Which sectors are taking advantage of opportunities for nearshoring manufacturing to Mexico?

2020 brought the coronavirus emergency that landed a blow to the world economy. As a result, the global pandemic clearly demonstrated the fragility of the global value chain. Thus, how manufacturing sectors respond to this and future similar challenges could determine their destiny and that of the region of the world where they carry out their business operations. Under the current circumstances, there has been a recent growth in opportunities for nearshoring manufacturing to Mexico.

Because of the pandemic, more than a few transnational companies of varied sizes have decided to move their production nearer to home. This action has been taken to protect themselves against supply interruptions and reduce their dependence on overseas industrial zones such as Wuhan (China), the place of origin of the SARS-CoV-2 coronavirus. Mexico is the leading destination location for this nearshoring activity.

While no country is immune from disruptions to its production and logistics ecosystem, Mexico’s appeal as a key manufacturing hub in North America was triggered by three things:

• The entry into force of the renewed Mexico-United States-Canada Treaty (USMCA, formerly NAFTA) gave certainty to commercial exchanges. In addition, it ratified the tariff preference for manufacturers established in Mexican territory.

• Trade tensions between China and the US and their tariff war have been in force since 2018.

• The country’s logistical advantages in terms of transportation times and costs (by train or road) compared to the 30-40 days it takes for an Asian containership to reach the California coast.

Added to the factors enumerated above is the global boom in electronic commerce derived from contagion prevention and social distancing measures. This development continues to drive the demand and opportunities for nearshoring manufacturing to Mexico.

All this has converged so that, according to the membership of the NAIOP, the National Association of Industrial and Commercial Properties of the US, some manufacturers in Mexico have dared to make the bold statement that “the benefits of producing in Asia are over.” This means that nearshoring (relocation of the production to the low-cost country closest to the consumer market) is the most convenient investment both for costs and manufacturing quality

Opportunities for nearshoring manufacturing to Mexico: most benefited sectors

The manufacturing industry in Mexico is one of the most competitive in the world because, in addition to offering low labor and operating costs, it is known for its use of technology and high quality standards.

Additionally, in recent decades the presence of original equipment manufacturers (OEM) has increased. These companies and their suppliers have established plants in Mexican territory to take advantage of strategic advantages such as location, extensive logistics infrastructure, and consolidated supply and export chains.

Thus, the main clusters of the manufacturing industry that benefit from opportunities for nearshoring in Mexico are from the following sectors:

1. Automotive and auto parts.
2. Aerospace.
3. Medical devices.
4. Pharmaceuticals.
5. Electronics and home appliances.
6. Information and communication technologies (ICT).

Automotive and auto parts

In the last ten years, the production and sales of the Mexican automotive industry have increased exponentially. Eighty percent of exported vehicles are destined for Mexico’s partners in the USMCA, the United States, and Canada.

Additionally, Mexico is among the leading suppliers of parts and components worldwide. Furthermore, it is a global leader in the production of trucks and specialized vehicles. As further proof of the strength of the automotive sector in Mexico, assemblers such as Mercedes-Benz, Volkswagen, Audi, FCA, Hyundai, Mazda, Toyota, Kia, Nissan, and Ford have installed plants in various regions of the country.

Opportunities for nearshoring manufacturing to Mexico related to the automotive industry exist in various locations.

• Northern border. Nearly 81% of automotive export production is concentrated in 12 metropolitan areas in northern Mexico. Among them are Tijuana, Ciudad Juarez, Hermosillo,  and Monterrey.

• Center-Bajío-West . Guanajuato, Aguascalientes, Querétaro, Jalisco, San Luís Potosí and Zacatecas concentrate a high number of OEMs, as well as Tier 1 and Tier 2 suppliers.
• Puebla, State of Mexico and Veracruz . The Center-East of the country has attracted international auto parts manufacturers, increasing their participation in the logistics and supply chain of the sector with outstanding industrial corridors such as Toluca-Lerma.

Aerospace

The main aerospace clusters in Mexico are located in Sonora, Tijuana and Baja California, Chihuahua, Nuevo León and Querétaro. Each of them has its specialization. These areas have developed supply chains and strong links with communities, government, and academic institutions.

Thus, the Mexican aerospace ecosystem has steadily grown year after year. Industrial recruitment efforts have earned it more than 3.4 billion dollars in foreign direct investment (FDI) during the 1999-2020 period. The countries that invest the most in the sector are the United States (63.9%), Canada (24.6%), and France (7.4%).

Medical devices

In Mexico, there are eight main clusters of prosthetics and medical and surgical instruments, and the largest is located in the city of Tijuana and the state of Baja, California. It is made up of over 60 companies.

The US market is the leading destination for Mexican exports from this industry.

Pharmaceuticals

Mexico has one of the most developed pharmaceutical industries in the region, with more than 200 companies. These include renowned multinational firms.

Although the most prominent clusters are in Mexico City and Jalisco, the State of Mexico, Puebla and Michoacán also have a significant pharmaceutical industry footprint. The industry continues to grow. Earlier this year, the state of Hidalgo signed agreements with six Indian producers to promote a new cluster of generic medicines.

Electronics and appliances

Mexico has eight and six manufacturing clusters for electronic devices and household appliances. They are distributed throughout the length and breadth of the country. This manufacturing sector represents even more opportunities for nearshoring manufacturing to Mexico

Tijuana, Baja California; Saltillo, Coahuila; Ciudad Juarez, Chihuahua; Monterrey, Nuevo León, and the State of Mexico are the locations with the greatest presence of manufacturers from both sectors.  The products produced in Mexico are exported to the whole world.

Information and communication technologies (ICT)

With a value of 13.7 billion dollars, Mexico has the second-largest technology sector in Latin America, only behind Brazil.

In 2018, Mexico was the 2nd largest exporter of devices for transmission/reception of voice, images, and other data. This includes wireless or radio communication devices (except cell phones). Its main export destinations were the United States, Hong Kong, Malaysia, China, and Israel.

USMCA: boosts manufacturing investments and opportunities for nearshoring manufacturing to Mexico

Added to the strength of each manufacturing sector and the productive advantages of Mexico is the certainty that the USMCA provides. This update of the NAFTA reinforces the trilateral relationship between the United States, Mexico, and Canada and, at the same time, creates new investment opportunities with provisions such as:

1 . Duty-free access to the Mexican market. By investing in light manufacturing and assembly operations, foreign manufacturers gain lower costs, less bureaucratic paperwork, and predictability in cross-border transactions.

2. Rules of origin. OEMs and suppliers benefit from regional value content increases to 75% on cars and 70% on light and heavy trucks, respectively. In addition, the provisions relating to labor content and research and development go beyond the rules of origin of traditional trade agreements.
3. Investment security. The USMCA offers a transparent, predictable, and favorable legal framework for investments, including mechanisms for dispute resolution.
4. Trade in services. The text of the USMCA establishes that the Parties shall not impose barriers that distort the cross-border exchange of services (for example, the obligation to have a physical office in one or more of the countries that are party to the agreement).
5. Digital commerce. Chapter 19 of the USMCA establishes that digital products transmitted electronically will be tax-free. Furthermore, it recognizes the value of digital platforms to improve the availability of goods and services, among other advantages.
6. Protection of intellectual property. The T-USMCA guarantees transparency and the protection of patents and technological innovations through a complete legal framework.

We invite you to contact the experienced professionals at the Tecma Group of Companies so that your company can take advantage of the many opportunities for nearshoring manufacturing to Mexico.