Episode 1: Reasons Why Companies Should Consider Manufacturing in Mexico
In our first episode, Ricardo Rascon and David McQueen discuss five reasons companies should consider manufacturing in Mexico. As part of Tetakawi, David spends most of his time talking to foreign manufacturers who are thinking about expanding into Mexico. Before joining Tetakawi, David was president of two Canadian companies who made the strategic decision to manufacture in Mexico.
On top of everything else companies have to worry about in terms of tariffs and geopolitical risks, they now have to consider pandemics as a threat to supply chains. Based on the interactions had by the team at Tetakawi, many companies seem to be putting Mexico at the forefront of their strategies. First, David identifies five critical factors critical in choosing a manufacturer: manpower, logistics, trade barriers, market access, and operating costs.
Beginning with manpower, David highlights the expansive pool of available labor in Mexico. In addition to considering the ability to hire manpower now and in the future, companies also need to be able to retain the people they have hired and ensure their workforce remains engaged and productive. Many industrialized regions of Mexico have an abundance of people equipped with the experience and training needed in manufacturing skills. The border Mexico shares with the U.S. gives them an important advantage in terms of logistics, expanding into the modern highways and rail systems. Addressing trade barriers, David reveals that Mexico has more free trade agreements than any other country. Additionally, their involvement in the USMCA Trade Zone provides the best possible access to Canada and the U.S. In fact, Mexico is far more likely to offer secure access to the U.S. than most other low-cost countries for the foreseeable future. Speaking of market access, Mexico has large manufacturing clusters in many different industries. Finally, David discusses Mexico's competitive edge regarding manufacturing costs. As this episode draws to a close, David touches on a few other benefits Mexico offers: affordability of electricity and natural gas, an agreeable climate, and intellectual property protection.
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Announcer: 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 of 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 Rascon: Hello, and welcome to episode one of Tetakawi's Manufacturing in Mexico podcast. My name is Ricardo Rascon, and today I'm joined by my good friend and colleague, David McQueen. As part of Tetakawi, David spends the majority of his time talking to foreign manufacturers who are thinking about expanding into Mexico. Before joining Tetakawi, David was the president of two Canadian companies who made the choice to manufacture in Mexico. David, how are you doing today?
Dave McQueen: I'm great, Ricardo. Thanks very much.
Ricardo Rascon: Glad to hear it. These last 10 to 18 months have been pretty crazy, haven't they?
Dave McQueen: Yeah, they have. I mean, on top of everything else companies have to worry about in terms of tariffs and geopolitical risks and I don't know what else, they now have to consider pandemics as a threat to their supply chains. It's crazy out there.
Ricardo Rascon: Yeah. And now, what we're seeing is companies, big and small, are really rethinking their supply chains. And I could say based on the number of interactions we're having here at Tetakawi, it seems like many of these companies are putting Mexico at the forefront of their strategies.
Dave McQueen: Yeah. I think Mexico ends up on most lists of low cost country options, for some very good reasons. It doesn't fit every strategy, but it's certainly an option that makes sense for a lot of companies.
Ricardo Rascon: I agree. And that's why today we're going to talk about a number of reasons why Mexico could be the best choice, and hopefully help companies decide whether they should look closer at Mexico, or whether they should consider some other alternatives.
So, David, if you're a manufacturer who is looking for an alternative venue and Mexico is on your mind, where do you start with your due diligence?
Dave McQueen: Well, I think there are five factors that are critical to every company. These are the five things that most companies need to get right in order to choose a manufacturing location. And they are manpower logistics, trade barriers, market access, and of course, operating costs. Now, every company's going to have some factors that are different that influence their particular situation. But if you don't get these five right, then you can usually forget about everything else.
Ricardo Rascon: Okay. Let's start with manpower. What should companies be thinking about when they look at labor in Mexico?
Dave McQueen: Well, I think the first thing is the size of the pool of manpower that's available. You need to have a pool of people who are competent for the tasks that you're going to assign them to, and who are available, and are available in sufficient quantity to fill your needs. You might be able to use unskilled people and inexperienced people, and you might be able to train them, or you might be able to get specific skills. You might require specific skills and abilities. But whatever the case, there has to be a large enough pool of people now and in the future to fill your needs. And I mention the future because companies sometimes enter the Mexican market in a tight labor market, but they have low head count so their needs can be met. Then they find that they can't find the manpower to grow in that particular market. So you need to think about both.
