Manufacturing in Mexico vs. China: Why U.S. Companies Prefer Nearshoring

For decades, China has been a leading international trade partner with the U.S., due to low labor costs. However, in recent years, more manufacturing companies have chosen to diversify their portfolios and expand their production to Mexico, if not move it altogether.

The trade conflict between the U.S. and China quickly caused major concern. Then, the instability of the subsequent pandemic years made many U.S. companies rethink their strategies. Due to these significant drawbacks, it’s no surprise that Mexico recently jumped ahead of China as the largest U.S. trading partner.

Though it’s been effective for decades, manufacturing in Mexico has become the preferred choice for U.S. operators looking for cost-conscious, localized solutions. Though each company has its own specific needs and requirements, this route is currently the most alluring, and here’s why:

1. Worker Stability in Mexico

The low cost of labor is what initially attracted manufacturers to move operations overseas. However, a generation of industrial workers in China are entering retirement age and younger people entering the workforce are unwilling to replace them. Therefore, there’s not the same influx of workers willing to work for low wages as before, which is similar to what the U.S. is experiencing.

Whereas, manufacturing continues to be a popular industry in Mexico, with tens of thousands of engineering graduates entering the workforce every year. Additionally, U.S. companies work in collaboration with universities in Mexico to get the skilled workers they need in a range of roles. This kind of work availability leads to cost-effective labor rates, with wages much lower than U.S., and in many cases, China.

2. Close Proximity and Shipping Costs

Despite China’s low labor wages, the cost of shipping is high. For a long time, these costs offset each other, but with transportation and shipping costs at historic highs, and labor rates on the rise, it’s not the value it once was.

U.S. manufacturers prefer the close proximity that comes with manufacturing in Mexico. Depending on where their facilities are, they are often able to receive their shipments on the same or next day. This convenience and efficiency allow them to get products to market faster and eliminate additional costs when shipments are delayed.

3. Tax Advantages and Incentives

The trade war between the U.S. and China quickly caused manufacturers to reevaluate their options due to retaliatory tariffs. Soon after, the USMCA was officially enacted, which gave incentives to those operating within the three countries. In fact, certain provisions require that manufacturing content be produced in the U.S., Mexico, or Canada.

Additionally, another advantage unique to Mexico is the country’s IMMEX program. This allows U.S. and other foreign manufacturers to temporarily import tools, equipment, and machinery needed for production with exemption from the 16% value-added tax.

4. Intellectual Property Protection

Technology is changing at a rapid pace, and protecting intellectual property has always been a concern for U.S. operators in China. Whereas, in addition to tax incentives, the USMCA has specific provisions that enforce violations regarding intellectual property protection and copyright infringement. Companies developing sophisticated equipment and patented products can feel confident in maintaining ownership without fear of illegal reproduction.

5. Shelter Services in Mexico

U.S. and other foreign companies also have the option of manufacturing under the legal umbrella of a shelter services operator. This minimizes a company’s risk and liability and provides them with administrative support and expertise during the setup process.

Shelter services in Mexico include site selection, trade compliance, taxes and accounting, among other responsibilities necessary to get production up and running. Manufacturers maintain complete control over their processes and ownership of their intellectual property rights.

These are a few of the many ways Mexico outshines China. The competitive edge is hard to ignore, which is why an increasing number of companies are choosing to hop on board. Manufacturing in Mexico saves on production time and costs while maintaining convenience and quality for U.S. and other foreign operators.

To learn more about the benefits of nearshoring and how working with a shelter services company can help you reach your business goals, contact IVEMSA today.