Tetakawi:

Welcome to Tetakawi's Manufacturing in Mexico podcast, where we talk to internal and external experts to provide you with news, insights, and best practices about doing business in Mexico. Whether you're thinking about expanding into Mexico or already there, this podcast will provide you with the information and advice you need to launch, operate, and thrive.

Ricardo Rascón:

Hello, and welcome to another episode of our Manufacturing of Mexico podcast. My name is Ricardo Rascón, and joining me today is David McQueen. David, ¿Cómo estás?

David McQueen:

Muy bien. Gracias. I'm doing very well. Thank you, Ricardo.

Ricardo Rascón:

I'm glad to hear. So in today's episode, we're going to talk about the significant growth that's taking place within Mexico's manufacturing sector, and how this growth is presenting potential investors with both opportunities and challenges, especially when it comes to site selection. So to kind of put this significant growth into perspective, if we look at the data, in 2023, foreign direct investment in Mexico's manufacturing sector was 19.1 billion. This is up from 13.71 billion in 2022, and 11.28 billion in 2021. So if we look at the growth rate from 2022 to '23, it's a 39% growth rate. And from 2021 to 2022, it's a 21.5% growth rate. So business is booming. And keep in mind, most of these are new investments, so we can't forget about the thousands of foreign companies already operate in Mexico. What we're seeing is they're doubling down on their investments and growing faster than ever. So David, with these data points in mind, what do you think is causing the growth in Mexico's manufacturing sector, and how are these dynamics playing out on the ground?

David McQueen:

Well, I think there's several factors Ricardo. Obviously, everybody is aware that there's pressure to nearshore production, from Asia particularly. Big focus on China, of course, where there are political risks as well as financial incentives to relocate business. I think many companies, through the pandemic and in the high interest rate environment right now, see long supply lines as a problem as well. Having 10, 12 weeks of inventory costs a lot more than it did a few years ago, and it doesn't allow you to respond to the market very quickly as everyone saw during the pandemic crisis. So I think those are big factors. In addition to that, labor's an issue everywhere in the world right now, especially skilled labor, but Mexico has an advantage there, and I think a lot of manufacturers are realizing that they have a demographic advantage in that their working population is expanding organically.

That's not the case in most countries, and it's backed by some excellent training and education resources, experience, and so on. So in terms of a place to find skilled labor, while it's not easy in Mexico necessarily, it's certainly a lot easier than countries like China where the skilled labor force is declining and probably will continue to do so. I think those are all factors. We've certainly seen the dynamics ourselves. Some of our parks have reached capacity. The organic growth of our clients has been significant. A lot of new companies have approached us. And not just from the United States and Canada, the traditional areas where we see a lot of our clients come from. We're seeing a lot of Europeans, people from Asia. There's general interest internationally in those companies that are providing products for the North American market to get their production into North America, and particularly into Mexico.

Ricardo Rascón:

So with all of these companies setting up in Mexico or expanding their existing operations, is it becoming more difficult for companies who want to launch a facility there for the first time? If I'm a manufacturer and I want to expand into Mexico, is there capacity for me?

David McQueen:

Well, the challenges have certainly increased in the last five years, especially in some of the more popular manufacturing locations, but there's still plenty of capacity. You need to do a little more homework on where you locate, and you need to consider the specific factors that are going to impact your business and how those might play out in the location you're choosing.

Ricardo Rascón:

So can you speak to the types of challenges that I would face and where?

David McQueen:

Sure. Some regions, the border zone for example, have experienced higher real estate costs and manpower shortages for a number of years, so that's not new there. But in the current environment, some of these areas are running out of room for expansion. There just simply aren't people, or there is not real estate available. Tijuana, for example, has some of the most expensive real estate in the country, and probably the most difficult and expensive recruiting and retention environment at all of Mexico. Most of the industrialized regions north of Mexico City are also seeing some degree of increased real estate pressure and some lower manpower availability these days. Monterey, for example, has been very popular with companies in recent years. It's experiencing some significant challenges in terms of the availability and cost of facilities, as well as the specific acquisition of skills and manpower and the ability to retain those skilled people and the manpower that you hire. Certainly not to the same extent as Tijuana, but certainly a lot higher than it was a few years ago.

Ricardo Rascón:

Yeah, definitely. I've spoken to companies operating in Tijuana, and turnover is upwards of 15% a month, which makes it pretty difficult to maintain your quality standards when you're trying to fill a bottomless bucket. So this manpower problem, Dave, it seems to be pretty global. If there are people, they don't have the skills. And if they do have the skills, there aren't enough of them, correct?

