March 27, 2023


Learn Business From Experience

Mexican Provide Chain Administration: You are not in China Anymore

14 min read

Final yr, I requested my good buddy Andrew Hupert to clarify what it takes to maneuver manufacturing from China to Mexico, largely by evaluating the 2 international locations. I selected Andrew for this near-Herculean job as a result of he has spent a lot time in each China and Mexico, navigating their manufacturing methods from the within.

My regulation agency continuously consulted with Andrew once we first began doing China authorized work, again when Andrew was residing in China. Although Andrew had for many years tied his life and profession to China, he — like me — was one of many earliest proponents of a post-China manufacturing world. To raised assist the rapidly growing number of companies looking for to maneuver their manufacturing from China to Mexico, moved to Mexico, turned fluent in Spanish, and began consulting and writing about what’s required.

Final yr Andrew wrote a collection of 5 posts on the variations between China and Mexico manufacturing and I urge you to learn all 5 of those:

Then on the finish of final yr, Andrew and I collectively wrote Three Issues Everybody Leaving China for Mexico Ought to Know, as an introduction to what we anticipate will probably be a ten half collection to be written over the subsequent 7-9 monthsThis collection will contain Andrew writing about what he’s seeing of firms shifting their manufacturing to Latin America/Mexico and attorneys in my agency who assist firms that make these strikes legally writing about what they’re seeing as properly, typically with Andrew, as is the case right here, and typically individually.

Final week we wrote Three Errors We Made in China and Three Issues We’ll Get Proper in Mexico.

The under was written by each Andrew and me and it constitutes our third piece on this new collection.

Please word that Andrew and I additionally will probably be placing on a free on-line Q & A session in February on what it takes to maneuver manufacturing from China to Latin America. Please verify again right here later this week for the total particulars on that. Within the meantime, when you’ve got any questions you need us to reply at that occasion, please ship these to us at [email protected]

1. The North American Leaders Summit

Although final week’s North American Leaders Summit left many unimpressed, it did have some good classes for these seeking to arrange operations in Mexico, particularly in case your purpose is to shift your provide chain out of China. Like most occasions like this, it has some excellent news for worldwide companies, some unhealthy information, and loads of ambiguity.

The excellent news is that the political connections between the US, Canada, and Mexico are sturdy and steady. Sure, Mexican President Obrador Lopez (generally known as AMLO) appeared to exit of his technique to chide the US for its colonial previous, however that’s simply regular habits for this populist chief and it signifies his confidence within the US-Mexico partnership. There was no speak of pulling out of the USMCA commerce bloc nor any complaints about financial coverage. All three leaders appeared snug with each other they usually all behaved cordially.

The unhealthy information was that the assembly produced little by the use of substantive outcomes and it didn’t actually cope with any vital new points. The US and Canada want to see Mexico liberate its power market and transfer in the direction of cleaner, greener types of electrical energy technology. Canada and Mexico would really like the US to liberalize commerce, significantly within the auto sector. Whereas the summit was going down, a USMCA panel did rule in favor of Canada and Mexico in a dispute with the US over local-content rules, however the timing on this was a sheer coincidence. In different phrases, the three leaders weren’t concerned within the week’s solely vital resolution concerning Mexico/Canada/United States commerce relations. President Biden and AMLO confirmed changes to the immigration state of affairs, however that call had been within the works for some time. Nothing new was introduced – however no harm was executed to present industrial relationships both.

2. The Foremost Takeaways for Your Enterprise

A. The Mexican Authorities is Much less Central to Enterprise Than China’s Authorities

TheMexican authorities doesn’t play the outsized position in North America that the Chinese language authorities performs in Asia. Not even shut.

Mexico doesn’t have Particular Financial Zones (SEZs) which might be helpful to you. And although Incentives and free commerce applications do exist in Mexico, they’re not the policy-driven gated communities during which international companies in China usually clustered.