The next thing you need is you need to be able to retain the people that you've hired. Otherwise your investment in training and recruiting is going to skyrocket, and your operational efficiency is going to plummet. And last, you need a pool of people who are interested in and motivated by manufacturing, so your workforce is engaged and productive. So what you're looking for is a location with three things, enough people to hire now and in the future, the ability to retain your employees, and a motivated workforce.
Ricardo Rascon: And how does Mexico stack up in these areas, Dave?
Dave McQueen: Well, in each of these cases, Mexico has some important advantages. First, in the industrialized regions of the country, which is most of the country north of Mexico City, and some areas to the south and east. There are large pools of people who have experience and training in a wide range of manufacturing skills. Some regions, like Monterrey's Saltillo area, which is about five million people, these areas have been industrialized for more than a century. So they're very deep in skills, the services and education that are needed for manufacturing.
The other regions, like the Bajio, which is closer to Mexico City, they're more recently industrialized, but they've invested heavily in education and skills development. And they've been around long enough to develop a comprehensive manufacturing base.
Ricardo Rascon: And when companies think about Mexico, is it just unskilled labor that it also offers, or is it a steady pool of skilled employees as well?
Dave McQueen: Oh, no. It isn't just unskilled labor. There are large pools of engineers or managers to draw from as well. Mexico graduates a huge number of engineers every year. And many of them actually specialize in manufacturing disciplines. The same goes for managers and executives.
Ricardo Rascon: And what other advantages does Mexico have, Dave?
Dave McQueen: Well, the second advantage is the median age. It's only 29 years in Mexico. So it's much younger than either China or the United States, both of which are around 38. Younger manufacturing workers are more motivated. They're more productive. And of course, they have a longer working life as well. But they also typically learn new skills faster, so your ramp-up rate accelerates as well.
Ricardo Rascon: So Mexico sounds ideal from a manpower perspective. There's a young, motivated, and skilled workforce that is ready to help manufacturers succeed. But are there any downsides associated with Mexico's labor pool?
Dave McQueen: Well, there are two that I can think of. First, there's no standard system for skilled trades. People are available that have the required skills, but they've learned their skills informally. So companies need to do their own verification, and that can add some challenges. In a lot of cases, it's not difficult, but for some specialized skills, it can be a bit of a challenge. The training and certification of skilled trades in Mexico is changing, but for now, you need to do your own assessment of skilled workers.
The second thing is that Mexico is a large country. So like the United States or China, not everywhere is industrialized. There are regions of the country that are rural or they're specialized in other industries like agriculture, tourism, or resource extraction. Some of these areas offer attractive labor rates and provide enticing incentives for manufacturers. But if you're considering these areas, you really need to make sure that the manpower and services you need are going to meet your needs. They might not.
A case in point is that certain agricultural regions in Mexico have much of the workforce employed seasonally in their region, and then those people travel to the United States or Canada during the harvest in those countries. Now between those two options, they can end up with a pretty good income by Mexican standards. And these people are not very easy to attract into a manufacturing job, and even harder to retain. So areas with established manufacturing manpower are much easier to recruit and operate in.
Ricardo Rascon: Thanks, Dave. Let's talk about logistics next. Obviously the border with the United States is an important advantage that Mexico has.
Dave McQueen: Yeah, it certainly is. And that advantage is increased by the fact that the highway and rail systems are modern, they're efficient, and they're seamlessly integrated with the systems in both the US and Canada. You could load a trailer in Guadalajara and drive it all the way to Montreal. You can put it in a rail car and do the same thing. Not only that, you have excellent container ports on both the Atlantic and the Pacific. And you have efficient transport lanes to South America, Western Europe, and Asia. Air links are good as well.
Of course, shorter distance lowers the cost of reaching markets, but it also improves turnaround time. So not only do you get a shorter transportation cost, a lower transportation cost, but you also have lower inventories and faster market response. Most destinations in the United States are less than two days drive from the industrialized cities in Mexico, whereas surface routes from Asia could take weeks to reach their destination.
Ricardo Rascon: Mexico offers a competitive workforce, efficient logistics, especially in the context of North America. But what about trade barriers?
