As the trade war with China continues, more companies are looking south of the border with new interest.
As of 2019, Mexico is the largest goods trading partner with the U.S. with over $600 billion in imported and exported goods. This relationship has created 1.2 million jobs as of 2015, according to the latest data available from the U.S. Department of Commerce. It’s also been reported, as of February 2019, that U.S. trade with Mexico increased 3.36%, while trade with Canada decreased by 4.12% and with China by 13.52%. This illustrates the direct impact of the current administration’s trade war with China in particular, which ultimately has had negative repercussions for the U.S.
Generally speaking, products manufactured in Mexico are high-mix, low-volume, such as automotive and aerospace parts. This level of product is more expensive to move from China to North America when compared to shipping from Mexico. They also require more engineering skills than many products manufactured in China, which trend toward low-mix, high-volume, such as sunglasses or clothing.
As a result of Mexico’s cost-effectiveness, global companies with a stake in the North American market, including Nestle and the BMW Group, have increased investments in their Mexican factories in recent months. In 2014, Nestle planned a $1 billion investment over five years to build and expand three of its factories in Mexico. And earlier this year, the BMW Group announced its new automotive plant in San Luis Potosi, Mexico as a boost to their “regional production flexibility in the Americas.”
Mexico’s advantage today
Manufacturers that have not expanded operations internationally or have previously looked to China as their sole trading partner have started to consider manufacturing in Mexico as an alternative. For enterprises considering such a move, it’s important to understand the benefits and drawbacks of expanding operations to Mexico as opposed to China.
First, Mexico’s proximity to the U.S. means lower shipping costs and the ability to work in similar, or the same, time zones. Conversely, manufacturers that already have foreign business relations with other countries may be less inclined to learn new processes and compliance measures necessary to operate in Mexico. For example, in Mexico, companies maintain independent operational control. Whereas, in China, manufacturers must partner with a local company or investor, which can lead to challenges regarding confidentiality and bureaucratic decisions.
Second, manufacturers can benefit from Mexico’s skilled trade workforce at a lower labor cost relative to the U.S. or, at times, China. Currently, Mexico’s minimum wage is equivalent to $4.70 per day compared to the U.S. minimum wage of $7.25 per hour, or approximately $58 per day. Among China’s main provinces, including Shanghai and Beijing, the monthly minimum salary is equal to $364 or approximately $12 per day. For manufacturing positions specifically, the wages have increased. For example, along the border, salaries are approximately $3.50 to $4 per hour for production line workers. Whereas a similar position in the U.S. for a production line averages around $14 – $16 per hour.
Additionally, it’s far easier for companies to travel south of the border for training, quality control, logistical matters and to maintain open communications, thereby limiting potential disruptions in production.
Third, U.S. companies can take advantage of the cost-effectiveness of manufacturing in Mexico under the country’s IMMEX program.
Working under Mexico’s IMMEX program
Formerly known as the maquiladora program, IMMEX offers tax benefits to foreign companies that are manufacturing in Mexico. Namely, they aren’t required to pay value-added tax (VAT) on temporarily imported materials, as well as machinery and other equipment, since they will be delivered back to the U.S. as a finished product. This is only applicable for companies that operate under the IMMEX program as a standalone entity or as a shelter operation. Those that decide to create a standalone entity in Mexico must pay the 16% VAT while they wait for their VAT certification to be approved. This is costly to businesses as the approval time can take several months. Since a shelter company already maintains VAT certification, this helps businesses start their operations in the quickest and most efficient way possible.
With regards to perceived disadvantages, maintaining compliance under the IMMEX program is one of the biggest challenges that most companies that operate under this program face. Foreign manufacturers operating as a standalone entity must track and report all goods that are temporarily imported. In addition, they must understand and follow all program regulations and pay the accompanying taxes as they are updated. Without the assistance of an in-country shelter corporation (which is responsible for securing all necessary permits and licenses, leasing operations facilities, and ensuring all legal compliance obligations are met) manufacturers may face labor and legal compliance issues.
The Future of Manufacturing in Mexico
In November 2018, the U.S., Mexico and Canada reached a new agreement to ensure “more balanced, reciprocal trade.” Although NAFTA remains valid, the United States-Mexico-Canada Agreement (USMCA) can go into effect following Trade Promotion Authority (TPA) procedures and approved legislation. Regardless of changes, the concern over possible tariff increases may be considered a drawback of operating in Mexico or any other foreign country.
The Trump administration stated in May 2019 that it would impose a 25% tax on all Mexican goods. This increase would have had major implications for both the U.S. and Mexico. As of now, the scheduled tariffs have been “indefinitely suspended,” according to President Trump, but it is a factor manufacturers consider when deciding where to expand operations. However, it’s important to keep in mind the Trump administration’s tariff plan, if implemented, wouldn’t incur changes overnight. It would happen incrementally with the opportunity for a compromise or resolution to take place at any point during the process.
Mexico continues to be an optimal foreign manufacturing choice for firms due to its proximity to the U.S., access to a skilled labor force, and historical competitive advantage for the automotive, aerospace, electronics, medical device and other industries. Many U.S. manufacturers have experienced the benefits of working with Mexican shelter companies for years and more are considering the advantages this trade relationship provides, especially amidst the ongoing trade war with China.
Article originally published on Sept.3, 2019 by Sergio Tagliapietra on www.supplychaindive.com