Mexican Provide Chain Administration: You are not in China Anymore

Final 12 months, I requested my good buddy 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 activity as a result of he has spent a lot time in each China and Mexico, navigating their manufacturing techniques from the within.

My legislation agency often consulted with Andrew after 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 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 12 months 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 12 months, Andrew and I collectively wrote Three Issues Everybody Leaving China for Mexico Ought to Know, as an introduction to what we count on can be a ten half collection to be written over the following 7-9 monthsThis collection will contain Andrew writing about what he’s seeing of corporations transferring 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 properly, 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 under was written by each Andrew and me and it constitutes our third piece on this new collection.

Please be aware that Andrew and I additionally can 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 examine again right here later this week for the complete particulars on that. Within the meantime, in case you 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 unhealthy information, and lots of ambiguity.

The excellent news is that the political connections between the US, Canada, and Mexico are sturdy and secure. Sure, Mexican President Obrador Lopez (generally known as AMLO) appeared to exit of his option 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 comfy with each other they usually all behaved cordially.

The unhealthy information was that the assembly produced little by means of substantive outcomes and it didn’t actually cope with any vital new points. The US and Canada want to see Mexico release its power market and transfer in direction of cleaner, greener types of electrical energy technology. Canada and Mexico would love the US to liberalize commerce, notably 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 choice concerning 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 Fundamental 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 are helpful to you. And although Incentives and free commerce packages do exist in Mexico, they’re not the policy-driven gated communities wherein overseas companies in China typically clustered.

It’s additionally comparatively straight-forward and cheap for overseas entities to function export-oriented factories in Mexico and doing so is way 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 “every little thing is feasible however nothing is straightforward” and overseas corporations would typically go to China with half an concept and go away 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 usually 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 facet, our legislation agency (Harris Bricken) usually expenses 35-75 % much less for the authorized work required to arrange and shield a consumer firm in Mexico than in China and that is just because what’s required to perform these items in Mexico tends to be far simpler and fewer dangerous than in China. Establishing and defending an organization in/from China is in lots of respects not like wherever else on the earth. Establishing and defending an organization in/from Mexico will not be 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” strategy. In Mexico you will want to depend on personal corporations for every little thing from enterprise registration to utilities to manpower. There are good, economical choices to select from, however overseas corporations establishing in Mexico generally discover that they’ve an over-abundance of liberty – typically needing to take duty for their very own infrastructure, managing scarce assets (generally this contains water and electrical energy), and furnishing their very own safety.

C. Mexico’s Perspective In direction of Worldwide Enterprise

The official strategy of the Estados Unidos Mexicanos (Mexico) is that overseas buyers are inspired to arrange manufacturing and sourcing services inside the nation as long as they 1) instantly export merchandise and processed supplies in another 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 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 large one, however locals are warily eyeing authorities involvement in airways and transport as properly).

Mexico has a authorized and institutional framework that allows overseas 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 rationalization 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 Corporations 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 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 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 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 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 need to be conscious are that Mexico will make the next low-cost and straightforward for you:

a. Arrange your factories in Mexico;

b. Import elements, supplies and tools 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 unique dialogue).

The phrases IMMEX, Maquiladoras, and Shelter corporations are used roughly 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 elements, supplies, and equipment with low or no duties. Native “shelter corporations” will handle 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 rapidly present you to the wide selection of personal corporations ready to rapidly allow you 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. The complete Baja peninsula (bordering California) can be a free journey zone. This rule permits autos to cross over from the US with no short-term importation allow (TIP), chopping down on delays, prices, and forms. This is among the elements 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 transferring 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 price of merchandise as numerous as auto elements, clothes and avocados move by Laredo day-after-day . . . . “and by practically each indication, extra items are on the way in which, presenting customs brokers, freight handlers and trucking corporations with a monumental alternative.”

4. Industrial Parks are widespread in Mexico, and that is typically 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), they usually typically work with the personal corporations that present shelter providers. Mexican industrial parks will usually offer you the infrastructure, logistics, utilities, and safety your manufacturing unit wants. You possibly can construct your individual services from scratch, however partnering with a Mexican industrial park will often result in your manufacturing unit going up quicker and simpler. The unhealthy information? These parks — particularly the most effective ones — refill quick.

D. Your Mexico Enterprise Mannequin

Relating to manufacturing unit set-up, consider China as a jigsaw puzzle the place issues solely make sense if you put the appropriate items in the appropriate place, and there is just one option 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 based on 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 massive complaints we preserve listening to about transferring manufacturing from Asia is that it’s unattainable to “decouple fully” from China. The fact although is that transferring 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 doable (typically fascinating) to plan an incremental shift that may really strengthen your provide chain and your customer support. It isn’t obligatory to maneuver your whole provide chain, both. You possibly can proceed importing technologically superior and specialised elements 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 whole localization of your worth chain.

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

Additionally it is 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 at all times should be decided on a product by product foundation by skilled worldwide commerce legal professionals and/or customs brokers.

As at all times, good planning and preparation are key predictors of success in Mexico. Mexican managers count on you to point out up with a whole resolution, which incorporates sourcing and compliance. In China we used to say that when you confirmed up on the Canton Truthful 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 drawback solvers. Mexican manufacturing unit managers comply with your plan.

The factor about Mexico is that it’s emminently doable to take an incremental strategy, step by step 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).
  • Utterly native sourcing and manufacturing.

E. Remaining 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 the way to work with China, and China discovered the way 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 drawback, and we could also be working 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 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 means to combine Mexican services 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 is not going to intrude 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 Individuals 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 a lot 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 expenses 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 motive to imagine that our resort room was bugged. We have been capable of watch no matter we wished 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 acquired alongside nice with our unhealthy Spanish and left there talking it higher than earlier than we went. It felt like folks have been pleased to see us and we have been pleased to be there. The climate was flat out good day-after-day, which coming from wet Seattle was one more massive plus. Mexico is a top-tier vacationer attraction for a lot of causes and China will not be for a lot of causes.

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