U.S. Manufacturers Find the Right Shore in Mexico

Derrick Johnson | UPS 

Check out this podcast on U.S. manufacturers moving to Mexico and recent trade reforms:

More and more these days, sophisticated U.S. imports – often from the aerospace, automotive and high-tech industries – share a common designation: Made in Mexico.

This trend reflects growing confidence among U.S. manufacturers that Mexico offers far more than affordable labor just across the southern border.

The country has modern, industry-specific manufacturing hubs staffed by skilled workers. U.S. companies and their customers can gain these benefits without having to wait for goods shipped across thousands of miles of ocean or paying for higher-priced air shipping.

Mexico has long been an important location for production and end delivery of goods, especially for companies that want to put manufacturing closer to U.S. demand.

But the country’s participation in many free trade agreements and its recent emergence as a world-class manufacturing center present an excellent opportunity for U.S. companies to balance other factors like costs or local resources to determine the proximity of sourced materials to production, warehousing and distribution.

In this case, U.S. companies establish manufacturing operations in Mexico to boost the benefits derived from just-in-time production practices while also taking advantage of Mexican skills and infrastructure.

Worth a second look

Over the last few decades, Mexico has established itself as a country where companies can build supply chains nimble enough to meet the demands of 21stcentury manufacturing.

Manufacturers need speed, efficiency and the ability to ramp up and contract production depending on the demands of the day. They also face more pressure than ever before to reduce transit times. This often requires shorter supply chains.

For U.S. companies that sell goods domestically, nearby Mexico is a logical choice to locate crucial supply chain links. That’s why we’re witnessing dramatic growth in a number of industries in regions throughout Mexico.

Take the aerospace industry, for example. Mexico has several aerospace manufacturing hubs that are known for industry expertise. Of Mexico’s 31 states, 16 have factories that specialize in aerospace, according to the Offshore Group. Between 2008 and 2013, as many as 36 aerospace factories were established in Chihuahua City.

The state of Chihuahua has universities and technical schools that graduate thousands of engineers and technicians each year. These graduates enter the workforce ready to support the local manufacturing industries, including aerospace.

U.S. automakers Ford, General Motors and Chrysler also are concentrating some manufacturing operations in Mexican cities, including Ramos Arizpe, Toluca, Hermosillo and Chihuahua.

The companies gain the benefits of relatively low business costs, skilled workforces and free trade agreements, which enable easier exporting to foreign markets.

Meanwhile, the city of Guadalajara has become known as a Latin Silicon Valley. More than 600 high-tech companies have facilities there, and the city is now the top producer of software, electronics and digital components in Mexico.

Manufacturing hubs like these compete directly with rival hubs in China, which, for a long time, has been the offshore manufacturing destination of choice for companies around the world.

But, as Chinese labor and transportation costs rise, U.S. companies see more value in locating manufacturing operations in Mexico where they can more easily supply U.S. markets.

Mexico’s improving transportation infrastructure is another important factor that companies consider when they decide to put operations in the country.

They also take a close look at intellectual property protection, which is stronger in Mexico than in other parts of the world. This is especially important for industries like aerospace and high-tech, which develop cutting-edge products.

Finally, concerns about setting up operations in Mexico are gradually dissipating as governments work to secure supply chains and improve personal safety for the people who live and work there.

The Mexico of tomorrow

Mexico’s economy is one of the most trade-integrated in the developing world, and trade between North American nations is on the rise. U.S. goods traded with Mexico in 2013 amounted to $506.6 billion, a gain of 2.8 percent from 2012, according to the U.S. Mission to Mexico.

In the 20 years since the passage of the North American Free Trade Agreement, exports from the United States to Mexico have increased by 336 percent while Mexico’s exports to the United States have increased by 465 percent.

That’s why UPS is so bullish on Mexico and has devoted so many resources to the region of late.

For example, UPS CrossBorder Connect service bundles the necessary transportation components north and south of the U.S.-Mexico border with the company’s leading brokerage capabilities. This provides seamless integration and supply chain efficiencies and helps companies balance the need for speed with cost concerns.

UPS launched the service in 2012 in direct response to the resurgence of Mexico as a manufacturing base.

We see immense opportunity in the U.S.-Mexico trade lane in the years ahead. When it comes to fostering economic growth, Mexico is a modern-day success story.

But the best part of the story is yet to be told. In 20 years, Mexico could be one of the primary incubators for innovation in the world. In large part, I see that happening through expanded business ties with the United States.

You may not know that Mexico is already the leading trade partner for 32 U.S. states. But reading the tea leaves, even better times are on the horizon – for both countries.

Derrick Johnson is Vice President of Marketing at UPS

Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.