Mexico Post-Nearshoring: Adding Value within the Mexico Manufacturing Model.

End of the Story First:? 10 years ago, brands targeting the US market would have set up factories on the Mexican border as close to a commercial port as possible.? That might not be optimal anymore. ?

MNCs were active in Mexico pre-2018, but since the trade war and tariffs took effect, they have been expanding their Mexican footprint at a breakneck speed.? The Chinese have been busy as well, setting up operations to avoid tariffs and move closer to their US market.? In the last few years, Mexico has transitioned from a quirky China+1 option to the main site-selection option for brands serving US markets.? ?

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Introduction

In 2023 the nearshoring conversation in Mexico shifted from “What’s nearshoring?” to “Ciudad Juarez or Monterrey?”. ??Big MNC projects are being waitlisted as industrial vacancy rates sink below 3%.? China’s economy is scary, Vietnam is crowded (and its supply chain is suspect), and the US has a labor shortage.? Your 1 + China choices are becoming constrained.? India is getting a lot of good press – but it’s complicated and far away.? Mexico remains your closest, simplest option for low-cost manufacturing.?

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The Mexico Model:?

The central model in Mexican business is so straightforward that newcomers (and Old China Hands) tend to overlook it.?

Mexico Inc. is set up for mass production/assembly of goods for the US market (or that supply chain).? That’s pretty much it.? There are no 5-Year Plans or hegemonic sub-texts.? Mexico wants you to build new factories, create lots of high-quality jobs, buy local parts and components, and ship EVERYTHING you produce across the border. ?Your shiny new appliances and auto parts don’t have to go to the US, but they can’t stay here.?

If you do things the Mexican way, your operation will be smooth, quick, and relatively low-cost.? Once you can figure out how to comply with relevant rules and restrictions, you’ll be able to import parts and machinery with low/no tariffs, and export to the US with low/no tariffs.? This is the way all the big auto industry players do it, and this is the way Mexico likes it.? If you follow the plan, you will have few bureaucratic snags.? If, however, you try going off the beaten track, you can expect delays, taxes, and hassles.?

Compared to China or other Asian manufacturing centers, Mexico is not particularly innovative or flexible.? In China, you’ll hear, “Anything is possible, but nothing is easy”.? In Mexico, you’ll hear, “The Quality Assurance team sent a ticket to HQ, and we have a call set for 3 PM Central Standard Time”.?

If you are coming from China or are otherwise new to Mexico, this risk-averse orientation is a double-edged sword.? On the one hand, Mexican problem-solving is organized and effective.? On the other hand, innovation and creativity are not highly regarded.? The risk-averse nature of Mexican business may create opportunities for managers with experience in China and other more free-wheeling markets.?

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3 Value Adds in the Mexico Model

The Mexico Manufacturing Model is a tripod with 3 categories of value-add.? First is geography.? Mexico is close and multi-modal.? You can drive or fly, rail or sail.? Second is the trade regime.? Come for USMCA tariff avoidance, stay for the IMMEX duty-free imports and Mexico’s 13 FTAs with 50 economies.? Finally, there’s the low-cost base.?

Newcomers to Mexico have to figure out how to maximize the benefits of each source of value-add to build and hold their competitive advantage in North America.?

Here’s how:

Mexican Value Add #1:? Geography.

Location, location, location.? It’s true for retail, and it’s true for Mexican manufacturing.? The value-add here comes in 3 big categories.? Site selection, time to market, and risk reduction.

Site selection is the main source of value – and your biggest headache in Mexico.? If you wanted to produce in China, you had a wide range of options - in and around Shenzhen.? Mexico has multiple economies and a range of “industrial corridors” that specialize in distinct technologies and products.?

The “best” region for manufacturers has traditionally been on the border (known as the Maquiladora Zone), but cities like Tijuana and Ciudad Juarez have gotten crowded, expensive, and dry. ??Drought and electricity shortages have changed the economics of the border zone.? Big MNCs that can produce their own infrastructure still favor the border region, but more high-tech firms are looking at Guadalajara and "The Bajio”.?

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Value Add for China Hands and Newcomers:

While operating in Mexico is simpler than China in many ways, site selection is not among them.? ?The 3 economies you will encounter in Mexico are the export-oriented factories on the border (Maquiladora zone), the Bajio region in the middle of the country, and OTHER.? Maquiladora/Border areas are the most convenient, but expensive and scarce.? The Bajio is Mexico’s high-potential development area, includes Guadalajara (for our purposes), and extends north of Mexico City, almost to Nuevo Leone.? Guadalajara has a reputation as Mexico’s Silicon Valley, while areas like San Luis Potosi and Queretaro offer low costs and big pools of labor, compared to Monterrey and Ciudad Juarez.? ?

Don't worry about the southern part of Mexico until you have a good handle of the Maquiladora and Bajio zones. That's where most of the manufacturing that you care about is taking place.

Mexican Value Add #2:? Trade Regime

USMCA + IMMEX = low/no duties or trade restrictions on the importation of materials and export of finished goods out of Mexico.?

Logistics and customs services are highly developed in Mexico, and there are plenty of qualified professionals and agencies to help manage the bureaucracy.? Optimizing your logistics, however, is a function of purchasing and sourcing.

The USMCA’s local content requirements can be as high as 75% (aggregate from the US, Mexico, or Canada).? Anything below that will trigger duties and restrictions.? Furthermore, businesses selling into the supply chain of large automakers may face further local content requirements.

Once you’ve mastered the complexities of USMCA and IMMEX, you can start to get a little more ambitious and look for ways to benefit from Mexico’s 13 FTAs with 50 economies, including the CPTPP and the EU.

Mexicans know the rules and follow the rules. ?This is Six Sigma country.? They are efficient when it comes to production, and they apply the same principles to problem-solving.? They don’t waste a lot of time thinking outside the box.?

If you have international experience, you may be able to take advantage of Mexico’s broad network of trade agreements, including CPTPP (with Asia) and the EU. ?International sourcing is an area where you may be able to compete effectively with locals.?

Mexican Value Add #3:? Low-Cost Structure

Mexico isn’t as cheap as it once was.? Inflation, shortages, and bad currency moves have made operating in Mexico pricier, but it still seems cheaper than China in most scenarios.? Cost optimization efforts in Mexico are largely focused on avoiding tariffs, ?optimizing logistics, local sourcing, and HR.

Mexico’s approach to cost control is to follow HQ directives and repeat what has worked before.? Mexican factory managers tend to be followers of Six Sigma and The Toyota Way, so they value efficiency overall.? Still, their approaches to problem-solving tend to be extremely conservative by international standards, so there is some potential for managers with China experience.?

A sure-fire method for controlling HR costs is to set up in-house training and development programs.? Mexico isn’t great at human capital development, and its vocational schools are set up to train entry-level factory technicians.? Firms that set up their own training and management development programs can secure a lasting advantage by building a deeper management bench than the competition.

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Final Word

Mexico managers are on the HQ org chart and the HQ call list.? Everyone you meet in Mexico is a specialist with formal reporting lines.? Relationship manager/jack-of-all-trade problem solvers don’t have a formal role in Mexico.? That’s what happens when you take away the 12-hour, 8,000-mile gap between HQ and the factory floor.

Where do Old China Hands and other newcomers fit in?? ?Mexican problem-solving and creativity are not well-developed, and this creates some openings.? Mexican managers don’t like innovation or risk.? This tends to constrain their decision-making, and as Mexico’s economic role in North America shifts, there may be opportunities for those with experience managing unpredictable or chaotic situations.? ?

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