Industrial site selection in Mexico post-pandemic: 5 Keys

Despite severe disruptions to global value chains caused by the coronavirus pandemic, trade has not ceased. Although manufacturers from all industries have had to put their growth plans on hold, economic reactivation in the world will largely depend on the different companies being able to overcome in the operational challenges that the pandemic has caused in the shore and medium term.  Under these circumstances, industrial site selection in Mexico will be impacted by several variables. 

In light of the aforementioned, industrial real-estate analysts at Colliers International recently compiled 5 key criteria to help global companies optimize their strategy for Mexican industrial site selection.  They have also revealed some key questions to consider before approaching a developer or a broker of industrial land sales in Mexico .

5  criteria for the industrial site selection in Mexico post COVID-19 

1. Supply chain flexibility 

By disrupting the global value chain, the pandemic has forced companies to seek a supply model that is less dependent on Chinese manufacturing.

Thus, many companies looked to pursue a strategy of nearshoring in Mexico (relocating production from Asia to the nearest country, in this case, for a US manufacturer).  Other manufacturers have opted to pursue a “China + 1” strategy.  China+1 refers to China remaining the main source of supply for a company, while it diversifies based on benefits to specific operations but doesn’t move the whole supply chain.

Thus, companies can reflect upon the following questions:

• Which strategy will best meet my needs for the next 5 years?
• And for the long term, 7 to 10 years or more?
• How is my supply chain reconfigured with such a strategy and what steps do I have to take to mitigate future risks?

2. Quick access to markets

Although industrial sites in Mexico are typically planned for 10-20 years of operation, the changing business environment brought on by COVID-19 has led some manufacturers to consider a short-term occupancy to cover their cost structure, and, at the same time, to accelerate entry into new markets.

Under these circumstances, the quickest option may be to occupy a space within an industrial park with inventory warehouses available. This course of action may be pursued at least until a more robust and prolonged solution can be implemented.  Companies that embark upon this path may ask:

• What contribution will the rent of a building or industrial warehouse have, as an alternative to achieve business and growth objectives in the short term?
• How will the long-term placement strategy be affected by this decision, particularly if the occupation is specialized and the contract lasts for more than 10 years?

3. Operating costs related to industrial site selection in Mexico

According to Colliers,  the recurring costs required to operate an industrial site in Mexico (including transportation, tax, personnel and service expenses) account for 65% of the budget , while spending on industrial buildings and land is only 5%.

For this reason, the site selection exercise must consider a balance between various operational costs.  Such considerations are especially critical during an economic recession.  The consolidation of the supply chain and rapid access to markets are among them. Some guiding questions are:

• How do taxes (on income or property) vary in the different cities or regions in Mexico?
• Are there any special economic regions with lower minimum wages or lower service costs?

4. Accessible workforce

In Mexico, as in other countries, there are local governments that, with the cooperation of their citizens, have been able to flatten the contagion curve, which has enabled manufacturing firms to maintain functioning operations.

If competitive salaries and “triple helix” models (where private initiative, government and educational institutions collaborate to prepare a highly qualified workforce) are added to the above, this represents a great opportunity that companies that are involved in industrial site selection simply cannot pass up.  Some questions that should be considered include:

• Is it possible to use data analytics to identify and attract workforce?
• Is it possible to avoid places with potential for new outbreaks?
• Is it possible to avoid union activity or can it be managed?

5. Incentives

During technical shutdowns and reduced economic activity, some governments choose to increase economic and tax incentives to attract new business, recover revenue, and lay the foundation for future growth in their communities. This type of incentives can be a compelling feature when choosing the location to install a new industrial plant.

However, while fiscal stimulus drives transactions above the stipulated break-even threshold, they do not necessarily turn a bad location into a good one. For such as case, some key questions related to industrial site selection in Mexico are:

• What kind of incentives does the location offer, whether they are inexpensive or otherwise? Depending on the project’s goals, one may be more important than the other.
• Does the viability of the project depend on incentives? If so, how could this dependency be overcome and what is needed to meet the long-term needs of business operation?
• Is it possible to take advantage of the entire package of tax incentives and subsidies? Special care must be taken not to work with inflated figures.

In conclusion, Colliers industrial site selection analysts point out that, to take strategic advantage during this uncertain period, companies that implement these types of criteria in the selection of industrial sites are those that are able to significantly reduce risks and improve their chances of success in future projects.