or down and are willing to sacrifice control over the process in order to avoid long-term commitments/liabilities.
• They can partner with a shelter manufacturer to get the best of both worlds. This option is hugely popular among small and medium companies who want the most control with the least hassle. 

Shelter manufacturing is when a foreign company contracts with a company in Mexico to jointly operate a factory. That Mexican company is the owner of record, but the other company calls the shots. This is sometimes called shell manufacturing, because the shelter partner is essentially a shell, but they have so much more than the paperwork under control. They’re also highly integrated into the local culture, labor market, supplier networks, and so much more. They often already have factories ready to go to work for you or they offer step-by-step help in building a new factory. 

And the best part? They handle all the red tape and let the US company focus on the product. This option creates an opportunity none of the other modes of entry afford foreign-owned businesses seeking access to Mexico’s lower labor costs and other benefits. 

Here are five critical advantages that are unique to working with a shelter service to enter Mexico.

1. Turnkey Startup

Outsourcing to Mexico can take a year or two when you open a subsidiary in Mexico. The process is varied and prone to pitfalls. Regulatory compliance is tricky, there are scores of forms and permits to attend to, and the financial risk of opening a company in a country you’re not familiar with is immense.

But with a shelter partner, you can begin manufacturing in your own Mexican factory in as little as a few weeks. If you choose to build your own factory through a shelter service, it might take a few months. In fact, one of the best ways to know when the shelter option is right for you is when you need speed and simplicity.

And the process is well laid out and turnkey. Simply follow the steps outlined by your partner, provide the inputs required, and leave the compliance and personnel matters to them. Most outsourcers are up and running in about 6-12 weeks.

2. Instant Relationship

A reputable shelter provider has been working in Mexican manufacturing for many years. They are well respected among labor groups, vendors, supplier networks, government agencies, and distribution chains. When you enter Mexico holding hands with them, you aren’t the new kid on the block trying to establish your credibility. You’re the friend of that local shelter provider. You’re in!

This means you can immediately access these relationships, developed over years of working together, to see instant results. Your shelter provider knows what engineers and assembly staff to hire, what security firm is most reliable, which vendors have the best prices, and what suppliers will have the materials soonest. They are plugged into the best industrial parks and infrastructure. And you inherit all those relationships and savings instantly.

3. Next-Level Efficiency

So much effort goes into learning the rules of doing business in a foreign country. But working with a shelter partner means all that effort can go directly into producing a superior product. This option allows outsourcing companies to forego the inefficiency of the learning curve. Your inside man already has best practices under control. Maintenance concerns and operational busy work are their problem. You go straight to results.

4. Tax Savings

There’s something called “gringo pricing” in Mexio. Foreigners often feel they are being charged a premium for being outsiders or “gringos.” But really, they’re simply paying the price of ignorance and inexperience. This is especially true when it comes to taxes and regulatory compliance.

In Mexico, there are so many ways to save on different taxes and compliance issues – but only if you know about the loopholes and proper avenues to follow. A shelter service automatically positions your business for maximum tax savings by leveraging every exemption and applying for every credit or discount. No falling through the cracks.  No gringo pricing. Just immediate savings.

5. Maximum Safety

There’s a lot of fear about doing business in Mexico. Cartel violence, kidnappings, and drug wars have led many to believe Mexico is unsafe. While some of this is deserved, the fact is Mexico is a vibrant, modern, and relatively safe country with a drug-crime problem in some areas. As such, it pays to have a balanced perspective on safety in Mexico.

A unique advantage shelter partners offer US firms is the ability to set up an operation in the safest manner possible. Shelter providers are insiders. Your shelter partner will have an established presence in the safest industrial complexes. They will contract the most reputable security firms. They will understand what to watch out for and how to run a factory to prevent theft or other risks. And they will know what parts of town are safe and which are not. 

Working with a shelter partner may not be for everyone. But for those companies wishing to access Mexico’s savings, the prospect of skipping the wait and foregoing the hassle make the shelter option more than worth it.

Manufacturing costs significantly impact a business’s financial health and competitive edge. These costs dictate pricing strategies, investment decisions, and operational efficiency. When asking how to reduce manufacturing costs, managers must first understand how these different costs interact and combine to bring about productivity. 

As Mexico becomes a prominent destination for manufacturing outsourcing, it becomes apparent that the Latin American country is well suited to helping companies cut costs and save money. But just where are these savings at, and how much can the average company cut from the bottom line? What is it about Mexico’s unique offering that makes nearshoring there so profitable?

These and other considerations are what we will now discuss.

