Companies have historically outsourced production and manufacturing to China. Offshoring can sound like a good idea. You are saving quite a lot, so why not? But what if there was a better alternative? Though many theorize that Mexico is indeed a better place to set up your plants and factories, is it really true? How big of a difference is it? Sourcing in Mexico is indeed remarkably better for American companies. Here are the top four reasons why.
#1. Better economic viability
Mexico has already beaten China in offering the cheapest manufacturing labor. Leading companies from the top industries of the world are choosing Mexico over China now more often than not. American businesses are finding the many benefits of nearshoring vs. offshoring. A few points are at play here.
The labor cost is significantly cheaper in Mexico compared to the US, but also when compared to China.
Over the last few decades, the year-on-year average wage increase is much smaller in Mexico than in China.
Transportation and logistics costs are much less when sourcing in Mexico thanks to the geographical proximity.
Tax waivers can be leveraged by American businesses when they manufacture in Mexico.
Mexico’s inflation rate is steady and it helps business owners better forecast and plan their expenses into the future.
#2. Faster product cycles and shipping from Mexico
The closer proximity to the US allows product cycles and shipping to be faster for American and Canadian businesses. An integrated federal highway system ensures that there’s land connecting the factory to you and you to the buyer, meaning things are remarkably rapid.
There is also no issue of holdups in ports like when shipping from China. The whole economy of Mexico has transitioned into a free-trade ally of North America over the last 50 years and consequently, trade routes are much faster, safer, predictable, and reliable.
For many businesses, the promise of faster product cycles and faster shipping itself can be the difference between sluggish growth and transformative success over the long run. Think Amazon. It has such a chunky market share simply because it can deliver the same stuff faster than the original company.
#3. Fewer legal hoops
You will need to navigate significantly fewer legal hurdles and hoops when you source in Mexico vs. when you source in China.
China is known for a less friendly patent system for intellectual rights (China follows the first-to-file system, while the US follows the first-to-invent or prior art system). Also, since they are a communist state, factory owners and the state owns equipment even if you buy it because it provides jobs for their workers, thus you no longer own it completely.
Almost all big companies who have tried to set up shop in China have reported revenue losses and sophisticated hurdles because the state of China places a heavy interest on keeping its money and business within its country, letting a very small amount of cash leave its shores. The state-owned competition doesn’t help either.
A Charney Research poll found that 35% of American companies also report that they must bribe officials in China to operate efficiently.
You have to acquire specific contracts in China for nearly everything. Chinese plants and factories can easily make slight changes in the design of a product and file a patent. And regardless of the history of the product or how minor the changes are, they will get a patent. Similarly, the tooling usually belongs to the owner. But in China, it can easily belong to the plant or factory owner. In all these cases, specific contracts have to be acquired and there is no list of all the contracts you will ever need, meaning that you will end up losing a chunk of your business over the trial runs.
The Chinese economy also has a tendency to think of bankruptcies as a result of criminal activity. From wrongful asset confiscation to CEOs being detained, American businesses filing for bankruptcies have faced a lot of troubles simply because of a Chinese premise that blurs the line between civility and criminality. Perhaps they have come to this conclusion after some history, but that doesn’t mean that all businesses filing for bankruptcy have to be pre-assessed as practitioners of wrongdoing.
#4. IMMEX program
With the IMMEX program in Mexico, virtually all legal and start-up tasks are taken care of for you by a shelter company like Javid LLC, so you do not have to worry about anything other than your products and business.
The IMMEX program or the maquiladora program allows foreign businesses to manufacture products and parts in Mexico meant for the original country, such as the US or Canada. If you are in the IMMEX program then one of the key benefits is the cost-saving that comes with the exemption from the 16% VAT on the import of raw materials, equipment, machinery, and goods. For a deeper look into the IMMEX program read our blog post.
#5. Workforce differences
Apart from manufacturing labor costs, Mexico's workforce is slightly more expensive when it comes to other types of wages and productive workforce. But this workforce is also trained much better.
Bottom line is that you do not have to sacrifice quality when manufacturing in Mexico, as the market is similar to the US due to the proximity.
A better production value and skilled workforce is a much better deal. As such, Mexico beats China here as well. Read more about Mexico's skilled workforce here.
In conclusion
Mexico truly allows American businesses to thrive. It is a give-and-take relationship. That’s not the case when you source in China. The Chinese state only cares for what it gets when companies manufacture on their soil, not what it can give back. This lack of fairness is the primary reason why American businesses are shifting out of China and moving to Mexico.
Everyone from the world’s biggest companies such as the leading automotive brands to the smallest one-man ecommerce platforms is seeing the benefit of sourcing in Mexico.
Written by: Tristan Burke