Mexico – Part of the Solution for North American Supply Chain Challenges

Ever since the Covid-19 pandemic disrupted global supply chains a year ago, Site Selection Group, a full-service site selection, economic incentives and real estate services firm, has been monitoring the effect it will have on industrial project investment in North America.

As plants in China began to shut down early last year due to COVID-19 outbreaks, manufacturers all over the world were left without needed component parts and materials. Then as the virus spread to almost every nation on the planet, supply chains were spun into disarray.

The recovery was well underway by the fourth quarter and global imports into the U.S. surged dramatically — increasing by 20-25% over December 2019 in many of the nation’s seaports. The record numbers of container imports, coupled with worker shortages at our seaports (presumably due to COVID-19) has created significant backlogs, which have been especially acute at the Port of Long Beach. One of our clients with manufacturing operations in Mexico has had more than 40 containers with component parts stalled at the Port of Long Beach for more than a month, and conditions at the port are not expected to improve until at least the summer, if not longer. Events like these are driving decision makers to rethink how their supply chains are constructed and managed.

Luis Gutiérrez, the Latin America President for ProLogis (the world’s largest industrial real estate developer), believes that supply chains in a post-COVID-19 world — will be “more resilient than efficient.” This portends that companies will favor setting up supplier networks that can withstand (or more quickly recover from) shocks similar to those that occurred in 2020.

Bottom-line cost savings will still be important, but resiliency — the ability to re-surge production — will be more important. Building resiliency necessitates that companies move the supply chain closer to the final assembly/integration operations, which should be located in close proximity to the end-user market.

The United States remains the largest consumer market on the planet with aggregate disposable income larger than the European Union and China combined. The US also is the world’s largest importer of goods with an average of about $2.5 trillion imports per year over the past five years. But with the new Presidential administration, and a compliant Congress, we expect higher taxes and more regulation in the United States.

Given that Mexico is located at the front door of the United States, it should receive increased consideration for those companies seeking to serve that market.

One company that has seized on this opportunity is California-based Ergomotion, a subsidiary of Keeson Technologies Co. The world’s largest manufacturer of adjustable bed bases, the company had 100% of their global production located in Asia, but determined that they needed to place a portion of their production closer to their major customers in the United States.

In the middle of the pandemic last spring, they chose Ciudad Juarez, a Mexico border city, to establish a 250,000-square-foot final assembly plant, which just began operations in February. The operation will ultimately employ about 400 production workers. “After careful evaluation of a number locations we chose Ciudad Juarez because we felt it was the best location to serve our customers. We are already looking toward the future at possible expansions,” said Johnny Griggs, COO of the company.

Mexico’s manufacturing advantages

Manufacturing is important to Mexico, providing more than 4.25 million jobs. Almost two-thirds (63.3%) of those jobs are provided by mostly non-Mexican companies operating under the IMMEX or maquila program. Under this program, companies can manufacture products under one of several operating models that allow corporate decision makers to adopt a risk and cost profile that best suits their needs.   Advisors like Site Selection Group can help companies identify the best model for their unique situation (stand-alone, shelter or sub-contract), but that’s a separate article.

Production wages in Mexico are globally competitive, but they have experienced upward pressure during the administration of Mexican President Andres Manuel Lopez Obrador (referred to as AMLO) who took office in December 2018.

During his first two years in office, national daily minimum wages have increased by 38% (in pesos) to 141.7 pesos (less than $7 USD) per day beginning in January of this year. His administration has pushed for even higher wages for Mexican cities located on the border with the United States. Daily minimum wages in Mexico’s northern border zone have increased by a more modest 21% (in pesos) over the same time period, and now stand at 213.39 pesos (just over $10 per day).

