Five Questions About Manufacturing in Mexico

It has been well documented that uncertainty in global supply chains is driving activity to nearshore locations that can effectively serve the consumer markets of North America. Most of this activity represents companies mitigating risks by taking proverbial eggs out of the Asian supply chain basket. Site Selection Group, a location advisory, economic incentives and real estate services firm specializes in helping companies locate manufacturing and distribution operations across North America. 

The United States has experienced a recent period of hyperactivity due to this phenomenon, as well as changes in consumer behaviors and activity stimulated by federal incentive programs such as the Inflation Reduction Act and CHIPS Act. However, Mexico has also become an attractive nearshore option and seems to be on the radar of more companies. Traditionally, Mexico has been a strong player in key industries such as automotive, medical devices and consumer appliances, but they’ve recently experienced a flood of interest from various sectors.

Site Selection Group routinely fields questions about doing business in Mexico from manufacturing companies looking to commence the site selection process. Based on this activity, SSG is answering the top five questions most frequently asked.

What is driving manufacturing activity to Mexico? 

The majority of activity interested in Mexico can fall into one of two categories: 

• Projects evaluating Mexico as an alternative to the United States
• Projects evaluating Mexico as an alternative to Asia 

The most apparent catalyst for manufacturing activity in Mexico in either category is its proximity to the United States consumer market. 

While highly political at times, Mexico and the United States have a long history as trading partners. According to a May 2023 report from the U.S. Census Bureau, Mexico eclipsed Canada as the U.S.’s top trade partner accounting for 15.9% of total trade. 

Additionally, the boom in interest in Mexico can be partially attributed to less-than-ideal developments in other countries, most notably the perceived risk of operating in China and rising costs associated with operating in the United States. 

What are the most pronounced advantages of operating in Mexico?

As it relates to projects deciding between Mexico and the United States, Mexico’s most pronounced advantage is its lower wage costs (although they have risen considerably). For those projects looking to nearshore investment from Asia, Mexico’s most pronounced advantage is shortening the transit time and reducing logistics costs associated with shipping goods across the Pacific Ocean. 

For certain industries, Mexico has developed strong clusters with mature supply chains. As previously mentioned, those are typically in the automotive, aerospace, consumer electronics, medical device and appliance sectors.

What are the main challenges or risks associated with manufacturing in Mexico?

While labor costs are relatively low in Mexico, the cost structure of other operating factors tends to be more expensive as compared to the United States. Specifically, these factors include more expensive utilities, real estate and transportation costs (if shipping to the U.S.). This underscores the need for companies to have a significant headcount in their Mexican operations to justify the added expenses. 

In addition, there are several less-than-obvious factors that escalate cost structures in Mexico that U.S. companies often take for granted. For example, it is customary for large industrial employers to provide transportation for their workforce. Most large industrial employers also offer on-site health care for employees (and sometimes their families). Additionally, it is common to provide meals to the workforce. 

Lastly, the volatility in exchange rates between the Mexican peso and the U.S. dollar (USD) can have a profound impact on profit margins. As of August 2023, the Mexican peso had increased in value against the dollar with a current exchange rate of $17 to $1 USD compared to a more robust dollar in April 2020 when the exchange rate peaked at $24 pesos to $1 USD. 

What is the climate for economic incentives in Mexico?

The most common incentive, although quasi-statutory, that companies benefit from can be attributed to trade agreements reducing tariffs, taxes and other penalties associated with cross-border commerce. 

Additionally, Mexico has a long track record of providing economic incentives to manufacturers. Like the United States, most incentives are driven by a project’s capital investment profile and job creation.  While there are certain federal and local incentives, Mexican states are often the most aggressive incentive-issuing bodies. Just like in the United States, incentives can range from grants, infrastructure assistance, tax assistance, reduced real estate costs and training assistance.  

What is the best way to determine if Mexico is a viable location for a manufacturing project? 

Determining if Mexico offers a compelling value proposition for a project can actually be a straightforward task. Because accurate cost benchmarks for labor, utilities, real estate and logistics exist, as well as a relatively straightforward taxing structure, building cost comparison to the U.S. isn’t a time or labor-intensive exercise. 

What often is more difficult is drawing distinctions between qualitative factors such as labor availability, labor quality, organized labor, regulatory climate, etc. Because qualitative data availability and consistency in Mexico are typically inadequate, hiring a site selection professional with real project experience from which to draw is imperative.