Understanding Manufacturing Costs

Total manufacturing costs consist primarily of three broad categories:

• Direct materials
• Direct labor
• Manufacturing overhead

Direct materials include raw materials like steel, plastic, and packaging materials, with costs varying by production volume. Companies typically manage these expenses by negotiating with suppliers or seeking bulk discounts. 

Direct labor involves wages paid to workers directly involved in production, like assembly personnel, quality inspectors, etc. Businesses can optimize these costs through workforce training and efficient production techniques.

Manufacturing overhead, or indirect costs, include expenses like machinery depreciation, utilities, and factory management salaries. These costs are fixed but can fluctuate with production volume. Accurate cost allocation requires businesses to use cost drivers to distribute these expenses across products.

Calculating total manufacturing costs involves summing direct materials, direct labor, and manufacturing overhead. Accurate calculations are crucial for informed decision-making. Cost accounting systems help assign costs to individual products, aiding in price determination. Pricing must cover production costs and consider market demand, competition, and desired profit margins.

Streamlining manufacturing costs involves continuous improvement and vigilance. Leaders must be willing to think outside of the box. Traditionally, lean manufacturing and advanced technologies have been used to reduce raw material and labor costs, minimize defects, lower overhead, and maximize quality. Investing in quality employee training also fosters efficiency and morale, contributing to cost-effective operations.

Fortunately, manufacturing in a Mexican maquiladora or export factory offers unique advantages to help US companies find how to reduce manufacturing costs in each of these categories.

How to Reduce Direct Material Costs

Manufacturing in Mexico allows US businesses to significantly cut direct material costs. Thanks to the USMCA, materials, equipment, and finished products can freely move across the border without tariffs. 

This tariff-free environment enables companies to source materials locally at lower costs. Rather than ship materials from around the world, when applicable, direct inputs can be sourced directly from a highly localized vendor and supplier network. 

Additionally, Mexico’s proximity to the US reduces shipping expenses and delivery times, which further drives down material costs. When US businesses can leverage local suppliers in Mexico and North America, they benefit from competitive pricing and reduce the financial burden associated with importing materials from distant locations like Asia.

How to Cut Labor Costs

One of the most compelling advantages of outsourcing manufacturing to Mexico is the reduction in labor costs. Mexican labor rates are substantially lower than those in the US, allowing companies to save on wages and benefits. But they’re also on par with or even lower than China’s rapidly rising labor wages.

The maquiladora program enhances these savings by enabling US companies to set up local factories with favorable labor conditions. By employing skilled Mexican workers at lower rates, businesses outsourcing to Mexico can maintain high production standards without the steep labor expenses typical in the US. 

This cost efficiency is further amplified by the ease of access to a large, trained workforce ready to meet the demands of various manufacturing processes. Mexico’s labor force is renowned for being highly skilled and tailor fit to industry requirements. No longer the home of low-skill assembly workers, Mexico is up to the high-skill jobs associated with more sophisticated manufacturing and fabrication.

How to Lower Manufacturing Overhead

US manufacturers can also reduce their overhead costs by outsourcing to Mexico. Manufacturing overhead encompasses expenses like utilities, factory maintenance, and administrative salaries, all of which are lower in Mexico. 

The maquiladora program and partnerships with shelter services offer additional cost-saving benefits. These arrangements streamline operations, provide tax advantages, and minimize administrative burdens, allowing businesses to focus on production efficiency. 

Additionally, Mexico’s ongoing infrastructure investments, which are aimed at supporting the surge in manufacturing activities, also contribute to lower overhead. They achieve these cost savings by improving logistics and reducing transportation delays. The strategic location of manufacturing hubs near the US border ensures seamless operations, cutting down on costs related to transport and logistics.

Streamlining Operations

Beyond direct material, labor, and overhead cost reductions, outsourcing manufacturing to Mexico helps manufacturers save in another area, too: streamlining.

Manufacturers who outsource to Mexico’s dynamic production environment find that overall operational efficiency is enhanced. Shorter supply chains, reduced lead times, and proximity to US markets enable quicker response to demand fluctuations. And in turn, this agility allows companies to manage inventory better, minimize waste, and optimize production schedules. 

This is only compounded when they access Mexico via a shelter partner or contract manufacturer. These turnkey options provide additional support in navigating regulatory compliance and customs procedures, ensuring smooth operations. 

The collective benefits of lower costs and improved efficiency position US businesses to compete more effectively on a global scale, capitalizing on Mexico’s many strategic advantages.

Mexico is a manufacturing country. While many other industries and trades do well in the Latin American country, a large percentage of Mexico’s GDP comes from manufacturing – both for domestic use and for export.

But three manufacturing industries in Mexico stand out as the dominant over all others. These three make up the lion’s share of export values, units produced, and economic activity. In this article, we’ll take a snapshot of each of these three manufacturing industries that Mexico does so well.