But since almost all global manufacturing companies operating throughout Mexico have historically paid significantly higher than the mandated minimum, the increases for manufacturers have been far less dramatic. Nationally, wages for production workers have risen 14.5% per year during AMLO’s first two years in office, and now stand at an average around $2.49 per hour. The percentage increase in production wages in all of the border states (except Coahuila) have been dramatically higher than the national number, but even with higher increases on the border, most border states (except Baja California) still have base hourly production wages which are lower than the current national average. Average production wages declined in 2020, but we think that this will be temporary as the manufacturing community recovers from the COVID-19-induced shocks to the supply chain.

Mexican production wages are significantly impacted by the peso-dollar exchange rate. The peso, which averaged 18.82 to the dollar in February 2020, lost 28% of its value against the U.S. dollar during the first two months of the pandemic falling to an average of 24.2 pesos in April.

The peso has not fully recovered and now stands at 20.7/USD as of the writing of this article. The net effect of this is that wage inflation in Mexico has been negligible for much of Mexico in recent years. The peso has lost 38% of its value against the dollar since 2013 causing average production wages in real dollar terms by a total of around 4% in the three years prior to the pandemic. That’s 4% total, not annually.

In addition to competitive wages, many of the 32 state governments across the country have become quite proficient at supporting manufacturing operations. Many states have established economic development and investment promotion offices, and we have found those (particularly in the larger states) to be quite professional and also quite helpful. Many will assist with expedited permitting, worker training, supplier development and, in some instances, even financial incentives. Rules and how incentives are negotiated vary widely from state to state, but any incentives offered will be based on the industry segment you are engaged in — the number of jobs, wages and capital investment of the project.

For companies that require engineering talent, there is good news across Mexico. For more than a decade, the federal government has been making significant investments in STEM education, and new engineering programs have been established in almost every state. Mexico is now one of the top 10 countries in the world in generating engineering talent, ahead of countries like Germany and France. At present, there are more than 1.27 million engineering students in Mexico and last year more than 183,898 persons graduated with engineering degrees at both the graduate and undergraduate level.   Mexico’s universities, in fact, have been so responsive to industry demands, that depending upon location, engineers can be found in many industry disciplines such as aerospace, automotive, biomedicine, information technology and more.  

Locations to watch

Cities along the 2000-mile border with the U.S. continue to attract the most manufacturing jobs for companies producing goods for the U.S. market. Approximately 13% of the nation’s workforce resides in the northern border states, but over half (55.2%) of all maquila (manufacturing for export) employment exists in these states. Over a third (37%) of all maquila employees work in cities located immediately on the border, and over the past three years these border cities have attracted 67,000 of the 82,000 new maquila jobs created in Mexico. Two border cities, Ciudad Juarez (central) and Tijuana (west), have captured 60% of the maquila employment growth in all of Mexico over this time period.

Why does the border attract so much attention? The border cities have natural logistics advantages given their proximity to the United States, and almost every border location is supported by tremendous logistics capabilities. Perhaps more importantly, however, management can live on the U.S. side of the border and commute to their operations in Mexico on a daily basis. A plant manager or engineer living in El Paso, Texas, for example, can reach any manufacturing plant in Ciudad Juarez with a maximum commute time of 45 minutes. It should be noted, however, that with significant competition for the labor force, border cities tend to experience higher labor turnover.

Puebla, Mexico’s fifth largest metro area with over 3 million people is an intriguing location. It’s a city steeped in culture and history (origins of Cinco de Mayo) with stunning European architecture. The city burst onto Mexico’s industrial map in 1964 when Volkswagen located its Mexico headquarters there and the following year built its first Mexican production facility to make the Beetle. Today, the city is home to multiple assembly plants from both VW and Audi, surrounded by numerous Tier 1 and other automotive suppliers. VW invested an additional $400 million U.S. there last year for the production of the Taos SUV.

Interestingly, on average, the city’s higher education institutions have more than 2,000 students enrolled in pursuit of degrees in the English language, more than any other city or state in the country. And in recent years, the region has flexed its creative muscles by establishing Ciudad Modelo (model city) – a city which Gov. Barbosa Huerta likes to refer to as a city designed specifically to support innovative industry. Ciudad Modelo is a 470-acre development with available industrial land, surrounded by health care, hotels, a convention center and educational institutions that provide customized curriculum and training for a wide range of industry and engineering disciplines.

