Mexican Provide Chain Administration: You are not in China Anymore

Final yr, I requested my good good friend Andrew Hupert to elucidate 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 programs from the within.

My regulation agency often consulted with Andrew once we first began doing China authorized work, again when Andrew was dwelling 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 higher 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 might 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 corporations shifting their manufacturing to Latin America/Mexico and legal professionals in my agency who assist corporations that make these strikes legally writing about what they’re seeing as effectively, generally with Andrew, as is the case right here, and generally individually.

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

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

Please observe that Andrew and I additionally might 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 complete particulars on that. Within the meantime, you probably have 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 trying to arrange operations in Mexico, particularly in case your aim is to shift your provide chain out of China. Like most occasions like this, it has some excellent news for worldwide companies, some dangerous information, and a variety of ambiguity.

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

The dangerous information was that the assembly produced little by means of substantive outcomes and it didn’t actually take care of any vital new points. The US and Canada want to see Mexico unencumber its power market and transfer in direction of cleaner, greener types of electrical energy era. Canada and Mexico would love 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 relating to Mexico/Canada/United States commerce relations. President Biden and AMLO confirmed changes to the immigration scenario, however that call had been within the works for some time. Nothing new was introduced – however no injury was accomplished to present industrial relationships both.

2. The Essential 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 function in North America that the Chinese language authorities performs in Asia. Not even shut.

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

It’s additionally comparatively straight-forward and cheap for overseas 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, but it surely’s as much as particular person corporations to place the items collectively. China was well-known for the phrase “all the things is feasible however nothing is easy” and overseas corporations 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 simply share your IP or your product particulars with the central authorities.

c. The necessity to rent personnel by state-run employment businesses.

From the authorized aspect, our regulation agency (Harris Bricken) sometimes costs 35-75 % much less for the authorized work required to arrange and defend a shopper 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 anyplace else on this planet. Organising and defending an organization in/from Mexico just isn’t all that completely different from locations like the USA, Canada, or Spain.

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

C. Mexico’s Angle In direction of Worldwide Enterprise

The official strategy of the Estados Unidos Mexicanos (Mexico) is that overseas traders are inspired to arrange manufacturing and sourcing amenities 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 rules.  Mexico likes your investments, likes your know-how, and likes the salaries you pay its staff. It doesn’t like unfettered competitors in its shopper markets, and it takes an energetic function in defending home corporations. Mexico additionally has an unlucky tendency to nationalize a few of its key industries (power is the massive one, however locals are warily eyeing authorities involvement in airways and transport as effectively).

Mexico has a authorized and institutional framework that allows overseas companies to arrange operations and export to the USA and to different markets at low price and excessive effectivity. This framework is generally 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 Applications. See Utilizing Shelter Firms to Transfer Manufacturing from China to Mexico and Shelter Manufacturing in Mexico: Again by Widespread 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 beneath, after which deal with them in significantly extra element in later posts.

1. The USMCA is the brand new model of NAFTA, and it kinds 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 trade, however its provisions apply to any trade. 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 menace, however that’s just about what it’s. The underside line for decision-makers is that USMCA lets you import Made in Mexico merchandise into the US largely tariff-free. Although this settlement was not totally with out controversy, it has deep bipartisan help 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 gear into Mexico;

c. Rent workers in Mexico;

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

The phrases IMMEX, Maquiladoras, and Shelter corporations are used kind of interchangeably when speaking about overseas corporations in Mexico. The underside line right here is that Mexico has streamlined the method for overseas corporations to arrange operations and import components, supplies, and equipment with low or no duties. Native “shelter corporations” 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 corporations” will shortly present you to the wide selection of personal corporations ready to shortly assist you 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 USA. There are completely 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 with no non permanent importation allow (TIP), reducing down on delays, prices, and paperwork. This is without doubt one of the components explaining why so many foreign-invested corporations are positioned proper on the US-Mexico border – and why the true property there’s so scarce and costly. Many 3PL suppliers are positioned inside these zones. For a captivating New York Instances article on how the Laredo, TX, is booming as a result of so many corporations 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 Laredo from Mexico already exceed all imports passing by the Port of Los Angeles. Roughly “$800 million value of merchandise as various as auto components, clothes and avocados go by Laredo every single day . . . . “and by almost each indication, extra items are on the best way, presenting customs brokers, freight handlers and trucking corporations with a monumental alternative.”

