In our first article in our five-part series on the accelerating trend of onshoring manufacturing due to COVID-19, we explored how it has changed how businesses consider location strategy. In the second part of our series, we investigate the benefits and risks of manufacturing in Mexico, which many have said is to be the biggest benefactor of new industries looking to shift reliance from China. But what are the driving factors to consider a move to Mexico? And where is the investment coming from? These are the topics that will be explored in part two of this series.
Nearshoring to Mexico
Whereas China has perennially been viewed as the ‘go-to’ country for outsourcing of goods since Nixon formally normalized relations with the country in 1972, U.S. businesses have been rushing to outsource their manufacturing to Asia, and specifically China, which seemed to provide an abundancy of low cost labor and endless manufacturing capacity.
Moving forward to 2020, China’s dominant role on the global manufacturing stage has not only been maintained, but further validated as the entire world looks to China as the manufacturing hub for much of the world’s product with nearly 13% of total global trade originating from China in 2019. Exports totaled over $2.5 trillion dollars in value, with everything from basic trinkets to high-tech computers coming out of China.
But there has been a crack on the sole reliance on China as the world’s manufacturing hub over the past 10 years. Inflation, global geopolitical tensions, tariffs and increased customer demands for speed to market has started to change the decision-making analysis to new markets.
Mexico has been one of those markets that has been a beneficiary of increased foreign investment as a direct result of the changing operations in China. As inflation in China has increased labor costs, currency manipulation and tariffs have also created an economic argument to consider alternative manufacturing locations. Beyond the economic concerns, geopolitical instability, social image and most importantly speed to market liabilities have increased the likelihood of companies to look for nearshoring opportunities, specifically with Mexico on the top of the list as a market for consideration. With this increased focus on Mexico, as a site of manufacturing for the American market, trade with Mexico has soared to over $614 billion dollars in 2019, making Mexico the U.S. largest trading partner.
Some of the reasons that are compelling to both the U.S. and other foreign businesses who are looking to serve the U.S. and the Americas are the following:
Mexico’s Location Advantage
With a 2,000-mile shared border with the U.S. and shared time zones, Mexico sits at the front door of the U.S. No longer dependent upon slow moving ocean vessels, and the staging and offloading of those vessels, product can be loaded on Mexico’s well-developed highway network or Mexican rail system that connects with U.S. rail lines. This will result in over two weeks of transit time to be shaved off delivery time to U.S. markets. With many direct points of entry into the U.S., connectivity with Mexico has proven crucial during the COVID-19 pandemic. Port Laredo has topped the charts as the U.S. entry point with the highest value of goods entering the country as shipments from China floundered. In addition, Mexico also possess well developed seaports and airports which give them access to the Americas and beyond. The model of having product in time is easier to achieve with a supply chain that is closer and involves less complexity.
Compelling Labor Environment
Although the perception has been Mexico is not as skilled as China in manufacturing, yet the price of labor is higher, the reality about the modern-day Mexican labor force is quite different. Inflationary pressures in China have increased labor rates dramatically over the last 10 years, surpassing those of Mexico in 2015. Currently, in comparing the labor costs of manufacturing in China and Mexico, Mexico maintains about a $2 an hour advantage. It has been said that as a rule of thumb, fully loaded U.S. hourly rates are comparable to Mexican daily rates in manufacturing. However, it’s not just the general labor that has advantages. Mexico also is home to a large highly skilled workforce with more than 112,000 engineers and technicians graduating from many of Mexico’s universities. Moreover, many of these graduates have global experience and are not only bilingual, but oftentimes multilingual.
Global Trade Agreements
There has been a lot of talk about the newly ratified USMCA trade agreement, specifically about increasing wages for product which will be sent to the U.S., the bigger issue here is that there is certainty in the agreement. Whereas U.S.-China relations have been very volatile with the implementation of tariffs on Chinese goods (yet another additional cost for goods coming China), the USMCA represents a multinational trade agreement that is settled between the North American nations. However, Mexico is leveraging its strategic location to also be an export market. To facilitate this, Mexico has established free trade agreements with 43 countries giving Mexican sourced products preferential treatment to over 1.25 billion people globally.
Growing Middle Class
Lastly, an important consideration in supply chain is to locate as closely to your consumer base. For Mexico, much of the consumer base is located north of the border in the U.S., or markets across the seas. But Mexico also has benefited from foreign direct investment in the country, raising standards and creating a growing middle class of consumers. Many Mexican citizens find their lives and livelihoods closely intertwined with the U.S. both economically and culturally. The Mexican market comprises of over 125 million citizens, and many of these consumers want U.S. goods and services.
These main advantages of nearshoring to Mexico- of being better, faster and cheaper – are the same drivers of consumer spending decisions that are compelling companies to revisit Mexico as the China alternative. In the next segment of this five-part series, we will explore the reasons for moving even closer, reshoring to the U.S. and the advantages for various industries.
About the Authors:
This article was written by the Colliers’ Workforce Analytics team, within Occupier Services, whose mission is to enable people strategy to advise and transform businesses. This consulting service offering leverages agile technology and advanced analytics to equip businesses with workforce-related insights to make fact-based, quantitatively justified location-related decision in labor markets around the world.
Head of Location Strategy Consulting, Gregory Healy, a senior vice president, leads the Supply Chain Solutions team in the U.S. for Occupier Services, as well as Workforce (Labor) Analytics Consulting practice. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.
As Vice President of Workforce Analytics, Bret Swango, leads the day-to-day, consulting operations of this service offering. An industry expert in labor and related data analytics, he provides clients with insights on markets around the world to help them navigate and understand the implications of workforce data and enable occupiers to make informed business decisions. Prior to this role, Bret served as a director on the Corporate Solutions team in Chicago working with clients to develop business intelligence platforms and analytical tools to align their real estate strategy with their operational objectives.