David McQueen:

Yeah, it's definitely a global problem right now. China, of course, we mentioned that a few minutes ago, is seeing an overall population decrease. Its retirement cohort is larger than the cohort entering the labor market. And of course, in China, there's no real inward immigration, so that's a big factor. But they're not the only ones. The workforce in North America is aging. The workforce in Europe is aging. That's true of most countries. Mexico is still experiencing some organic population growth, however. The birth rate is falling as it is in most countries, but the retirement cohort is still a lot smaller than the cohort entering the market, and they're going to see that expanding workforce even without immigration for some years to come. The problem in Mexico is that even with that significant expansion in the availability of the working age, people, manufacturers be growing so rapidly that there could still be local shortages. And especially, the direct labor market is less inclined to relocate for work than they might be in some other countries.

Ricardo Rascón:

And looking at the number of unemployed and underemployed people in Mexico, is there still a large number of people to tap into there?

David McQueen:

Yeah, particularly in the southern part of the country. But as I mentioned, there's historically been resistance in Mexico to relocating for employment amongst unskilled people. So you can have a tight workforce in a city in the industrialized north, but you can have very high unemployment in an industrialized area in the south, and they can exist at the same time. This is not true of professional people, managers and engineers, and so on. They're mobile throughout the country, so the resources there are available regardless of where you locate.

Ricardo Rascón:

And what about more skilled labor?

David McQueen:

Well, Mexico does a pretty good job of turning out college-educated manpower like engineers, management candidates and so on. And in many areas, industrial experience runs very deep in the unskilled workforce. Areas like Monterey have been industrialized for more than a century, for example. But if there is a potential problem, it's with what we consider trades. There's no national or state certification process for skilled trades like there is in the United States or many other countries. So trades are taught informally through on-the-job, apprenticeships. Now in areas like Saltillo, Monterey and so on that have been industrialized for so long, the employment market can be tight, but the skills are probably available. If you need a huge number of some particular skill, that might be a problem. You need 300 welders or something. Maybe it's a little harder to recruit, but the people are there In some other regions though, specific types of qualifications, machinists, for example, might be more difficult to find, or even unavailable in the area that you're looking to locate.

Ricardo Rascón:

So all of this pressure on local capacity for labor, and you even mentioned real estate a bit, is it leading to inflationary pressure as well in Mexico?

David McQueen:

Yes. Yes. Inevitably, if real estate or manpower in short supply, the price increases. So some markets are seeing some fairly rapid cost increases, and that can be another challenge you face. However, wage inflation is still generally lower than China and more or less in line with other parts of the world that are experiencing an inflationary environment, which is most countries right now. Although it's higher than it was previously, it's not significantly out of line with what you might expect elsewhere.

Ricardo Rascón:

So you talked about pressure specifically in Tijuana, Monterey, there's other border areas like Ciudad Juarez. Do you think people should avoid these areas altogether if they're considering their first expansion into Mexico?

David McQueen:

No, I wouldn't say that. Maybe possibly accepting a really difficult market like Tijuana. But even there, there might be reasons why you'd want to choose that. You might still find it beneficial to choose one of the more popular cities for your facility. We have clients in Saltillo, for example, for whom the benefits are the high skill levels, strong local supply and service base, proximity to customers in the US border. Those advantages outweigh any challenges they're facing in recruiting or constraints on available real estate. But we also have client who've chosen Saltillo specifically because they want to avoid the challenges in Monterey, which are slightly greater, and that's a city that's only 50 miles away. So it really depends a lot on what's critical to your company and what challenges you feel you can comfortably manage versus what challenges you want to avoid and what advantages you need.

Ricardo Rascón:

So if my company wants to minimize their exposure to these challenges of rapidly increasing wages, labor availability, increasing real estate costs, are there less popular or alternative manufacturing locations in Mexico that I should consider?

David McQueen:

Yeah, definitely. We just talked about the relative advantages of Saltillo over Monterey, but there are other alternatives within the industrialized regions that might be a better choice for some companies. And there are emerging locations, actually, in some areas of Mexico that have not traditionally been very industrialized, and those could work well for some companies.

Ricardo Rascón:

So tell us a little bit more about some of these areas, Dave.