Mexico’s growth industries are many and diverse

Target industries going forward for Mexico will be diverse, so it is impossible to cover every potential industry segment for which Mexico is well-positioned. Almost any industry segment is on the table, but there are a few which merit specific mention.

1. Transportation equipment

Automotive is Mexico’s most important manufacturing sector, providing just over 1 million jobs across the country. Producing around 4 million vehicles each year, most of the country’s automotive assembly plants are located in the Bajio region of central Mexico which is comprised of all or a portion of the states of Aguascalientes, Zacatecas, Guanajuato, San Luis Potosi, Queretaro and Jalisco.

Companies like Honda, Mazda, Nissan and General Motors all have final assembly plants there and they are surrounded by hundreds of Tier 1 to Tier 3 suppliers. Ford, Hyundai/Kia, VW, Audi and Chrysler (as well as the automakers mentioned previously) have plants in other parts of the country. Mexico accounts for 43% of all automotive parts shipped to the United States, far more than any other country outside of the US.

2. Aerospace

This is an emerging industry in Mexico that has a solid foundation in the states of Chihuahua, Queretaro, Sonora and Baja California. Industry names such as Bombardier, Fokker, Honeywell, Airbus, Safran & Textron Cessna (among others) all have a significant presence. The city of ​​Mazatlán is also getting in to the game, announcing a 480-acre aerospace Park with a 10,000 ft runway which is expected to come on-line before the end of 2021.

3. Medical Devices

There are an estimated 175,000 workers across the country in the device/pharma sector producing almost 5,700 FDA registered medical devices ranging from non-woven medical drapes and garments to electromedical devices to stents used in coronary bypass procedures. This sector added 7,800 jobs in Mexico during the first three months of the pandemic, and a total of more than 14,500 for the year. One out of every four of Mexico’s FDA-registered device manufacturers are located in Tijuana and over half (51.4%) of all medical devices produced in Mexico are split between the border cities of Juarez and Tijuana. Fifteen of the world’s 20 largest medical device companies have production in Mexico either thru stand-alone or sub-contract operations.

4. Consumer Electronics

Mexico has become a significant global player in the consumer electronics industry with current employment at almost 350,000. This industry segment is diverse, ranging from computers and peripherals to televisions to smartphones. Over the last three years, Mexico added more than 32,000 manufacturing jobs in this sector, a growth rate of 10.1% — the highest job growth by numbers and percentage of any of Mexico’s manufacturing industries. Over this time frame, Mexico exports of electronics to the U.S. increased by more than 7%, while Chinese imports were decreasing by 23%.   While there are a number of companies with stand-alone operations in Mexico — this sector has significant presence from the world’s largest contract manufacturers like Foxconn, Flextronics and Wistron.  

Additional information

Mexico has been clearly impacted by the global pandemic. The country had 4.257 million manufacturing jobs in February of 2020 and over the first four months of the pandemic lost almost 131,000 of those jobs. Some 94% of those manufacturing job losses from February to June were in the maquila sector. Since June, however, the manufacturing sector has been in a clear recovery. By October, the maquila sector had fully recovered and by November had more than 12,000 employees than existed in February prior to the beginning of the pandemic.

Largest major manufacturing sectors in Mexico by employment as of December 2020

Source: INEGI, data retrieved and organized by Site Selection Group

Largest manufacturing sub-sectors by employment as of December 2020

Source: INEGI, data retrieved and organized by Site Selection Group

Conclusions

Mexico’s proximity to the United States certainly gave it a boost amid the pandemic compared to more far-flung manufacturing locations. As companies look for ways to build resiliency into the future, they may look more closely at moving supply chains closer to the final assembly/integration operations and closer to their end-users as they make site selection decisions.

As a result, Mexico should continue to receive outsized attention from companies wishing to serve U.S. consumers in the future.