It’s additionally comparatively straight-forward and cheap for international entities to function export-oriented factories in Mexico and doing so is far more a Do-It-Your self (DIY) affair than in China. Mexico has a regulatory and authorized framework in place, however it’s as much as particular person firms to place the items collectively. China was well-known for the phrase “all the pieces is feasible however nothing is straightforward” and international firms would usually go to China with half an thought and depart there with a pattern product. Mexican managers have  extra concrete expectations about enterprise and their companions.

B. What you DON’T have in Mexico

In distinction to China, you do not sometimes have the next in Mexico:

a. An opaque enterprise registration or approval course of.

b. The requirement that you just share your IP or your product particulars with the central authorities.

c. The necessity to rent personnel by way of state-run employment companies.

From the authorized facet, our regulation agency (Harris Bricken) sometimes costs 35-75 % much less for the authorized work required to arrange and defend a consumer firm in Mexico than in China and that is just because what’s required to perform this stuff in Mexico tends to be far simpler and fewer dangerous than in China. Organising and defending an organization in/from China is in lots of respects not like wherever else on this planet. Organising and defending an organization in/from Mexico isn’t all that totally different from locations like the US, Canada, or Spain.

Mexico is on the different finish of the spectrum from China’s “massive brother” method. In Mexico you will want to depend on non-public firms for all the pieces from enterprise registration to utilities to manpower. There are good, economical choices to select from, however international firms organising in Mexico typically discover that they’ve an over-abundance of liberty – usually needing to take duty for their very own infrastructure, managing scarce assets (typically this contains water and electrical energy), and furnishing their very own safety.

C. Mexico’s Angle In direction of Worldwide Enterprise

The official method of the Estados Unidos Mexicanos (Mexico) is that international traders are inspired to arrange manufacturing and sourcing services throughout the nation as long as they 1) instantly export merchandise and processed supplies in a foreign country, 2) arrange a Mexican entity to transact home enterprise, and three) adjust to all relevant legal guidelines, guidelines, and laws.  Mexico likes your investments, likes your know-how, and likes the salaries you pay its employees. It doesn’t like unfettered competitors in its client markets, and it takes an energetic position in defending home firms. Mexico additionally has an unlucky tendency to nationalize a few of its key industries (power is the large one, however locals are warily eyeing authorities involvement in airways and transport as properly).

Mexico has a authorized and institutional framework that allows international companies to arrange operations and export to the US and to different markets at low value and excessive effectivity. This framework is usually primarily based on the next:

1. USMCA (a/ok/a T-MEC in Mexico and CUSMA in Canada). For an excellent and really concise clarification of the USMCA, take a look at USMCA: Trump’s new NAFTA deal, explained in 600 words.

2. IMMEX/Maquiladora/Shelter Packages. See Utilizing Shelter Firms to Transfer Manufacturing from China to Mexico and Shelter Manufacturing in Mexico: Again by Well-liked Demand.

3. Free Journey Zones. See Mexico free trade zones worth exploring for stateside international shippers.

4. Industrial Parks. See Finsa records 99% occupancy rate in 2022 thanks to nearshoring.

We’ll very briefly describe every of the above under, after which deal with them in significantly extra element in later posts.

1. The USMCA is the brand new model of NAFTA, and it types the spine of the rising North American Financial Zone. That is the settlement that gives for low/no obligation import into the US of products made in Mexico and Canada. Its preliminary focus was the auto business, however its provisions apply to any business. US lawmakers don’t just like the time period “free commerce settlement” as a result of each labor unions and America Firsters see free commerce as a risk, however that’s just about what it’s. The underside line for decision-makers is that USMCA means that you can import Made in Mexico merchandise into the US largely tariff-free. Although this settlement was not solely with out controversy, it has deep bipartisan assist in Washington DC, and it’s unlikely to go away any time quickly.

2. IMMEX is a set of Mexican guidelines designed to draw worldwide funding FOR EXPORTERS. There’s a lot to unpack within the IMMEX guidelines, however the details of which you ought to be conscious are that Mexico will make the next low-cost and simple for you:

a. Arrange your factories in Mexico;

b. Import components, supplies and tools into Mexico;

c. Rent staff in Mexico;

d. Run you enterprise in Mexico, as long as it exports manufacturing out of Mexico (this doesn’t imply you can not entry Mexico’s client of B2B markets, however that’s a unique dialogue).

