In recent years there has been a trend of United States and Canadian companies turning to Mexico to manufacture goods, especially in the, auto, plastic, and aerospace industries. In fact, Mexico’s trade output increased 3.4% in the first nine months of 2014 and is expected to grow 4-4.5% this year and next1.
The main driver for businesses deciding to manufacture in another country is the cost. As the cost to manufacture in China continues to increase, Mexico may be the more cost efficient option. The productivity of China is increasing as it becomes more efficient, but Mexico can be more attractive because of its productivity-adjusted labor cost is now estimated to be 13% lower than in China. If you also consider electricity and natural gas costs, total costs in Mexico are estimated to be 5% lower than China and 9% lower than those same costs in the United States2.
Aside from the labor costs, many companies credit Mexico for its prime location. There are endless possibilities of shipping methods and the proximity between the countries allows for quick shipping times. With its proximity to the United States, Mexico offers a prime location to import and export. Mexico is the United States’ second largest export partner and third largest import partner.
Mexico has 11 trade agreements covering 43 countries, including the North American Free Trade Agreement (NAFTA) which encourages trade activity between the United States, Mexico, and Canada3. The United States and Mexico have continued to make progress towards making trade between the two countries even more attractive. Recently, the Federal Motor Carrier Safety Administration (FMCSA) conducted a pilot program that allowed United States and Mexican based carriers to provide transportation services over the border4. They are now reviewing how the pilot performed and will take that information to continue to plan for the future.
There was also progress made on November 21, 2014 when the United States and Mexico announced that they had reached a tentative agreement to open up the bilateral air market for both passenger and cargo services. Prior to the agreement, which will take into effect January 1, 2016, there were restrictions on the number of all-cargo airplanes per city. It also states that freight forwarders and carriers can handle their goods themselves on the ground instead of using a subcontracted company. It will also expand the amount of destinations the carriers can make with new freedom rights. Although air freight only accounts for about 3% of freight transportation between the two countries, it presents opportunities for companies to change and optimize their supply chain5.
Mexico seems to offer many companies a successful alternative but it doesn’t come without challenges. Companies that already have a presence in Mexico have experienced some difficulty conducting business in the country. Whenever companies begin to develop a presence in another country there is an adjustment to a different culture and Mexico is no different. Many face issues like education-level, organized crime, and corruption. They have also noted that the process to establish a presence in Mexico has been difficult because there was a lack of support in the forms of suppliers and credit and many feared supplementary fees requested from the government or through organized crime6.
If businesses continue to work through the political and cultural differences to reap the cost benefits then they may also be disappointed. Some products are at the same cost level to manufacture in Mexico as they are in China. If this is the case then these companies have to evaluate the other aspects of their supply chain to see if there is any savings in the transportation costs of their goods. Although transportation of the products itself has also proved difficult with long wait time at the border.
Then there are the problems that could occur in any country; employee turnover and the quality of products. Again, if a supply chain analysis still shows savings then some may opt to handle these difficulties and still see the return on their bottom line. Some companies have even taken it upon themselves to manage their own factories in Mexico to ensure visibility and keep their same practices7.
Mexico’s environment has also been a challenge that affects their performance and production. There is some apprehension in the falling oil prices and the effect it will have on the economy. Since crude oil is Mexico’s largest export it has a major influence on the peso and other economic factors8.
Overall, there are pros and cons of conducting business in Mexico. Some companies see the benefits while others don’t see the worth. However, many believe that as the relationship between the United States and Mexico grows, so will the opportunities for the supply chain.