Has Mexico Become a New Hub for Manufacturing?
Global Supply Chain Interruptions Have Uncovered Manufacturing Alternatives to China
June 20, 2022
Regardless of where you live, you are familiar with the “Made in China” tags included on many products you use. The reason why it is so common is that for years China has been the most significant manufacturing hub across the globe.
Many leading global businesses, such as Nike and Apple, have relied on China as their go-to country for manufacturing purposes because costs were hard to beat elsewhere. However, the increased dependency on China and the strained global supply chain have forced western companies to rethink their strategies. The tide of global trade is turning.
Today, shoppers are beginning to find “Made in Mexico” or “Made in Nicaragua” labels, for example, instead of “Made in China” on inexpensive clothing, household items, and other items sold by retailers, as many businesses have started to shift their manufacturing units to Latin America to bring supply chains closer to home; a concept known as Nearshoring. (Read our article on Nearshoring.)
This is a notable shift and there are several reasons behind the redevelopment of manufacturing and production units from China to Latin America.
WHAT CAUSED THE SHIFT?
Regardless of the product, businesses do not make significant changes to their manufacturing and supply chains often, even more so when it involves the relocation from one region to another. Just think about the complexities of completing shutting down plants or breaking partner contracts in one country and building up operations or forging new partnerships in another. It’s complicated, costly, and time-consuming!
Sometimes relocating production hubs is necessary for businesses seeking to shorten the production-to-consumer delivery time, save money, and avoid general aggravation. There are many factors that contribute to these difficult decisions. In this article, we will discuss some of these key factors that are influencing this trend of the manufacturing move from China to Latin America, namely Mexico, and why the global supply chain continues to narrow for so many producers.
1. THE U.S.-CHINA TRADE WAR
In 2018, former U.S. President Trump imposed punitive tariffs on trade with China, which ignited a trade war between the two nations. Since then, geopolitical tensions between the two superpowers have been on the rise with no signs of slowing down. The trade war caused significant problems between the nations. Price increases reached a point where they began directly impacting business relationships between manufacturers and the business owners.
While the trade war with China was initially a geopolitical concern for the U.S. (and other developed nations), it very quickly began affecting U.S. businesses locally as inflation became more of an issue. Higher prices led to a lower consumption of goods by U.S. consumers who began to feel the pinch. In order to survive, in some cases, businesses started shifting their manufacturing operations away from China, in search of greater cost-efficiencies. They found them by establishing manufacturing operations in Latin America.
On a related note, manufacturing costs have skyrocketed and wages have recently been on the rise in China, making the Superpower less competitive in terms of pricing and lowering producers’ ability to achieve the cost savings they once experienced in years past. This explains yet another shift away from producing goods there.
2. CROWDED PORTS AND THE COVID-19 PANDEMIC
COVID-19 has been another major cause for the reduction of manufacturing and relocation away from China. The pandemic shocked the world in 2019. Countries closed borders. Airlines discontinued key business travel routes. Large fleets of container ships were stalled in ports with no one available to unload orders. Workers were ordered to stay home. Supply chains were severally interrupted.
Since global trade channels were on lockdown, transporting goods and services became nearly impossible. Stalled supply chains led to significant losses and suffering for businesses in the U.S. and around the world. The limited availability of goods to suppliers and consumers; from microchips to new automobiles, to healthcare products and consumer electronics, became more than just a headline but began directly impacting consumers. While the need for these products, components, and other raw materials remained high, sourcing became a great challenge.
In the healthcare and IT sectors, for example, fragmentation and market chaos ensued. The once comfortable and reliable reliance on China for the basic elements needed to manufacture products in these sectors was quickly exposed. Packaging for key healthcare products became scarce, cost-prohibitive, or completely unavailable, making it nearly impossible for these companies to deliver to buyers. Companies incurred significant losses and were forced to look for alternative and innovative ways to stay in business.
One of the more obvious ways companies began solving the problem was to reduce the geographic distance between manufacturing facilities and the North American customer. One popular decision for many Western companies was to begin manufacturing products closer to where raw materials were produced and most easily accessible, like Mexico.
Today, China continues to struggle with supply chain issues as a result of COVID-19 and the lockdowns imposed on the Chinese people by their government. In fact, as of May 2022, industrial output is at its worst since the beginning of the pandemic.
3. THE UNITED STATES MEXICO CANADA AGREEMENT (USMCA)
In July 2021, the United States of America, Mexico, and Canada signed a tri-lateral trade agreement that benefitted the manufacturers, businesses, farmers, ranchers, local workers, and others of all countries involved.
The agreement aims to promote free trade between the nations and support supply chain and manufacturing units to be originated within the boundaries of these nations. According to the agreement, Mexico would become the predominant manufacturing unit and trading partner for the U.S. and Canada, which made many businesses in the region shift away from China to Mexico for ease of doing business, to save money, increase efficiency, and to shorten the supply chain.