David McQueen:

Well, 75% of the manufacturing in almost all foreign owned manufacturing in Mexico is done in IMMEX facilities. If we use IMMEX employment as a guide, the states of Chihuahua and Baja have the greatest challenges. Both of those states are approaching 20% of their working age population already being employed in an IMMEX facility. Coahuila and Nuevo Leon are next at about 14%, at 11% respectively. And we know both of those states have some real estate and labor challenges, not necessarily to the level of Coahuila and Tijuana, but higher than they were a few years ago. State of Sonora is around 8%, and the Bajío is around five or seven, in around that range, depending on which state, so they're going to be a little bit easier. At the under end of the scale, areas like Mazatlan and Yucatan are both starting to industrialize, but they only have about one to 2% of their population currently working in IMMEX and manufacturing, or in fact, in manufacturing at all. So it also matters which cities you're talking about, but there's some good options in Sonora and the Bajío, and there are emerging options in Mazatlan and Yucatan.

Ricardo Rascón:

So before we delve into each of these regions, you mentioned the IMMEX program. For listeners who may not be aware of it or haven't listened to any of our other podcasts, can you just provide us with a quick definition of what EMEX means?

David McQueen:

Sure. IMMEX is a Mexican government program and the intent is to help exporters. The key feature is that IMMEX allows exporting companies to avoid paying value-added tax, or in situations where they have to pay value-added tax, to recover the value-added tax. It also includes access to some duty relief programs that are specifically for exporters. So it's a very attractive option for exporting companies. And added to that, in terms of exporting, it includes not only exporting outside of Mexico, but any transactions that occur within Mexico between IMMEX companies. So goods can travel between IMMEX companies in Mexico and not attract value-added tax and take advantage of certain duty relief programs. So it tends to be the most popular way for companies to manufacture in Mexico. There are ways to also ship goods within Mexico. That's a topic for one of our other podcasts, but essentially, most foreign manufacturers are going to want to have an IMMEX facility in order to take advantage of the benefits of IMMEX.

Ricardo Rascón:

Okay. Great. So when we speak about IMMEX employment and the number of IMMEX programs, really what we're talking about is the market of foreign manufacturers in Mexico for the most part.

David McQueen:

Primarily, although it includes Mexican manufacturers as well. There are specific options for Mexican manufacturers who are doing IMMEX activities and their numbers would be included in that total in terms of employment.

Ricardo Rascón:

Perfect. So kind of delving deeper... Sorry for the segue there, but I do think it was important to explain the IMMEX program.

David McQueen:

Sure. Yeah.

Ricardo Rascón:

You mentioned certain regions in Mexico. Can you tell us which specific cities might make sense in each of these regions?

David McQueen:

Torreón and Coahuila would be choice, for example. That's an area with a few advantages in terms of availability of manpower and real estate that also, in terms of location, is similar to Monterrey and Saltillo. Metropolitan population of about a million and a half. A bit further from the US border, but a lower level of industrialization, so more labor at a better rate. In Sonora, Hermosillo is a good alternative city of about a million, three and a half hours by car from Arizona, fairly good industrial base that's been there for a while. In the Bajío, I would suggest probably Queretaro as the ideal choice, about 2 million people, pretty good industrial base.

And uniquely amongst Mexican cities, there's a significant amount of inward migration of labor. So that's an unusual thing, as I mentioned earlier, but Queretaro is an exception, so availability tends to be pretty good even though there's a significant concentration of industrialization. Mazatlan is another good choice. It's smaller at around half a million people, but a much smaller industrial base, so plenty of available labor at a competitive rate. And it's on the Pacific ocean, so you have ocean access as well. Similarly, Merida in Yucatan, a much smaller industrial base. It's a long way from the industrial north and from the US, but the metropolitan population of around 1.3 million, offers plenty of available labor. And in Merida's case, you have Atlantic port access if that's an advantage to you.

Ricardo Rascón:

So it seems like each of these cities has a different set of advantages and disadvantages. Let's dissect them one by one. So what can you tell me specifically about Torreón, Coahuila?

David McQueen:

Torreón is part of the metropolitan area known as La Laguna. It spans three states, actually. It's right in the corner of three states, located on the western side of the state of Coahuila. It's about two and a half hours west of Saltillo and about three and a half hours from Monterrey. That puts it about six hours from the Texas border by truck. While the city's been industrialized for some time, it hasn't been as popular as nearby locations, like Saltillo or Monterrey. Historically, other industries have been established there, mining for example. There's more available labor and it's at a slightly better cost.

Ricardo Rascón:

And are there any potential downsides to manufacturing in Torreón?