4. Industrial Parks are frequent in Mexico, and that is usually the best choice for SMEs looking for to maneuver their provide chains nearer to residence. Mexico’s industrial parks serve most of the similar features as China’s Particular Financial Zones (SEZs), and so they usually work with the non-public corporations that present shelter providers. Mexican industrial parks will sometimes give you the infrastructure, logistics, utilities, and safety your manufacturing facility wants. You possibly can construct your individual amenities from scratch, however partnering with a Mexican industrial park will normally result in your manufacturing facility going up quicker and simpler. The dangerous information? These parks — particularly the perfect ones — refill quick.

D. Your Mexico Enterprise Mannequin

With regards to manufacturing facility set-up, consider China as a jigsaw puzzle the place issues solely make sense if you put the fitting items in the fitting place, and there is just one approach to do it accurately. Mexico is extra of an old-fashioned Lego set (pre Star Wars) the place you get to place the items collectively in accordance with your individual plan.

A gradual, measured strategy to going into Mexico is feasible, and for a lot of SMEs it’s advisable. One of many large complaints we preserve listening to about shifting manufacturing from Asia is that it’s unattainable to “decouple fully” from China. The truth 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 may truly strengthen your provide chain and your customer support. It isn’t crucial to maneuver your total provide chain, both. You possibly can proceed importing technologically superior and specialised components from China/Asia, whereas utilizing Mexican labor for processing, meeting, and normal manufacturing. Your choices in Mexico run the gamut from low-cost warehousing to complete localization of your worth chain.

As a sidenote, we’ve purchasers which have skilled issues from not shifting sufficient of their manufacturing out of Asia quick sufficient AND we’ve 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 is not any straightforward job. Mexico affords a complete vary of choices, however it is crucial that you simply plan rigorously and seek the advice of with the fitting specialists to make sure that you’re complying with all related rules, whereas maximizing your tax, logistical, and authorized advantages.

It is usually important that you simply early on perceive what’s required on 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 all the time should be decided on a product by product foundation by skilled worldwide commerce legal professionals and/or customs brokers.

As all the time, good planning and preparation are key predictors of success in Mexico. Mexican managers anticipate you to indicate up with an entire resolution, which incorporates sourcing and compliance. In China we used to say that should you confirmed up on the Canton Truthful with a sketch of a product and $20,000 in your pocket, a manufacturing facility consultant would discover you and make a deal. That’s not how enterprise works in Mexico. Chinese language manufacturing facility managers had been inventive drawback solvers. Mexican manufacturing facility managers observe your plan.

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

• 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).
• Utterly native sourcing and manufacturing.

E. Ultimate Phrases

China within the Nineties was fairly tough across the edges and many individuals stated it might by no means make it as a market economic system. Over time, nonetheless, we realized the best way to work with China, and China realized the best way to work with us. Perhaps we each did our jobs just a little too effectively, as a result of now we’re grappling with the disengagement drawback, and we could also be operating out of time.

Mexico won’t ever have the large home market or the uncooked manufacturing scale China has now, however Mexico has loads of different benefits for manufacturers focusing on the US market. The USMCA commerce settlement and the two,000-mile land border are the primary stuff you’ll discover, and for many of you these are the highest priorities. Over time, nonetheless, it is going to be your skill to combine Mexican amenities seamlessly into your US enterprise that may make the most important distinction to your backside line. Your IP is usually 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 robust, 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 just a few 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 Individuals on our flight had 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 USA, 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 additional costs and through the use of bank cards and leaving resort 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 cause to consider that our resort room was bugged. We had been capable of watch no matter we needed on the resort 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 observed any distinction between my working from my sunny resort room patio versus my residence workplace. My spouse and I additionally each obtained alongside nice with our dangerous Spanish and left there talking it higher than earlier than we went. It felt like individuals had been completely satisfied to see us and we had been completely satisfied to be there. The climate was flat out good every single day, which coming from wet Seattle was yet one more large plus. Mexico is a top-tier vacationer attraction for a lot of causes and China just isn’t for a lot of causes.

Mexico affords worldwide managers far more flexibility than China ever may, and you may tailor your operation to your wants – to not these of a authorities or a political occasion. We urge you to contemplate it.