Mexico’s Manufacturing Supply-Chain Challenge

Today there are approximately 4,000 foreign companies with manufacturing operations in Mexico. Over the last 50 years, companies that required significant operating cost reductions to remain viable, established a presence in Mexico because of the labor cost differential with respect to other developed nations and its proximity to the U.S. However, over the past 10 years, foreign companies have come to Mexico to be part of the local or regional supply-chain to Automotive OEMs and Tier 1 Suppliers. While keeping operating costs low is always an objective, the benefits of proximity to the customer has been the primary driver in creating more efficient supply-chains.

While the automotive manufacturing industry in Mexico is seeing unprecedented growth, recently surpassing Brazil as the 6th largest manufacturer of light vehicles in the world, other industries such as Aerospace industry components manufacturing are making their way into Mexico at a steady pace but not without challenges.

The challenges to both the Automotive and Aerospace industry growth in Mexico are in their supply-chains, particularly with the Tier 2, 3, and even 4 manufacturers that are highly encouraged to be close to their Mexico customers but lack the resources and “risk appetite” to expand into a foreign country (Mexico). It is interesting to point out that the automotive manufacturing sector has developed in Mexico with the OEM coming first, followed by its Tier 1 suppliers while the aerospace industry has called on its Tier 2 and 3 suppliers to come to Mexico first, establish and certify their production processes to the standards of the industry, and only then will many of the OEM’s consider Mexico as a manufacturing venue.

It is evident that for several industrial sectors including automotive, aerospace, electronics, and medical devices, Mexico has progressed through 2 stages of manufacturing competitiveness: (1) Cost and (2) Proximity to end markets; while the third and current stage is developing lower tier suppliers of both foreign and Mexican origin. If OEMs and Tier 1 Suppliers wish to maximize their competitive advantage in Mexico they must help foreign Tier 2 and lower suppliers find a low-risk way into Mexico and they must identify and develop suppliers of Mexican origin who have the potential to meet their needs. Once OEMs are able to localize their supply-chains in Mexico, they will truly experience the Mexico advantage.