David McQueen:

Well, the added distance to the US border, that might deter some companies. It's also a bit further from port access. It's more towards the center of the country, so you're a bit further from a port. That could be a factor. Skills and services are not going to be at the level of Monterey or Saltillo, but I think they're going to be more than adequate for most companies, so I don't think that's a big factor. Another possible downside is that Torreón is gaining in popularity. And so being in the Northeast, the five-year outlook might present some of the same kinds of challenges other regions are experiencing. So you might have a period of time when it's a little easier, but perhaps then it's going to be a little bit more difficult in Torreón as well.

Ricardo Rascón:

Great. So tell us a little bit about Hermosillo, Sonora.

David McQueen:

We know Hermosillo well because we operate a park there. Also, our sister company, INTUGO, operates facilities there. Manufacturing's a smaller segment of the company than in some of the more popular cities, but it's still strong. Ford has had an assembly plant there since the 1980s, and the area is also part of the Sonoran aerospace engine manufacturing cluster. So skills and services are available. Wages and real estate costs are generally a bit lower than in the Northeast, and availability of both buildings and labor is a bit better. Access to the US Southwest is also very good of course, and port access in the Pacific side is not too bad. So if you're looking at the Western part of the United States, for example, then it becomes very attractive.

Ricardo Rascón:

And are there any potential downsides to manufacturing in Hermosillo?

David McQueen:

If you need to be close to the Eastern US or you want to be close to the domestic Mexican population, if either of those factors are important, this might not be your best choice. Some of the other areas are a little closer to those markets. Some companies might also find that certain specialized skills or services aren't locally available. So for example, if you need some very specialized kind of surface treatment or heat treating, something like that, perhaps it's not going to be available very conveniently locally. In terms of customers, if you're looking to locate where customers are nearby, there are fewer of them. They might be the right ones for you, but they might not. So that might be a deterrent for some companies.

Ricardo Rascón:

Great. So after Hermosillo, you also mentioned Querétaro, and I've heard companies talking about Querétaro for the last almost 10 years, so I was under the impression it was already a very popular choice. So why is it on your list as an alternative location to consider?

David McQueen:

Well, three reasons. First, Querétaro is experiencing inward migration of unskilled people, which doesn't occur much elsewhere. So in terms of a city which is very popular, you're right, it has the benefit of having better availability because unskilled people are actually moving there. So labor force is growing faster and there's more labor available. The second reason is that industrialization has progressed to the point where there's a pretty good level of support and relatively high levels of skilled personnel. So you're approaching the level of cities like Querétaro in terms of availability of those services. Third reason is that Querétaro is almost at the geographic center of the Mexican population. So if your goal is to supply the local population or local plants, local manufacturing plants, if that's your primary market, then it's an ideal location for that kind of activity.

Ricardo Rascón:

So other than the fact that it's hard to pronounce, are there any other drawbacks to manufacturing Querétaro?

David McQueen:

Well, access to the US. It's 11 hours or so by truck to the US border. So in comparison to places like say Saltillo or Torreón, it's a much longer journey. So that's one big drawback. It's also a bit higher cost generally. You're approaching the kinds of costs you would see in, say Saltillo, but it's somewhat cheaper than Monterrey. So if cost is not a critical factor for you, it's not the lowest cost option, then the other factors might be more important.

Ricardo Rascón:

And what can you tell us about Mazatlan?

David McQueen:

Mazatlan is different from the locations we've discussed so far. It's much less industrialized. So it's going to suit companies that require less skill or that can train most of their workforce internally. Those two factors are fairly important. Same goes for the supply chain. Specialized local services or suppliers, just not going to be as common as they are in the more industrialized cities. However, there's a very good labor availability and the rate of pay is lower. Same goes for real estate. It's not an area that is heavily industrialized. There's a lot of land available and real estate available. It's also got another benefit. It's a very attractive seaside resort, which is likely to appeal to expatriate employees, as well as professional staff hired within Mexico, like managers and engineers. It's a very nice place to live.

Ricardo Rascón:

Yeah, I do not complain about visiting Mazatlan. It's a very nice place. So are there any other disadvantages besides potentially lower skill and service level in Mazatlan?

David McQueen:

Well, similar to Querétaro, you're fairly far from the US. By land, it's about 12 hours to the Texas border and about an hour and a half longer to Arizona. Mazatlan has a Pacific cargo port, but you're away from the Atlantic port. So that might be an issue for some companies that they're looking at Atlantic side shipments.

Ricardo Rascón:

And I hear there's a new shelter service provider in town there in Mazatlan. What can you tell me about that?

