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.
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.
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.
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.