Businesses have found significant benefits by bringing manufacturing closer to headquarters and to potential consumers. Instead of importing and bearing the transportation costs, risks, and significant delays, they could now focus on exporting, selling, and significantly reducing production costs. There’s a compelling reason for why Mexico will become as successful as China was in years past.
We hypothesize that, in the near-term, Mexico will continue to grab manufacturing market share from China as U.S. and other multinational companies continue to sell their products to consumers in the Western Hemisphere. That said, whether Mexico has the capacity to rival China as a long-term, global manufacturing hub is yet to be seen. Undoubtedly, the Chinese are working tirelessly to adjust to the current, global business realities.
BIENVENIDOS A MEXICO (“WELCOME TO MEXICO”)…BUT, WHY?
Many businesses that have recently relied on manufacturing and other imported goods from China have since looked to Mexico for sourcing. Companies that import basic products, such as household goods and electronics, now have established a manufacturing unit in Latin America, specifically, Mexico, and have cut out China almost entirely.
But, why Mexico? While there are similar benefits across other Latin American countries, Mexico offers several benefits over China as a manufacturing partner. Here are a few:
- Less Time of Transport to Buyers (Shorter Supply Chain)
A key benefit from producing in Mexico, instead of China, is that businesses can save a lot of time and avoid interruptions transporting goods. With China as the manufacturing hub, transport was either managed by air (which is expensive) or by sea (which could take weeks). No matter which method you choose, the delivery of your shipment could still take a long time. However, the delivery of products from Mexico is much faster, and in some cases, may even be handled via ground transport. If the products are being delivered to the U.S., the benefits of the USMCA trade agreement also help navigate border and customs authorities.
- Lower Language Barrier
Trading with partners in China has often been a problem for U.S. companies due to the language barrier. In China, most Western business executives require an interpreter to communicate with local manufacturers or partners. However, Spanish is the second most common language spoken in the U.S, making it easier for U.S. executives to deal with their Mexican manufacturing counterparts. Though English literacy is still low in Mexico, the familiarity with English and Spanish among trading partners in Mexico makes language less of a barrier than it is in China.
- Time Zones Differences
The U.S. and China time zones are drastically different (12+ hour difference), often creating a barrier to dealing directly with manufacturers in China. When working with Mexican manufacturers, time zone is less of a concern because both countries share many of the same time zones. This leads to more immediate communication between U.S. businesses and their Mexican production facilities.
Nothing is perfect in global trade and business, and this rings true for Mexico. While there are clear benefits to manufacturing closer to home for U.S. companies, Mexico still has its challenges and business leaders should be aware. (Read our Market Spotlight on Mexico).
- Illegal Drug Trafficking: While political stability across Mexico remains high, illegal drug traffickers continue to operate across the country and present challenges to doing business. Business leaders should remain vigilant and be mindful of their own safety and safety precautions.
- Language Barrier: Though many Mexican executives speak English and many Americans and other business executives speak Spanish, the English literacy rate in Mexico is still ranked one of the lowest English-proficient countries in Latin America (19 of 20, according to the EF English Proficiency Index). As you begin doing business in Mexico, make sure you have Spanish speaking employees on your team to make things easier.
- Relationships are Essential: Sometimes, without the right business relationships, it’s impossible to get a deal done. (This goes for many countries beyond Mexico, by the way). So, whether you’re building a new manufacturing facility or establishing a formal agreement with a local partner, it’s imperative to spend time forming relationships that will yield a trusting business relationship between you and your Mexican counterparts.
There was a time recently when China was considered the most prominent global manufacturer, producer, and supplier for businesses around the world but recently the circumstances have changed. Businesses have found ways to increase efficiency and lower the cost of manufacturing which they can achieve by producing their goods closer to the buyer in Mexico and in other parts of Latin America.
Geopolitical expert Peter Zeihan has predicted the “Made in Mexico” is the future of manufacturing, and with the current circumstances — lingering COVID-19 pandemic, global conflicts, geopolitical tensions between the West and China, to name a few — we believe he might be onto something.
However, while Mexico seems like a clear winner to steal market share from China, it’s very unlikely China will be out of the game all together. And, it’s worth noting, that other Latin American countries like Guatemala, Costa Rica, and Colombia also stand to benefit from the supply chain shift.
Is this the “new normal” everyone keeps talking about? We’re not certain. But what we can say is that businesses are continuing to grapple with and suffer from supply chain delays. Consumers are frustrated and looking to the competition for solutions. Supply chain issues continue to effect businesses in a real way and the bottom lines are shrinking.
If you’re contemplating a move of your manufacturing hub from China to Mexico or elsewhere in Latin America, we can help. There’s no easy fix and the move won’t produce immediate results, but nearshoring is a strategy worth considering.