These challenges have forced companies to reevaluate their supply chain strategy and make adjustments.
One adjustment companies are making is nearshoring, which means relocating your production to a place that is closer to your business or customers.
For many product companies within the U.S., Mexico is vying as a popular choice for nearshore manufacturing.
But switching up your manufacturing location to Mexico is not an easy decision. There are many financial, logistical, and legal implications to consider.
Let’s review a few advantages and disadvantages to manufacturing in Mexico.
5 Advantages to Manufacturing in Mexico
- Proximity to the United States
- Favorable Trade Agreements
- IP Protection
- Skilled Workforce
- New Possibilities for North American Businesses
Advantage #1: Proximity to the United States
The concept of nearshoring means completing the work closer to home. For businesses in the U.S., nearshoring means having your manufacturing in a neighboring country like Mexico.
One benefit with this close proximity is a faster transit time in shipping your product from its production facility to your warehouse.
For example, if your business and customers are based in the United States and you have manufacturing operations in Mexico, it is much faster to transport your goods across a shared border than across a vast ocean.
When manufacturing overseas, ocean freight is a common method of transport. However, ocean freight lead times are upwards of 5 weeks. This timeline can get pushed out further if there is bad weather, port congestions, or delays at customs.
Because countries within North America have connected borders, there’s no need for ocean freight. Everything can be transported via road, rail, or air. This means less time to transport your finished product from the factory to your local warehouse.
Another benefit of the close proximity to the United States is easier traveling. This equates to short travel times and minimal time zone difference.
The convenience of the proximity makes it easier to visit the facility in person.
Instead of only visiting your product’s manufacturing facility once or twice as if your product was overseas, the proximity of Mexico could mean more frequent visits.
Visiting your manufacturing facility in person is important. It helps keep rapport with the team that is building your product.
By visiting the facility in person more frequently, you’ll also stay on top of due diligence with the factory and the standards you have for your product.
Advantage #2: Favorable Trade Agreements
The Mexican government wants new business. Therefore, it is open to trade deals to help incentivize foreign companies to come to Mexico.
This is shown in the IMMEX program, also referred to as the maquiladora program.
The IMMEX program requires registration for authorization. Once approved, a non-Mexican company can import components needed for manufacturing that are both duty-free and exempt from VAT.
Without being subject to these duties and taxes, the cost to build a product in Mexico can be considerably lower than if it was manufactured in another country.
Mexico is also part of USMCA (United States-Mexico-Canada Agreement).
The USMCA promotes efficient and transparent customs procedures to reduce costs and ensure predictability. The agreement also includes verbiage around supporting beneficial trade for fair markets and economic growth.
Advantage #3: IP Protection
We already mentioned in advantage #2 that Mexico is part of the USMCA. This trade agreement also includes IP protection. It has an entire chapter dedicated to the effective protection and enforcement of intellectual property rights.
Your product’s IP is what gives you a competitive advantage over similar products in the marketplace. There are a variety of steps you can take to safeguard your intellectual property. One way to protect your IP is to choose a manufacturing location, like Mexico, that respects IP rights.
Advantage #4: Skilled Workforce
Mexico’s workforce has doubled since 1990 with around 25% employed within manufacturing (roughly 13.9 million people). Mexico also has a pool of highly skilled workers. A skilled labor force means lower training costs and faster training times.
With a skilled workforce, the setup time to create manufacturing processes and train workers on the assembly of your product will be quick, therefore your production will be up and running faster.
Advantage #5: New Possibilities for North American Businesses
Mexico has always been a nearshoring option for North American businesses. It is often overlooked within the electronics industry since China has positioned itself as the go-to option.
However, with the major disruptions and challenges seen in 2021, Mexico is now on the radar as an alternative to overseas manufacturing.
Mexico is rising to the occasion by creating manufacturing hubs along its northern border to support a variety of industries, including manufacturing for electronics and medical devices.