The phrases IMMEX, Maquiladoras, and Shelter firms are used kind of interchangeably when speaking about international firms in Mexico. The underside line right here is that Mexico has streamlined the method for international firms to arrange operations and import components, supplies, and equipment with low or no duties. Native “shelter firms” will deal with your set-up and real-estate wants at aggressive charges. See Using A Shelter Company In Mexico: A Complete Guide. A Google seek for “Mexico shelter firms” will shortly present you to the big selection of personal firms ready to shortly provide help to prolong your manufacturing operations to Mexico.

3. Mexican Free Journey Zones make it simpler and cheaper for vans to ship your completed items throughout the Mexico-US border and into the US. There are totally different zones, however the ones you care about are the 12 – 16 mile zones on the border with Texas and Arizona. Your complete Baja peninsula (bordering California) can be a free journey zone. This rule permits automobiles to cross over from the US and not using a momentary importation allow (TIP), chopping down on delays, prices, and paperwork. This is among the elements explaining why so many foreign-invested firms are situated proper on the US-Mexico border – and why the true property there’s so scarce and costly. Many 3PL suppliers are situated inside these zones. For a captivating New York Occasions article on how the Laredo, TX, is booming as a result of so many firms are shifting their manufacturing from China to Mexico, take a look at How a Texas Border City Is Shaping the Future of Global Trade. US imports passing by way of Laredo from Mexico already exceed all imports passing by way of the Port of Los Angeles. Roughly “$800 million price of merchandise as various as auto components, clothes and avocados cross by way of Laredo on daily basis . . . . “and by almost each indication, extra items are on the way in which, presenting customs brokers, freight handlers and trucking firms with a monumental alternative.”

4. Industrial Parks are frequent in Mexico, and that is usually the most suitable choice for SMEs looking for to maneuver their provide chains nearer to residence. Mexico’s industrial parks serve most of the similar capabilities as China’s Particular Financial Zones (SEZs), they usually usually work with the non-public firms that present shelter companies. Mexican industrial parks will sometimes give you the infrastructure, logistics, utilities, and safety your manufacturing unit wants. You’ll be able to construct your individual services from scratch, however partnering with a Mexican industrial park will often result in your manufacturing unit going up sooner and simpler. The unhealthy information? These parks — particularly the perfect ones — refill quick.

D. Your Mexico Enterprise Mannequin

In terms of manufacturing unit set-up, consider China as a jigsaw puzzle the place issues solely make sense if you put the precise items in the precise place, and there is just one technique to do it appropriately. Mexico is extra of an old-fashioned Lego set (pre Star Wars) the place you get to place the items collectively based on your individual plan.

A gradual, measured method to going into Mexico is feasible, and for a lot of SMEs it’s advisable. One of many massive complaints we preserve listening to about shifting manufacturing from Asia is that it’s unattainable to “decouple fully” from China. The fact although is that shifting from a China primarily based provide chain to a North American primarily based provide chain needn’t be a jarring one-shot deal; It’s attainable (usually fascinating) to plan an incremental shift that can truly strengthen your provide chain and your customer support. It isn’t crucial to maneuver your whole provide chain, both. You’ll be able to proceed importing technologically superior and specialised components from China/Asia, whereas utilizing Mexican labor for processing, meeting, and common manufacturing. Your choices in Mexico run the gamut from low-cost warehousing to complete localization of your worth chain.

As a sidenote, we’ve got purchasers which have skilled issues from not shifting sufficient of their manufacturing out of Asia quick sufficient AND we’ve got purchasers which have skilled issues from shifting an excessive amount of of their manufacturing out of Asia too shortly. Hitting the Goldilocks zone of China decoupling isn’t any simple job. Mexico presents a complete vary of choices, however it can be crucial that you just plan rigorously and seek the advice of with the precise specialists to make sure that you’re complying with all related laws, whereas maximizing your tax, logistical, and authorized advantages.

