Trends in the Mexican manufacturing market and nearshoring

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Many of the certainties that companies had grown accustomed to over the past decade have been shaken, and there are a number of issues over which companies have absolutely no control. In this article, we provide a pathway for businesses to start approaching international manufacturing in an ever-changing world.

The demand is still there, probably in the face of new challenges, and your business’s ability to meet it may need readjusting. Such a reorganization may involve repositioning your global resources based on proximity to where they will be needed, rather than focusing primarily on the cost of production (a practice commonly referred to as “nearshoring” or “reshoring”).

Many North American companies looking to employ a proximity or relocation strategy are exploring Mexico as a possible production location. This article examines several of the key questions companies should think about when evaluating a proximity strategy and, in particular, the considerations for doing business in Mexico.

Choose your markets and production locations

The first step for any business considering a relocation or proximity strategy is to determine where in the world the demand your business will supply is located. In other words, which bank?

Most companies will start with their current markets; however, if they languish or a business needs space to grow, the logical way to go about it is to seek new target destinations with an appetite for exactly the type of products you offer. A simple way to do this is to review publicly available information about the main import markets for your company’s production.

The Harmonized Tariff Schedule (HTS) aggregates worldwide imports and exports at the same six digit levels and then increases in each country to 10 or 12 digit numbers that allow a user to identify more details in this trunk of six digit tree. Once companies have identified their potential untapped markets (largest importers of your products), they can use publicly available information to examine the country’s domestic apparent consumption, i.e. the output of production country plus imports minus exports, to determine the true size of the market.

The decision as to which markets a company should target will then determine where to locate production in order to shorten supply lines. For companies serving the United States, but for which local production is not an option, a logical choice is to consider Mexico as a manufacturing site.

Mexico offers a number of advantages as a local location – these are relatively well known, but they make a compelling case for the country when read together:

  • Mexico enjoys certain access to the USMCA region, a rare advantage these days;

  • Mexico is the least expensive manufacturing site within the USMCA;

  • Mexican labor has considerable experience in heavy and complex manufacturing;

  • Import duties are virtually non-existent, delivery times are hard to match by any other country in the world, time zones largely coincide with those of the United States, and major manufacturing sites have direct flights from the United States ;

  • Mexico offers a number of trade facilitation programs that have proven effective over the years;

  • Exports of Mexican origin benefit from preferential tariff access to the most attractive destination markets in the world, due to the extensive network of free trade agreements; and

  • The USMCA grants Mexican exports favorable treatment with respect to potential trade remedies and U.S. national security measures.

Benefit from the manufacturing efficiency of several countries at the same time

When choosing a production location, there are many cost elements to consider. In addition to the cost of labor, utilities, raw materials, etc., companies must consider the impact of various tariffs, duties and non-tariff regulations1 that will apply when importing of materials/components in the country where the goods are produced, as well as any other charges associated with the export/import of the final products.

Although some costs cannot be changed, there are ways in which companies can influence the tariffs, tolls and non-tariff regulations to which they are subject. This can be done through legal ‘engineering’ of rules of origin, i.e. working around the amount of inputs, treatment and overall transformation that the inputs produced at the foreigner must undergo to be considered from Mexico and enter the United States is subject to a reduced rate of import duty — which can be as low as 0%, according to the USMCA.2

We should always keep in mind that all business locations naturally come with a level of compliance red tape that your business must fully adhere to. It requires an orderly effort, and since your company is usually busy as an active manufacturer, it usually needs some kind of outside professional help.

Opportunities in Mexico to replace Chinese products penalized by tariffs

Although some have argued that Vietnam and other countries could be the winners of the US-China trade war3, Mexico has many advantages that could tip the scales in its favor. It is important to note that in 20194, the sum of tariff rates and transport cost rates for imports into the United States was 1.09% for Mexican products, compared to 14.28% for Chinese products and 10.62% for Vietnamese products.5 6

Most companies would agree that the US-China trade war has made Chinese-origin products less attractive due to increased tariffs. Recent data indicates that in mid-2022, the average import duty rate for Chinese exports was 19.3%,7 while for Mexico it was virtually non-existent when complying with the rules of USMCA or original requirements. As for transportation, the average price to ship a container from China to the United States was around $10,000, while the cost of crossing a truck from Mexico to the United States could be as low than $250 8 9

This creates an opening that can be filled by other exporting countries. Dussel-Peters identified a list of six-digit HTS subheadings – 77 in total – in which China’s share of US imports fell below its average of -3.51% during the period. 2017-2019, and in which Mexican imports grew above their 0.97% average over the same period, 2017-2019.10 The relevance of these 77 subheadings is that Mexico already relies on the production capacity for export to fill the void left by Chinese imports; this means that the capacity is already there to export to the United States

Finally, the Mexican manufacturing sector is highly dependent on trade promotion programs, which require large periodic deposits with the government; 11 moreover, given that Mexico uses more than a third of foreign content 12 in its manufacturing exports – with electronics, automobiles and auto parts standing out for their high levels – it is essential to be properly advised in order to maintain an orderly manufacturing operation in the country.



NOTES

1 Special authorizations, reference prices, quotas, prior notices, etc. may be required for the importation of a product.

2 Another way to approach the issue is to circumvent the bulk processing done in Mexico to cause the semi-finished product to be completed in the United States and considered a product made in the United States.

3 Enrique Dussel-Peters “TRADE OPPORTUNITIES FOR MEXICO IN THE CONTEXT OF TENSIONS BETWEEN THE UNITED STATES AND CHINA SINCE 2017”. OCTOBER 2021. Tenaris Tamsa. p. ten.

4 Unfortunately, the latest data available at this level of detail. More recent facts below.

5 Breakdown of sum of tariff rates + freight rate for imports into the United States from Mexico: 0.20% tariff rate + 0.89% freight rate = 1.09%. For imports from China: 9.81% tariff rate + 4.47% transportation cost rate = 14.28%. And for Vietnamese products: tariff rate of 6.56% + transport cost rate of 4.06% = 10.62%.

6 Dussel-Peters. “BUSINESS OPPORTUNITIES FOR MEXICO…”, pp 9 and 10.

7 https://www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart, accessed May 27, 2022.

8 https://www.businessinsider.com/shipping-costs-inflation-outlook-container-prices-high-supply-chain-crisis-2022-3, accessed May 27, 2022.

9 https://www.ivemsa.com/mexico-competitive-manufacturing-costs/, accessed May 27, 2022.

10 Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO…” Appendix 9, https://dusselpeters.com/357.pdf, accessed May 27, 2022.

11 Namely the Maquila program (all Maquila authorizations have now been converted to IMMEX permits, an acronym for Manufacturing, Maquila, and Export Services Industries Program), the Sector Promotion Program (PROSEC), Eighth Rule Permit, Refund of Import Duties to Exporters (Drawback), Origin Inspection (Customs Clearance Record) and Integral Business Certification System (Certified Business Record).

12 36.4% in 2016. Dussel-Peters. “BUSINESS OPPORTUNITIES FOR MEXICO…” p. 12.


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