By Doug Donahue, Principal, Entrada Group
With cost-competitive production and proximity to US and Canadian consumer markets, the obvious answer would be in the affirmative. But there are additional reasons motivating international manufacturers to look at Mexico production that may not be as conspicuous. We’ve distilled these additional elements down to the top three to highlight some common advantages Mexico offers to US, Canadian and even European manufacturers that lack a low-cost North America production location. All are based on the input of our clients in Mexico or on our discussions with global producers that have yet to establish Mexico operations.
Reason #1: Mexico adapts to change
The past few years have been challenging from a policy and political standpoint for Mexico, to say the least. Between the threat of The Wall and potential US tariffs, a new free trade agreement (to replace NAFTA), Mexico’s ongoing security challenges and a new administration in Mexico, much has changed in a short period of time. Political and immigration issues have put Mexico squarely in the spotlight as a punching bag for the Trump administration.
Yet despite all the negative rhetoric and turmoil, Mexico’s fundamentals remain strong. The country has found a way to change and thrive, as it has done consistently over the past four decades. One of the biggest factors behind Mexico’s resilience is the country’s young, adaptive and talented workforce. According to the World Economic Forum, Mexico graduates the eighth-highest number of students annually in engineering, manufacturing and construction in the world. This puts Mexico ahead of Germany, France and Canada. OECD data also shows that Mexican workers put in some of the longest hours in the world, with productivity levels to rival other nations. This powerful mix of capable, talented workers and a strong work ethic add up to a highly efficient workforce.
Mexico’s central bank and government has also done an excellent job over the decades of helping ensure the country remains competitive globally. In the late-1980s, Mexico suffered a calamitous economic debt crisis, which nearly ended in a default by the Mexican government. An international-led program resulted in a restructuring of Mexico’s economy, followed later by the implementation of an open market approach. This eventually resulted in Mexico’s Peso shifting to become a free-floating currency, no longer pegged to the US Dollar.
As a free-floating currency, the Peso has experienced ups and downs over time, but the net-net result has been a steady and ongoing devaluation. The Peso’s devaluation has given Mexico a longstanding competitive advantage in attracting manufacturers looking to reduce production costs, particularly for those selling product to the US. The fact that the decline has been relatively gradual—without too many wild swings in value—has further bolstered manufacturers’ confidence about the prospect of producing in Mexico.
Finally, Mexico is one of the strongest nations in the world at negotiating free trade agreements, which encourage foreign direct investment. Currently, Mexico has free trade agreements with 46 nations around the world, embracing the philosophy that by continuing to conduct and develop trade, Mexico will further expand as a key manufacturing hub for the entire western hemisphere.
Reason #2: Mexico offers a proven path for growth
A Mexico production facility has given Entrada Group’s international manufacturing clients a foundation from which to develop new business in North America strictly by virtue of their presence in the country. International OEMs and Tier One/Tier Two companies manufacturing in Mexico always prefer to source product locally for many reasons, including cost savings, just-in-time delivery, shorter supply chains and storage cost savings. Furthermore, such companies prefer to work with an in-country supplier that holds key Mexico certifications such as IMMEX compliance.
John White, Executive VP of Telamon, a long-time Entrada Group client in Mexico, feels that the entrance of large companies into Mexico has opened doors for him to supply product that may have otherwise been sourced abroad. “Many of our customers have put a footprint closer to our facility and that has helped us get in to broaden our portfolio and work with new companies we haven’t served in the past,” John said.
Reason #3: USMCA ratification looks very promising
The long period of uncertainty surrounding the future of what was once NAFTA appears to be nearly over. Most analysts are optimistic about USMCA approval as of this writing, though the US Congress and new Mexican government have yet to assure passage. Should USMCA fail to be ratified, NAFTA rules would remain in place until a member country withdrew.
Overall, NAFTA isn’t substantially different from USMCA, the latter of which won’t affect most manufacturing sectors. However, the auto industry, for example, was closely scrutinized throughout the negotiations. Under USMCA, 75% of the components going into a car or light truck must be manufactured in Mexico, the US or Canada to qualify for zero tariffs. This is up from the 62.5% threshold under NAFTA. Thus, all things being equal, the greater requirement for content originating in the USMCA region will put much more pressure on auto sector manufacturers that lack North America production to establish a footprint in one of the three countries.
As our clients attest, Mexico gives them a huge competitive advantage. By offering customer proximity, a cost-competitive North American production location and free-trade access, Mexico production has helped Entrada Group’s clients expand over the years. Mexico’s talented manufacturing workforce should further bolster this growth.