Dave McQueen: Well, in Mexico, you're really talking about the lack of them. Mexico is inside the USMCA trade zone. So that provides the best possible access to both Canada and the United States. You've got a combined North American market, Mexico, Canada, the US. It's over 500 million people and they're all in one free trade zone. So that's a definite advantage.
But Mexico also has more free trade agreements than any other country. You can't get better access to the United States, but you also have the potential to export or import at low or no tariff with many other countries. Some of those countries, like Brazil, have some pretty significant trade barriers with the US. But from Mexico, you can import and export at much lower cost. And the list includes many countries in South America, Caribbean, Asia-Pacific region, and of course, the EU.
Ricardo Rascon: And are there any other logistics factors to consider?
Dave McQueen: Yeah, I think there are. We've seen, under the Trump administration, that trade can become a political weapon and supply chains can get caught up in that conflict. Businesses can't do much to control or predict political actions, but they can balance the risk. Mexico offers a low cost platform in a country with a business friendly environment and a strong relationship with the United States.
So manufacturing capability that's in Mexico is a low cost option for balancing risk elsewhere in the supply chain. You could make a similar argument about natural disasters or pandemic risks. They can all disrupt supply chain logistics, so having some geographical option is a strategic advantage.
Ricardo Rascon: So are you saying that companies with facilities in locations like China should consider offsetting risk with a facility in Mexico as well?
Dave McQueen: Yeah. For companies that have the capacity and the resources to support multiple locations, it's certainly a good way to lower risk. It's much easier to ramp up than it is to initially start capacity. So companies that can support multiple facilities can definitely use geographical diversity to lower their global risk. And Mexico offers stability, proximity to the United States, and low cost. So it makes a lot of sense as part of a global manufacturing portfolio.
Ricardo Rascon: And what if a company can't support multiple locations?
Dave McQueen: Well, Mexico is far more likely to offer secure access to the US than China or most other low-cost countries for the foreseeable future. They have a shared border, the USMCA trade agreement, and they're heavily integrated into the North American economy. So that all works towards maintaining an open trade relationship. I think if I were a US manufacturer and I could have only one low cost factory, I'd be strongly inclined to have it in Mexico.
Ricardo Rascon: Let's talk about market access, Dave. What do we mean by market access in the context of our discussion today?
Dave McQueen: It can mean different things for different companies. But the thing we're concerned about here is that certain markets can be difficult or even impossible to serve unless you have a facility in close proximity to the customer. Now, in the automotive world, much of the supply chain has to be within a prescribed distance of the assembly plant that they're serving.
But in other businesses, turnaround time is critical, so successful companies must be close to their markets or they can't minimize transit times. In other cases, the product margin just can't bear large distribution costs, so you can only serve markets that are close to your factories.
Ricardo Rascon: So what are Mexico's strengths?
Dave McQueen: Mexico and the Southern US have large manufacturing clusters in a lot of different industries that depend on quick turnaround and close proximity. So in many cases, at least a portion of these markets are only accessible by manufacturing in Mexico, where you have both proximity and low cost. Mexico also has a large domestic population, with a sizeable expanding middle class. In many cases, supplying this market also requires local manufacturing capability, either to lower the cost or to respond quickly.
And not every company is going to produce a product for which proximity of the customer matters. But for most companies, there's at least some potential to increase revenue by locating in Mexico, closer to their customers. And in many cases, the potential for growth is going to be very large.
Ricardo Rascon: So following that theme, Dave, obviously everyone can benefit from lower production costs and we all know that costs in China have been rising. So is Mexico competitive from a cost perspective?
Dave McQueen: Yeah, Mexico is very competitive. Recent comparative studies have shown that fully fringed manufacturing and wages in Mexico are as much as 35% lower than China. And the rate of manufacturing wage inflation is about 15% lower. Professional salaries are lower as well. Engineering salaries in Mexico are around 25% less than China. So when you add in the cost of inventory or savings on inventory and transportation, your landed product cost in the United States can be significantly cheaper manufactured in Mexico. But also, with the basic wage gap, you may be able to supply other regions of the world at a lower cost as well.
Ricardo Rascon: And what about other factors, like utilities and real estate?