Many factories are setting themselves up to meet the demands of high mix low volume production to provide a flexible supply chain model to their customers.
Based on these 5 advantages, Mexico may be a good location to manufacture your product. Let’s now look at a few reasons why manufacturing in Mexico might not be the best fit for your business or product.
5 Disadvantages to Manufacturing to Mexico
- Location for Non-North American Businesses
- High Moving Costs for Existing Production
- Higher BOM Costs
- Minimal Savings on the Total Product Cost
- Country of Origin May Not Be “Made in Mexico”
Disadvantage #1: Location for Non-North American Businesses
There is not much benefit to Mexico’s location compared to other countries if your business or customer is outside of North America.
The time and cost difference to transport your final goods from Mexico versus other countries, whether shipping through ocean or air, could be insignificant.
Disadvantage #2: High Moving Costs for Existing Production
If your product is already set up for production elsewhere, it could be more costly than it’s worth to move the operation.
Moving operations means breaking contracts, shipping tools, purchasing or sending equipment, and more. All of these items can add up.
In addition, there will need to be new investments in training and efficiency to account for the new workforce and the new factory floor layout.
Lastly, there’s a risk in down time with production during the transition if not prepared for appropriately.
If you are looking to manufacture in Mexico, it’s best to get set up using a new product rather than attempt to move a current product’s production that is already humming along.
Disadvantage #3: Higher BOM Costs
When moving your product’s manufacturing to another country, you will need to consider the sourcing location of your product’s components and raw materials. These items are listed on your bill of materials (BOM).
Many components and raw materials for electronics originate in China. If this is true for your product, would you want to continue to use your current supplier? If so, then there will be an extra cost to sending these components and materials from China to Mexico. These added expenses include freight and tariff costs.
However, if you’re open to sourcing your components from within Mexico, then there is still a cost associated with the time and resources needed in order to find a reliable and compatible replacement for your supplier.
Moving your manufacturing to Mexico might affect your product’s BOM costs. This is another area to evaluate closely to ensure any fluctuation in BOM costs does not impact your business negatively.
Disadvantage #4: Minimal Savings on the Total Product Cost
And as seen in disadvantage #3, your BOM cost can increase if your sourcing location for components and materials remain in China.
However, if you are primarily shipping your final product to North America, then you’ll see lower freight costs and faster time to transport your product to your customer.
Fast transport time can have a positive domino effect: requiring less stock to keep on hand to needing less warehouse space.
Therefore, some costs could increase while others decrease if you manufacture in Mexico. Depending on how these costs cancel out one another, there might be minimal savings on your total product cost.
Disadvantage #5: Country of Origin May Not Be “Made in Mexico”
International trade agreements and import regulations use country of origin to determine what terms or treatment your product qualifies for. It is a highly regulated marking so it is important to list an accurate country of origin.
The country of origin is influenced by where components and materials come from, where assembly and subassembly stages occur, and what trade agreements the product is abiding by.
Because of these complexities, the country of origin may be different from the location where the product is physically manufactured.
If you want to list Mexico as your product's country of origin, you must assess all areas of its supply chain to ensure your product is eligible for this mark.
Mexico is becoming a new hub for electronics manufacturing and can be a great option for your product. While there are many benefits to manufacturing in Mexico, there are drawbacks as well. This is true for any country that you choose to manufacture your product in. Carefully evaluate any financial, logistical, or legal impacts when looking at Mexico to determine the best manufacturing location for your product.
- Moving Manufacturing to Mexico from China: The Questions We Got | harrisbricken.com
- Why more companies are moving manufacturing to Mexico: Is this the end of China? | borderassembly.com
- Mexico’s IMMEX program: A summary for foreign investors | vistra.com
- Mexico - Trade Barriers | trade.gov
- Manufacturing in the U.S. vs Mexico - Comparing Costs and Labor Force | thenearshorecompany.com