David McQueen:

There very definitely is. Until recently, that was one of the drawbacks of a location like Mazatlan, is that you could not get a shelter provider there to help you set up and operate. But Tetakawi has opened a manufacturing community, and we now offer full shelter support there. So a company looking to launch with a shelter provider now has that option in Mazatlan with Tetakawi.

Ricardo Rascón:

Yeah, and I know our first client should be operational in a couple months here, and we've had a tremendous amount of success recruiting for them. We've been really surprised with the skill set that we're seeing there, and it's a very ambitious workforce. So obviously, this is an aerospace client that's setting up there so there's some training required, but it's a workforce where you don't have to be fearful of investing in training because turnover isn't going to be as big of an issue in maybe some of these other areas that you were mentioning, David. So Mazatlan, we're very excited about it, and I think it could be a good location for companies to consider and see if it makes sense for you.

David McQueen:

And many companies do have a structure where their main requirement is a workforce they can train and retain and they don't need to hire in specialized skills, so it works ideally for that.

Ricardo Rascón:

Great. So aside from Mazatlan, the last city you mentioned was Merida. I think I'm noticing a theme here with you, Dave, and you're picking your next vacation. What can you tell people about Merida?

David McQueen:

Well, it has some similarities to Mazatlan. There's a low level of industrialization, so all the same comments that we made about it being a great place for unskilled labor and a labor force that you're willing to train, they apply to Merida as well. But if you have highly specialized skills or specific support services, those may not be available. You might need to consider doing them in-house. It has a good supply of labor at a lower cost. Real estate shouldn't be a challenge either. It's even further from the US though. It's not even practical to consider truck shipment from Merida. It's such a long way. But if you're looking at ocean shipment or rail, the logistics are pretty good. And so there's another thing. It's on the Atlantic side. If you're a company that needs specific side logistics, that might complicate things. But if you're a company that needs Atlantic side shipments or is happy bringing things through the Panama Canal, it's perfect for that as well.

Ricardo Rascón:

Thanks, Dave. I think you've given us some viable options to consider if they want to avoid or minimize some of the challenges that you mentioned earlier in some of these industrialized areas. Is there any other location advice that you would give companies who are thinking about expanding into Mexico maybe for the first time or for an expansion beyond their initial investment?

David McQueen:

Yeah, I think my main recommendation would be before you start looking at locations and listen to everybody else saying, "Well, this is a great spot, that's a great spot," think through what's critical to your company, and along with that, what things are you comfortable managing. So how critical are logistics, and what does that mean about where you need to locate? How critical is skilled manpower to you or specific kinds of services that you require for your company? And then you could think on the other side, well, what are we prepared to manage or comfortable managing that has less of an impact on our business? There's a wide range of options, there's a lot of factors to consider, and you want to find a location that suits the success faster for your company, and then to be comfortable managing the things that might not be your first choice in terms of location.

The other thing I would say is that it can sometimes be difficult to find reliable data for Mexico. So it's a good idea to get help. Shelters are a great source of advice in data. All of us work in Mexico with clients on a daily basis, so we're very active in the market. We can give you very current information in the markets that we are operating. Real estate brokers are a good source, of course, for properties, not the best choice when it comes to labor markets or supply chains. And although they'll offer advice on those things, they're not the best source of information there. Government sources can be helpful, but you have to remember that, of course, economic development people are looking to promote their area, and so they have more of a tendency to paint their particular region in very favorable colors. So you need to take that information with a grain of salt.

And customers and suppliers, people who are already on the ground, those people can give you insight into what it's really like to operate in that region, how the problems occur, and what they are, and how easy it is to handle them. So they can be reliable advice as well.

Ricardo Rascón:

Well, thanks, Dave. I really appreciate the insight that you shared. Given the impact that location has on success, it's a very critical decision. So as you mentioned, it's important to analyze all the data, leave no stone unturned, and set your company up for success. So thanks again, Dave. And as we wrap up today's conversation, I just invite you all to keep your eyes and ears open for future episodes where we'll continue to explore the dynamic world of manufacturing in Mexico. And if you haven't had a chance to listen to any of our previous episodes, I encourage you to do so. We cover a wide range of topics, everything from manufacturing costs in Mexico to the different modes of entry. So thank you all again for joining us today, and until next time.

Tetakawi:

We appreciate you joining us for this session of the manufacturing in Mexico podcast. For more information and resources about how to succeed in Mexico, be sure to visit our website tetakawi.com.