When evaluating potential sites for a factory, manufacturing companies bring unique needs and concerns to this decision. However, there are five specific factors that virtually every company needs to get right when selecting a manufacturing location.
As we discuss in Tetakawi’s Manufacturing in Mexico podcast, Reasons Why Companies Should Consider Manufacturing in Mexico, these five factors critical to every manufacturing companies site selection process are:
- Market access
- Trade barriers
- Operating costs
Below, we dive into these factors and how a Mexican factory can help meet manufacturing companies address these issues. For deeper insight, listen to the full podcast here or below:
Mexico offers some important advantages in both labor availability and stability. In terms of stability, the median age in Mexico is only 29 years—much younger than China or the United States, which both see median ages around 38. These stable demographics support long-term workforce needs.
Some regions of the country, such as Monterrey's Saltillo area, have been industrialized for more than a century. As a result, these regions are home to large pools of people who have experience and training in a wide range of manufacturing skills. More recently, industrialized regions, such as the Bajio, have made up for lost time through heavy investments in education and skills development. In addition to manufacturing-specific skills, Mexico also graduates a large number of engineers each year, many specializing in manufacturing disciplines.
That said, it is important to recognize that there is no standard system of certification for skilled trades. While there are many vocational schools and training opportunities available, many workers still gain these skill sets through informal opportunities. Manufacturing companies may need to do their own verification or training.
The shared border with the United States is an important advantage for Mexico. That advantage is strengthened by highway and rail systems that are modern, efficient, and seamlessly integrated with the systems in both the United States and Canada. Not only that, excellent container ports on both the Atlantic and the Pacific provide efficient transport lanes to South America, Western Europe, and Asia.
This shorter distance means manufacturers can reduce transportation costs and gain the benefit of lower inventories and faster market response. Most destinations in the United States are less than two days drive from Mexico’s industrialized cities, whereas surface routes from Asia may take weeks to reach their destination.
3. Market Access
Certain markets can be difficult or even impossible to serve unless manufacturers have a facility in close proximity to the customer. The most notable example today is in the automotive world, where much of the supply chain has to be within a prescribed distance of the assembly plant that they're serving. It's for this reason that Mexico and the southern United States have developed large manufacturing clusters serving a number of industries—from the booming life sciences market in San Diego, Calif., and the Baja region of Mexico, to the massive aerospace presence in Arizona and Sonora, to the automotive assembly plants throughout the southern U.S. and Mexico.
In other businesses, turnaround time is critical. This may demand manufacturing companies be close to their markets to minimize transit times. In other cases, the product margin just can't bear large distribution costs, so manufacturers may only serve markets close to their factories. For many companies, there's at least some potential to increase revenue with a location in Mexico, close to their customers. In many cases, the potential for growth can be very large.
4. Trade Barriers
Not only does Mexico provide geographic accessibility to the world’s largest market, but it also affords manufacturers the potential to export or import at low or no tariff with the U.S. and many other countries.
In fact, Mexico has more free trade agreements than any other country, and this provides a tremendous incentive for manufacturers coming from countries that may have significant trade barriers with the United States in particular. That includes low-cost manufacturing countries like Brazil, among other countries in South America, the Caribbean, the Asia-Pacific region, and the European Union.
In addition, being within the USMCA trade zone provides Mexico-based manufacturers with low-cost access to both Canada and the United States. This massive North American market reaches over 500 million people, all in one free trade zone.
5. Operating Costs
Low manufacturing costs often drive factory location decisions, and, in this regard, a Mexico factory is very competitive. Recent comparative studies have shown that fully fringed manufacturing and wages in Mexico are as much as 35% lower than in China, while the rate of manufacturing wage inflation is about 15% lower.
In general, Mexico's real estate and utility costs are also globally competitive, although this will vary based on location. Across more industrialized regions, Mexico sees a good availability of Class A industrial rental properties. Add to this reduced transportation costs, and many manufacturing companies find they can serve the North American market in particular at a highly competitive rate.
Learn more about the factors that impact you
Every manufacturing company should perform its due diligence prior to making a move. As we discussed in our podcast, Mexico provides unique advantages in the five areas noted above, but there are regional variations to consider and potential pitfalls to avoid. These may be best navigated with the support of a partner experienced in site selection.
However, if there’s one universal truth, it’s that all manufacturing companies should be evaluating their ability to serve their customers, as well as their supply chain reliability, in the midst of today’s evolving manufacturing environment.