In this episode…
Dan Harris from China Law Blog recently wrote: “Mexico is the New China” and Manufacturers are Moving There.
Renaud Anjoran and Adrian from the team explore the topic of nearshoring to locations like Mexico, why it may especially suit US companies, what Mexico’s manufacturing pros & cons are in comparison to China, assessing your supply chain risk, and Renaud finishes off by giving some guidance for importers who are interested in moving some or all of their manufacturing out of China.
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✅ Is Mexico really a credible alternative to China? It depends. When developing new electrical products from scratch Mexico probably isn’t a good choice over China (or Taiwan with Chinese components), however, for some simpler products Mexico is beneficial and especially if your key market is the USA due to low lead times and the ability to closely keep an eye on things.
✅ What is happening in China (and SE Asia) that is driving US companies out to other countries like Mexico? Political tensions between the USA and China aren’t receding and this is worrying for some manufacturers due to the unstable and risky situation. Supply chain risk is also an issue, and this became very evident when the pandemic hit in early 2020 and importers have been blocked from visiting China and checking their suppliers and products, thereby suffering from higher risks. A very long supply chain is also risky as importers with Chinese or SE Asian suppliers today are at the mercy of extremely expensive or unavailable shipping. Poor management of the epidemic also raises supply chain risks, too, especially in places like Vietnam and India.
✅ Why Mexico is an obvious choice for some US importers suffering from supply chain risks in Asia. It already has a lot of manufacturing and the workforce wages are far lower than in the USA, some say it’s even cheaper than China for manufacturing.
✅ Is moving to Mexico something that would be more suitable for SMEs rather than MNCs? Not really, it depends on the products being manufactured, though. A lot of SME trade is relabelling standard off-the-shelf products and not developing new products, therefore it may be hard for you to move away from those suppliers, many of whom are in China. Large MNCs who develop their own products and place huge orders with various suppliers who already have manufacturing operations around the world will have an easier time moving and persuading key sub-suppliers to follow in order to retain their business. This is common in the auto industry.
✅ Could nearshoring to somewhere like Mexico be more expensive than having a supply chain in Asia? It can be. It depends on your wider supply chain. If you’re assembling in Mexico, but all of your components are coming from China then you’re not going to reduce a lot of costs and will still have numerous risks, such as the costs of shipping and what happens if components arrive and are defective or sub-standard when you receive them. Returning them to China will take a long time if it’s even possible, and the costs of expedited shipments are even higher. You need to map your supply chain and consider where the risks are and how you might reduce them. Perhaps, in this case, if we bear risk management in mind, another location near to China may be a better option than nearshoring to Mexico from China.
✅ What benefits does Mexico have? It’s a good source of parts in plastic, rubber, metal, and glass due to the auto industry there (if you can reach the suppliers’ MOQs as they’re used to dealing with large auto companies). There are a number of large electronic contract manufacturers, although a lot of what they purchase comes from China so the supply chain can be stretched still, but it is near to the USA, though, and it may be possible to source a lot of electronic parts from there as an alternative.
✅ Are many companies truly moving 100% of their manufacturing to Mexico, or is it more of a supplemental location? In fact, most companies who have moved operations to Mexico recently have also retained their China operations. It may be that for those who the US market is important for, they use Mexico as a place for manufacturing or assembly so they can avoid tariffs (the US Mexico Canada agreement and CPTTP also allows tariff-free imports of goods from Mexico into the US) and benefit from close proximity for shipping completed products into the USA, but for other markets around the world, they continue to manufacture or assemble and ship from China. Map your supply chain, understand the total risk, and don’t just look at the extra margin you can make by moving.
✅ What are Mexico’s drawbacks? Mexico’s labor laws are quite strict and could be somewhat surprising for some American importers who are used to less-protected labor. It can be unsafe in some areas, such as muggings, kidnapping, gun crime, etc, but Mexico is very large and it’s not fair to label it as an ‘unsafe’ country.
✅ Renaud’s tips on managing the process of moving some/all manufacturing out of China. Think about diversifying your supply chains into other areas. China, Taiwan, and SE Asia are in close proximity and likely to be affected by the same events so possible options would be places like India and Mexico as these locations aren’t going to be influenced by China as much.
If a lot of critical components (especially custom-made) come from China you’d better keep assembly near to China to reduce quality and reliability risks. To reduce risks it is better that you use standard parts that can be obtained freely if possible as this reduces reliance n China.
If interested in Mexico, learning about shelter companies is a good idea as they provide a good entry into the country by taking care of the paperwork, staff, renting premises, sourcing components, and much more if you want to set up manufacturing there, leaving you to focus on processes, specifying what you need, etc.
✅ Wrapping up
- China Law blog’s post: “Mexico is the New China” and Manufacturers are Moving There
- Another post from China Law Blog: Using Shelter Companies to Move Manufacturing from China to Mexico
- Renaud wrote about Why Your Product’s Final Assembly Should Be Close To Its Key Components on QualityInspection.org.
- Read about How To Diversify Manufacturing Sources Out of China and Cut Risk.
- Listen back to our earlier episode Manufacture in China, Vietnam, India, or Elsewhere in 2021?
- Listen back to our earlier episode A New ‘Cold War’ Between The USA & China’s Effect On Manufacturing.
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