Dave McQueen: Well, electrical power in Mexico is slightly less expensive than China, and natural gas is very competitively priced, although it isn't available in all areas in the country. But real estate's a little harder to compare because, as we all know, location matters. However, as a general statement, the real estate costs in Mexico are globally competitive. And the availability of Class A industrial rental properties in particular is very good.
Furthermore, the climate in most of Mexico generally allows the use of lighter, lower cost building design, and that can lower construction costs. And then there's an added bonus to some regions like the Bajio, where you can operate without either heating or air conditioning. So you reduce your utilities load and further reduce your facility costs.
Ricardo Rascon: And what about subsidies? Don't make any countries try to offset production costs with subsidies?
Dave McQueen: Yeah, sure. And subsidies are a bit like politically motivated tariffs that we discussed earlier. They distort the market, and where they apply it may not be possible to compete effectively. However, subsidies, like tariffs, attract retaliation by other countries. And since they're political, not practical, they can also disappear or be reduced suddenly by the government providing them. Are there cases where China or some other low cost country has subsidized an industry to the point where Mexico cannot compete? Yes. But those cases generally either already face countervailing duties in the United States and some other countries, or they're at high risk of retaliation from trade partners, including Mexico.
So each case has its own dynamics and timing, but having underlying manufacturing costs that are low is usually the best long term strategy. Companies can't really control political actions, and many times political actions do not make good business sense. But what companies can do is balance the risk by investing in locations with solid underlying economics, and Mexico has that.
Ricardo Rascon: I agree, Dave. And earlier you mentioned some other factors that might come into play for some companies. Can you list a few of those?
Dave McQueen: Yeah, sure. This won't be a comprehensive list by any stretch of the imagination, but the first thing that comes to mind is direct government interference, and related item protection of intellectual property. Some other low cost regions, notably China, have limited protection of intellectual property and a very high risk of direct government interference. Mexico operates much like the United States, with no direct interference with private companies, and a strong protection for the property.
Another thing that could be important is the expatriate lifestyle and services. For North Americans particularly, Mexico's very accessible. Most cities offer attractive and economical housing, excellent services, world class health and education facilities, and other services for expatriates. There's immigration regulations that are business friendly and they're pretty easily navigated. And in fact, there's a large predominantly North American expatriate retirement community in Mexico. So finding services in English is often easy and inconvenient in a lot of locations.
Another factor might be the availability of specific industry clusters that may not be as common elsewhere. Depending on your product, this could offer some significant growth opportunities. A few of the large clusters in Mexico that come to mind include flat screen TV production, heavy truck assembly, home appliances, light off road and leisure vehicles, but there are others as well. And then there's accessibility and communications, which could be an advantage particularly for US based companies. From anywhere in Mexico, the US is a few hours by air, and it's located the same time zones. So this means communications are easier and quicker, and personnel can easily travel between locations. So response time improves, costs are reduced, and companies can achieve a critical performance advantage in some cases.
Finally, there's a particular advantage for global auto parts suppliers. This is an industry-specific thing. But the USMCA provides for increases in local content that are to be phased in over a number of years. And these requirements need to be met by manufacturing in one of the three USMCA countries. So for goods that require low cost manufacturing, or the way logistics favor Southern customers, Mexico is clearly going to be a good choice for meeting those content requirements.
Ricardo Rascon: Well, thank you, Dave. We've covered a lot of ground. So for companies who've heard you speak and said, yes, I'm excited by the possibility of expanding into Mexico. I want to perform some further due diligence. What's their next step?
Dave McQueen: Well, I think the first thing to do is consider which gateway you want to use to access Mexican manufacturing. Do you want to consider contract manufacturing, or would you be better to set up your own facility? Should you incorporate, should you use the shelter model? Once you've decided on a gateway, then you probably want to start thinking about locations in Mexico. Knowing where you want to go and how you want to get there, puts you in a pretty good position to start working on the details of modeling your specific strategy.
Ricardo Rascon: Thanks, Dave, that's a perfect segue into our upcoming episodes. Our next podcast will talk about gateways to entry, and the one after that, we'll discuss how to select a location in Mexico. Join us for either or both, and learn more about how to manufacture in Mexico. Thanks again, David. And thank you, everyone, for listening.
Announcer: 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.