Mexican Manufacturing

Reshoring and nearshoring have replaced offshoring in the past decade or so. Companies eager to minimize risks and shorten time to market have reconsidered their lengthy supply chains. Instead of razor-thin margins and inventories being shipped all around the world, much of the supply chain now occurs in the same geographic region. 

And Mexico has benefited immensely from this trend. As the manufacturing powerhouse of the North American trade bloc, Mexico supplies high-skill, low-cost manufacturing for much of the needs of Canada and the United States. But through an impressive array of free trade agreements, Mexico also supplies manufactured goods to much of Europe, Asia, and South America. 

As a result, Mexico’s emphasis on manufacturing yields results that are quite impressive. Market forecasts for 2024 predict:

• Value added from manufacturing will reach $131 billion USD.
• Value added per capita will exceed $1,000.
• Total manufactured output should reach $400 billion USD.
• Manufacturing intensity will be 31.2%.
• Employees currently working in Mexican manufacturing number 3.7 million.

And chief among the manufacturing industries in Mexico are the following three sectors.

1. Electronics Manufacturing

Electronics manufacturing in Mexico currently produces the most export value of any sector in the country. In 2021, exported value in this manufactured space exceeded $87 billion USD. The country has been engaged in this industry since the 1960s, and is now the 6th largest electronics manufacturer in the world.

• Electronics manufacturing comprises 2.5% of Mexico’s gross domestic product.
• Electronics spending is forecasted to exceed $1.2 trillion annually by 2032.
• Electronics account for approximately 30% of Mexico’s total exports.
• Over 1,100 electronics companies are manufactured in Mexico as of 2023.
• Mexico’s workforce employed in electronics manufacturing is approximately 330,000.

Primarily centered along the border with the United States and the Baja California region, Mexico’s activity in this field extends even to the central region and Mexico City, itself. Major electronics companies like Sony, Vizio, and HP have invested significantly in the country for its numerous manufacturing advantages. 

Due to a combination of strict IP protections, intense vocation training, and rapidly modernizing infrastructure, electronics factories in Mexico can produce much of the same technology as Asian factories for not much more cost. These products can reach North American markets much faster from Mexico and for far less in transportation costs.

2. Automotive Manufacturing

Probably the most active and robust manufacturing industry in Mexico right now is automotive manufacturing. In fact, Mexico is the 4th largest producer of automotive parts worldwide. Most of the leading automotive brands in the world rely on Mexican manufacturing to produce highly affordable, quality vehicles for global exports. Some of these brands include:

• General Motors, which made around 414,000 vehicles in Mexico in just the first half of 2024.
• Nissan, which manufactured 340,000 vehicles in the past six months.
• Ford, which produced well over 200,000 vehicles there this year.
• Chrysler, which made over 220,000 vehicles there in the first two quarters of this year.

Other notable companies have a smaller, albeit significant, footprint in Mexico, some of which include BMW, Audi, Volkswagen, Kia, and Honda. All in all, Mexico has produced around two million vehicles so far in 2024, alone. And approximately 1.7 million of those were for export. Annual export values for the Mexican automotive sector frequently exceed $40 billion USD.

3. Aerospace Manufacturing

While not as massive as automotive and electronics manufacturing, aerospace manufacturing in Mexico is still one of the top three primary manufacturing sectors in the country. And the industry produces components, units, and vehicles for all three sectors of aviation: private, commercial, and defense. 

What’s truly notable about Mexico’s aerospace manufacturing industry is the sustained rate of growth that typically averages approximately 15%. 

• Annual foreign direct investment (FDI) reached $5.5 billion USD in 2021.
• The sector creates approximately 60,000 jobs for Mexicans.
• Aerospace exports reached $6.7 billion in 2021.
• Total export value reached approximately $8 billion in 2022.

Well over 300 of the world’s leading aviation companies invest in Mexican operations to propel their global and regional strategies. Companies like Airbus, Boeing, Beechcraft, and Honeywell all recognize the substantial advantages Mexico’s maquiladora manufacturing infrastructure provides. With a focus on innovation, quality, and cost savings, the Latin American country has much to offer aerospace manufacturers.

These three sectors make up the three most active, most profitable, and fastest growing manufacturing industries in Mexico. Each of them has roots running deep in the Mexican economy and enjoys substantial industry hubs and highly integrated supply chains. 

And as the world economy shifts, and manufacturing comes back home to North America, Mexico is poised to ride this wave into the future and leverage current strengths with developing opportunities to become a primary global hotspot for each of these manufacturing industries.

Mexico is known for being a manufacturing powerhouse and the center of the reshoring trend now in full swing across the globe. And among the biggest opportunities for growth is electronics manufacturing in Mexico. In fact, the trajectory of this industry is downright impressive.