It is usually essential that you just early on perceive what’s required to your Made in Mexico merchandise to adjust to USMCA and Mexican, United States, and/or Canadian necessities on native product content material and diploma of product transformation. This compliance or lack therof will affect your tariff charges and it virtually at all times have to be decided on a product by product foundation by skilled worldwide commerce attorneys and/or customs brokers.

As at all times, good planning and preparation are key predictors of success in Mexico. Mexican managers anticipate you to indicate up with an entire answer, which incorporates sourcing and compliance. In China we used to say that for those who confirmed up on the Canton Honest with a sketch of a product and $20,000 in your pocket, a manufacturing unit consultant would discover you and make a deal. That’s not how enterprise works in Mexico. Chinese language manufacturing unit managers have been artistic downside solvers. Mexican manufacturing unit managers observe your plan.

The factor about Mexico is that it’s emminently attainable to take an incremental method, progressively increasing your publicity, by slowing increase your operations there as per the under:

  • Warehousing (“simply in time” was a Covid casualty.)
  • Fulfilment facilities (for the US market)
  • Meeting
  • Sourcing from Mexico, the US, and LatAm, whereas persevering with to import duty-free from Asia (offering the completed items are exported instantly).
  • Blended provide chains (native fabrication backed up with specialised manufacturing imported from Asia).
  • Fully native sourcing and manufacturing.

E. Ultimate Phrases

China within the Nineteen Nineties was fairly tough across the edges and many individuals stated it will by no means make it as a market economic system. Over time, nevertheless, we discovered tips on how to work with China, and China discovered tips on how to work with us. Possibly we each did our jobs a bit too properly, as a result of now we’re grappling with the disengagement downside, and we could also be operating out of time.

Mexico won’t ever have the massive home market or the uncooked manufacturing scale China has now, however Mexico has loads of different benefits for manufacturers concentrating on the US market. The USMCA commerce settlement and the two,000-mile land border are the primary belongings you’ll discover, and for many of you these are the highest priorities. Over time, nevertheless, it is going to be your capability to combine Mexican services seamlessly into your US enterprise that can make the most important distinction to your backside line. Your IP is mostly fairly protected in Mexico and its central authorities won’t intervene in your day-to-day operations. Maybe most significantly, you’ll profit from a strong, versatile framework of commerce agreements (together with CPTPP).

I (Dan) went to Queretaro final month for a few fast conferences. My spouse got here with me and we spent a number of days there in 65 diploma climate. She solely went with me as soon as to China and that took a ton of planning and was an enormous deal. Our journey to Queretaro was a complete piece of cake. We flew to Houston then took a two hour or so flight to Queretaro and we cleared customs in about 30 seconds — and all this with none visa or quarantine. Two of the People on our flight have been clearly such regulars to Queretaro that one of many customs officers hugged them and welcomed them again. I child you not. I do know lots of you don’t care about any of this, however I do and I care as a result of I really feel like each greenback I spend in Mexico goes to an ally and advantages the US, whereas each greenback I spend in China goes to a rustic most Americans view as an enemy.

On a extra sensible stage, our telephones labored with none further costs and by utilizing bank cards and leaving lodge suggestions in {dollars}, we by no means as soon as even wanted to transform any cash. Our Web labored nice and was by no means blocked, nor do I’ve any purpose to imagine that our lodge room was bugged. We have been in a position to watch no matter we wished on the lodge TV and on our computer systems and the time distinction was such that these from my workplace who didn’t know I used to be there by no means seen any distinction between my working from my sunny lodge room patio versus my residence workplace. My spouse and I additionally each obtained alongside nice with our unhealthy Spanish and left there talking it higher than earlier than we went. It felt like individuals have been joyful to see us and we have been joyful to be there. The climate was flat out excellent on daily basis, which coming from wet Seattle was one more massive plus. Mexico is a top-tier vacationer attraction for a lot of causes and China isn’t for a lot of causes.

Mexico presents worldwide managers far more flexibility than China ever might, and you’ll tailor your operation to your wants – to not these of a authorities or a political celebration. We urge you to think about it.


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