It borders the vast and prosperous US market, labor rates are less than 25% of those in the US, and with the USMCA trade agreement in place, it's a good location for business. Little wonder then, many US businesses choose to do some or all of their manufacturing in Mexico.
Automobiles and auto parts, textiles, chemicals and electronics are just some of the products currently manufactured in Mexico, primarily in states bordering the US. Companies with operations south of the US border have multiple advantages over those manufacturing elsewhere. Here we'll discuss what those are. We'll review the principal benefits, cover the labor cost savings and explain how a manufacturer can set up in Mexico.
WHO CAN MANUFACTURE IN MEXICO?
Many familiar names from the US, and not just the automotive companies, have manufacturing operations in Mexico. Appliances, consumer goods and electronics are some of the major industries manufacturing in Mexico for the US and other markets. However, the very size of these businesses may be responsible for a perception that Mexican manufacturing is only for Top Tier manufacturers with deep pockets.
The reality could not be more different.
Mexico is open to manufacturers of all sizes, types and industries. Consider:
- While some manufacturers produce finished products in Mexico others send components across the border for US assembly. (This facilitates late order customization.)
- Some manufacturers move materials and components made on highly automated lines into Mexico for assembly by lower-cost Mexican labor.
- Giant multinationals have set up operations in Mexico, but so too can medium and small manufacturers.
- It's not just about labor. Products that are heavy, bulky, or both are costly to ship.
Manufacturing in Mexico keeps transport costs under control.
The bottom line is, there are many manufacturing opportunities in Mexico for US companies. Whatever type of manufacturing you do, and however many people it takes, Mexico could be a very good option.
For a deeper analysis of what manufacturing industries are thriving in Mexico, go see this article: Major Industries Manufacturing in Mexico.
WHY MANUFACTURE IN MEXICO: BENEFITS AND ADVANTAGES
It's not just about low costs. Mexico is a manufacturing powerhouse with many advantages over economies in Europe and Asia. The country has good infrastructure, a stable, business-friendly government, an educated workforce and deep manufacturing expertise. Plus, it shares a border with one of the world's biggest and most affluent markets. This is why, in their report, "The Shifting Economics of Global Manufacturing," Boston Consulting Group classed Mexico as a "rising global star."
You can see a detailed explanation of all the benefits and advantages of manufacturing in Mexico here. They can be summarized as:
- Hourly cost of production workers is around $4 versus $16 - $21 in the US.
- Factory space is around $0.52 per Sq. Ft. in Mexico versus $6.53 in the US.
- Comparable electricity costs to those in the US ($0.09 KWh versus $0.12Kwh).
- Health care costs below US levels.
- Similar IP protection as in the US.
- Good understanding of / familiarity with US and global quality systems.
- Good availability of graduate engineers (approx. 130,000 engineers graduating each year).
- Short supply chains to US markets.
- Trade agreements in place with over 46 countries.
All but the last two should be clear. Regarding supply chains and trade agreements, a little more information may be helpful.
Supply Chain Benefits
Long supply chains, as when shipping goods from Asia, pose two problems:
First, the impact on cash flow. With a high likelihood of goods taking at least two months to arrive, (documentation, loading, transport, unloading, customs delays,) a lot of money is tied up.
The second impact of long supply chains is on flexibility. In many consumer markets, taste and demand can change quickly. Lead times of three months or more, (to include manufacturing,) limit the ability of a manufacturer to adjust production schedules. If a green model starts selling better, (perhaps due to a celebrity endorsement for example,) stock shortages could result in lost sales while simultaneously forcing discounting of other colors.
With transport from Mexico into the US taking a few days rather than weeks- see Mexico's Nearshoring benefits, manufacturing south of the border provides a great deal more flexibility.
No wonder why even Chinese companies are looking to sell into the US from Mexico…
International Trade Agreements
Many US businesses look at Mexico as a great place to manufacture for the US market. While this is correct, and takes advantage of its location, it overlooks the potential for exporting to other markets as well. Having a large number of international trade agreements with over 46 countries, Mexico is well-positioned as a global export center. (For example, it's no further from Europe than are Asian competitors.)
WHERE TO MANUFACTURE IN MEXICO: BEST LOCATIONS
Mexico is a big country - with a population of over 120 million, it is about three times the size of Texas. Like the US, it is composed of states, each of which administers to the residents of that region.
Manufacturing is widely dispersed throughout Mexico, although there's more in the northern states, especially those bordering the US like Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas. Within each state there are well-established centers of manufacturing. Tamaulipas for example has the city of Matamoros, just across the Rio Grande from Brownsville, Texas, and Chihuahua has Ciudad Juárez, directly across from El Paso.
Matamoros is a good example of what many US businesses look for in a Mexican manufacturing location. It is directly connected to the US by four international bridges with excellent road conditions. A population of over 500,000 means a good-sized pool of workers and the presence of leading manufacturers like GM, Toyota and Nike means lots of manufacturing expertise.
It is also worth noting that Matamoros´ border neighbor, Brownsville,Tx, has the only deepwater seaport directly on the U.S./Mexico border, which has been recognized worldwide for its bulk heavy lift in project cargo, steel fabrication, storage, crane services, towing and tug services among others.
Manufacturers interested in researching potential locations should review our Site Selection Guide in Mexico.
HOW TO MANUFACTURE IN MEXICO?
Multinationals like GM, General Electric and Bosch have both resources and local contacts to establish their own operations, but what of smaller businesses? How does a small or medium sized manufacturer go about setting up an operation in Mexico?
Trying to go it alone or start from scratch is difficult. The tax regimen is different to that in the US, as are employment laws. Finding premises is a challenge without local knowledge and contacts. These can all be addressed but it will take time. That's time during which you'll continue incurring US costs.
The faster, less complex route is to work with a shelter company.
A shelter company is a Mexican business that provides resources to companies wishing to start manufacturing in Mexico. A professional shelter company, like International Assembly LLC (IAI Mexico) for example, tailors services to the specific needs of each client.
Services typically offered include:
- Facility Maintenance and Insurance
- Labor Cost and Management
- Performing / Supporting Quality, Environment, Health & Safety Audits.
- Securing local financing as necessary.
- Handling legal and tax requirements around business formation/establishment in Mexico.
- Compliance to Mexico and US custom laws
- Recruiting managers versed in local laws and customs. (HR is a common starting point as this position then fills out the team.)
- Sourcing materials, components and other resources.
- Utility Contracts
Growing Businesses Manufacture in Mexico
There's a reason Mexico is an up-and-coming manufacturing powerhouse: it's a good place to make things. Many manufacturers have already taken advantage of the lower costs and business-friendly environment. Others are hesitating with concerns over the difficulty and complexity of setting up a manufacturing operation.
Shelter companies like IAI Mexico make the process as pain-free as it can be. By enlisting local support you're able to maintain focus on day-to-day operations while the shelter company handles the administrative, legal and logistical challenges of starting up a new manufacturing operation. Whether your company is large or small, there are many advantages to be found in Mexico.