The Latin American country is uniquely suited to highly skilled assembly and technical manufacturing, and with proximity to the US consumer market, factories there are highly profitable ventures. Indeed, Mexico has already been well established as a manufacturing hub for electronics, but it is the story of Mexico’s growth and resilience in this market that is the source of the greatest optimism. 

By the Numbers: Electronics Manufacturing in Mexico

A vital sector for the country, electronics manufacturing is a vital sector for the Mexican economy. It dates back to the 1960s and has a long and successful track record of a growing and highly profitable manufacturing industry. 

Beginning in Juarez with a focus on consumer electronics, this sector in Mexico now encompasses many areas, from consumers electronics to automotive electronics, medical equipment, computing, and more. Early in its history, the industry focused on mass production and low-skill assembly. This, however, has morphed over the years into a high-mix approach, with an emphasis on higher value-added products made in smaller batches.

• The industry accounts for 2.5% of Mexico’s gross domestic product.
• Electronic components manufacturing comprises the largest subsector at 7.1%.
• Forecasted spending in electronics is expected to exceed $1.2 trillion annually by 2032.
• Approximately 30% of Mexico’s exports are electronics.
• Mexico is the 6th largest producer of electronics in the world.
• Approximately $5 billion USD is invested in electronics manufacturing in Mexico every year.
• Over 1,100 electronics companies currently have operations in Mexico.

Mexico and Semiconductor Chips

Over the past few years, the world has endured an ongoing shortage in semiconductors. While Taiwan and Asia have manufactured the lion’s share of chips for many years, US and European demand has outpaced supply. And US investment in manufacturing domestically has lagged woefully behind. 

However, Mexico has emerged as a promising alternative for semiconductor manufacturing. Because of the country’s aggressive investment in manufacturing electronics and their well-established dominance in automotive manufacturing, Mexico is poised to make great strides in supplying the global semiconductor market – and especially the North American market.

Mexico offers North America the opportunity to build a better supply chain for this specialized sector of electronics. Chips go into everything from Teslas to smartphones to numerous everyday products. The Inflation Reduction Act and CHIPS Act in the US are already focusing on North American investment to build the infrastructure needed to manufacture semiconductors on the continent. 

While Mexico may not be fully set up to handle the complete process of chip fabrication, it is highly suited for adjacent operations like testing and packaging and even assembling more basic chips. Mexico has invested heavily in increasing its technological capacity and training a highly skilled labor force. It excels at creating supplier and vendor networks in industry hubs. And EV manufacturing is already investing in Mexico, setting the stage for a rapid formation of semiconductor hubs in the country.

Major Electronics Players

Electronics manufacturing in Mexico centers primarily around industry hubs in the northern and central parts of the country. The industry is especially growing in the north of Mexico, with several states hosting more than 100 companies each, including:

• Nuevo León
• Chihuahua 
• Jalisco
• Baja California

Baja California is the unchallenged leader of Mexico’s electronics manufacturing, with at least 200 companies in this one state alone. But Mexico state in the central part of the country is also home to well over 100 companies and a vibrant supply chain. Leading global manufacturers of electronics components, products, and associated parts have factories there, including among others:

• HP
• Samsung
• Panasonic
• Foxconn
• Toshiba
• Sony
• Siemens
• RCA
• Compaq
• Vizio
• Lenovo

The most heavily invested companies in Mexico’s electronics industry are OEMs for computers, smartphones, and flatscreen TVs. In fact, Mexico manufactures and exports more televisions than any other country in the world. 

Future Opportunities

Mexico’s maquiladora manufacturing system offers electronics companies numerous advantages, such as:

• Strong IP protections
• Proximity to the US consumer market
• Highly skilled labor
• Strong trade agreements with most of the world
• Dual language capability and ease of management for English speakers
• Strong manufacturing infrastructure and a business-friendly climate

Because of Mexico’s unique value proposition for electronics manufacturing, the country has demonstrated profound resilience. In spite of a slow second quarter in 2023, electronics manufacturing in Mexico bounced back strongly in the fall of last year. 

Contract manufacturing offers even smaller companies the option to manufacture electronics in Mexico, leveraging low-cost, high-skill labor and Mexico’s other advantages. But other modes of entry have also proven profitable for US companies. Shelter manufacturing has also given small-medium-size companies a leg up in accessing Mexico’s electronics industry.

As global demand for technology and electronics accelerates, decades of industry experience have positioned Mexico to ride the wave. New investments are being announced every month. And with China and other Asian countries on the decline, and shorter supply chains increasing in popularity, Mexico’s prospects for future growth in electronics are quite promising.