After decades of rapidly increasing the amount of sourcing in Asia, U.S. manufacturers are accelerating efforts to reduce costs and shorten their supply chains by “nearshoring” to Mexico. There are three main drivers that are bringing urgency to this issue and one little known reason why the time is right for expanding your supply base in Mexico.
Driver 1: Supply Chain Challenges
Covid-19 related supply chain challenges have resulted in unprecedented impacts to cost and time related to transporting goods from Asia and other Low Cost Country locations. While the situation is expected to return to “normal” at some point, the Covid supply chain crisis has highlighted the risks built into long supply chains requiring ocean freight.
U.S. manufacturers sourcing to Mexico can take advantage of fast, reliable ground transportation networks and preferential customs processing. The FAST program is a trusted shipper program that allows expedited border crossing processing for commercial carriers who have completed background checks and fulfill certain eligibility requirements.
Driver 2: Trade Agreements
While the U.S. and China are in the midst of an active trade war, the U.S. and Mexico (along with Canada) implemented the USMCA in mid-2020. This NAFTA-replacement trade agreement has valuable provisions for automotive parts that waive tariffs when regional content provisions are met, while maintaining duty-free importation of most manufactured goods.
Tariffs on Chinese goods imported to the U.S. – introduced in 2018 – are still in place. American importers are paying on average 19% duty for the majority of goods from China. Tariffs from China and other Asian countries are not expected to be reduced in the near future as these countries implement the Trans Pacific Partnership Agreement without U.S. participation.
Driver 3: Economic Advantage
Manufacturing labor costs can be 35% higher in China than in Mexico. According to Statistica, the 2020 Mexican average manufacturing labor costs were $4.82/hour, while the equivalent Chinese labor costs were $6.50/hour. In addition, some energy costs can be higher in China vs. Mexico, with natural gas prices costing 50% to 170% more in China.
When a Total Cost of Acquisition approach is taken, the economic benefits can really add up. Importing manufactured goods from Mexico has a great advantage over most Low Cost Countries in the areas of shipping costs and tariffs, and Mexico’s manufacturing labor costs are becoming significantly lower than China’s.
Mexican manufacturers that supply the auto industry are being affected by the global semiconductor shortage. The majority of the 26 automotive assembly plants in Mexico produce lower cost products, while automakers are emphasizing luxury products in order to optimize profits from the limited chips they are able to obtain. The result is that Mexican automotive suppliers currently have substantial capacity resulting from a 20% decline in Mexican automotive volumes in 2020 and 2021 compared to 2019.
Mexican suppliers have a long history of supporting U.S. manufacturers, particularly since NAFTA created economic advantages beginning in 1994. The four factors described above are driving companies to take a fresh look at expanding their supply base in Mexico.
APD is hosting a webinar: “Sourcing to Mexico”. During this webinar, we will share a 5-step process for sourcing to Mexico, along with lessons learned from recent Mexico sourcing projects: Click Here to Register