Manufacturers See Mexico as Leading Option for Future-proofing Supply Chain

July 29, 2020

I recent years, nearshoring has become an increasingly attractive option for manufacturers seeking to more strategically and cost-effectively reach global customers. Now the global COVID-19 pandemic, coming hot on the heels of trade uncertainty due to tariffs and newly negotiated free trade agreements, has thrust the need for a diversified global footprint into new focus. 

A July 2020 report from global consultant PWC indicates that a significant number of companies are focusing on Mexico as an option for future dual-sourcing scenarios. According to the report, manufacturers are finding that dual-sourcing — with locations in Mexico and either China or another Asian country, could generate savings of 5% to 20% compared to sourcing from China alone. On average, companies should save 23% off current production costs by moving manufacturing to Mexico. 

However, the report identifies this strategy as effective for more than just potential cost savings. PWC’s consultants suggest moving manufacturing could also boost operational resiliency and improve customer experiences. 

The tipping point

Manufacturing Tipping point: Mexico, United States and CHina

Large companies have examined the cost savings of nearshoring for several years, particularly since 2015 when China’s labor costs surpassed labor costs in Mexico. 2018 data from Statista noted that hourly manufacturing labor costs in China are at $5.51 USD versus $4.45 USD in Mexico. Overall, trends show China’s wages to be increasing while Mexico’s remain stable.

With this shift in balance, manufacturers have determined that the combined labor and freight cost savings available from operating in Mexico more than offset the cost of moving manufacturing to a new location. 

Tradeoffs to consider

Of course, before a company moves locations, there are many factors to consider beyond those initial cost savings. As PWC notes, companies with established relationships with Chinese suppliers may find it challenging to rebuild a complex supply chain in a new country. 

Fortunately, Mexico’s large industry of manufacturing has attracted strong networks of component suppliers for a range of industries. Various industrial clusters can be found within specific regions, operating near specific OEMs to support efficiencies of scale. For example, Mexico’s 300 aerospace manufacturing companies includes OEMs, Tier 1, 2, and 3 suppliers operating in Queretaro, Sonora, Chihuahua, Nuevo Leon, and Baja California. Meanwhile, Mexico’s medical device industry is comprised of almost 650 companies located in Baja California, Chihuahua, Coahuila, Nuevo León, Jalisco, Sonora, and Tamaulipas.

In addition, manufacturers must consider labor availability. In Mexico, for example, data reveals that the number of individuals entering the workforce in Mexico far outpaces the number of individuals reaching retirement age, and will do so for the foreseeable future. The median age in Mexico is 27.9, and projected to increase only to 31.2 by 2025. 

Finally, PWC encourages manufacturers to consider tax and tariff uncertainties. With the USMCA trade agreement in effect as of July 1, 2020, trade benefits between the U.S., Mexico and Canada have become much more certain. 

How much could you save?

Manufacturing in Mexico Cost Reduction

To determine if your company could benefit from nearshoring production, PWC advises companies begin by looking at their products and assigning low, medium or high value to their product value density — the value of the manufactured products against its physical size and/or weight (product value density) — and the amount of labor required to produce the product. For example, companies producing low value density products and using “medium” amounts of labor will find nearshoring can save 24% on average due to the lower labor and logistics costs and lower tariffs. 

While there are tradeoffs to consider in moving production, resiliency doesn’t have to be one of them. As the PWC researchers put it, “lower landed cost and speedier fulfillment can achieve improved resilience.” As consumption patterns change, companies win by flexibly positioning themselves to respond to new demands more competitively.

What do you stand to gain? 

There remain many unknown variables surrounding the current crisis to determine what the future holds and what direction will be best. In fact, 52% of companies surveyed by PwC said it’s “too soon to tell” how the pandemic might impact their supply chain strategy.

However, that means nearly half of the companies surveyed are already acting to make a change to their manufacturing location today. Companies that have felt the impact of the pandemic have learned that flexibility in meeting market demand is key to weathering disruption. 

Determining if your company could save by manufacturing in Mexico demands an analysis of your current operating costs and market demand, as well as insider insight on which Mexico locations might best support your goals. Tetakawi can help. Our advisors can help you develop a cost estimation and site selection plan to determine if manufacturing in Mexico is right for you. 

 

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