Weighing Options for Near-Shoring: Four Models for Manufacturing in Mexico
As published by CliftonLarsonAllen’s Manufacturing & Distribution Blog
Diversification, reducing risk, and shifting production closer to markets are key drivers in a business case for stabilizing supply chains. This article explores the benefits and models for launching manufacturing in Mexico.
After enduring two-plus years of supply chain challenges and global economic uncertainty, manufacturers of all sizes are examining their global production footprint and nearshoring strategies. Companies know that the ability to drive significant EBITDA improvements and increase enterprise value multiples is essential to any value creation plan. Mexico has become a popular option.
What makes Mexico attractive?
Mexican manufacturing output hit an all-time high of $232.11 billion in 2021, bolstered in part by a wave of manufacturers moving production there from elsewhere. For decades, Mexico has been a well-known low-cost country (LCC) for manufacturing. Mexico is the world’s 11th richest country, the USA’s 3rd largest trading partner, and a top five importer of advanced manufacturing technology globally.
Often cited benefits of manufacturing in Mexico include:
- Skilled, cost-competitive labor. Many manufacturers in the U.S. and Canada are struggling to fill open positions as older generations retire and younger generations are turning to careers in other sectors. In Mexico, by contrast, manufacturing is a desirable career. Mexico is among the few nations with expanding workforce demographics. The country offers a young and willing workforce ready to put their technical skills and certifications to use.
- Nearshore production. Facilities in North America are accessible within hours and without ocean travel, bringing supply chains closer to manufacturers and manufacturers closer to consumers.
- More opportunities for topline revenue growth. Entering the market in Mexico provides access to new markets, customers and potential for the creation of new lines of business. For midmarket companies that have traditionally focused on a single production (or single country) location, thinking globally still can mean staying in North America.
- Diversification of production: Mexico offers a low-cost production alternative to companies that might have been considering China or already have operations in China (or elsewhere in Asia) and are seeking to mitigate risks.
- Scale in months, not years. This is possible if you’re working with a firm that can provide everything it takes to get started in Mexico, and makes production visible and manageable.
What’s your logical model?
The path to Mexico manufacturing depends on your needs, and there are several models for manufacturing in Mexico to consider.
- Standalone – Suited for companies requiring complete independence and control of all aspects of not just production, but all G&A support elements.
- Contract Manufacturing – For small-to-midsize companies lacking the level of capital and risk tolerance of a multinational OEM and are willing to forgo control of manufacturing to a subcontractor.
- Joint Venture – Entails two companies forming a cooperative business venture where resources, risks, rewards, and responsibilities are shared and assumed by the new, combined corporation.
- Shelter – For companies thinking of profitability in months instead of years, a shelter platform could be a smart option. This unique model to Mexico streamlines entry, accelerates startup and reduces certain risks. It is a fast-track approach to Mexico for the manufacturer in your portfolio, without sacrificing control. Your company retains full responsibility for production and quality, while an established Mexican support company provides the labor, infrastructure, compliance and Mexican know-how.
Where manufacturing expansion discussions used to be rooted purely on cost, now companies are shifting focus to growth and access; noting that Mexico shares the same time zones as the U.S., and goods move across a border rather than an ocean. These models all address the most basic need: a sizable and willing workforce who values manufacturing as a livelihood.
Is there a downside?
For most companies focused on value creation, the words ‘establishing production’ sounds costly in both time and money. Quicker time to market involves firms that already know how to navigate legal and logistical challenges to get production running.
The volatile, inflationary economic climate has the potential to make things more challenging than usual. Every investment needs to yield the highest returns in the shortest timeframe.
When it takes significantly less time and money to start production, investments in Mexico can deliver stronger returns sooner and more reliably compared to working with Asia. “Enlisting trusted professionals focused on manufacturing and experienced in supporting strategic operational footprints in Mexico makes startup costs more predictable. And with manufacturing based in a facility engineered for speed, scale and flexibility, production can adapt to whatever the value creation plan demands,” noted Jay Winkler, Director of Strategic Initiatives, Entrada Group.
In addition to cost savings, an experienced shelter can help companies grow by managing everything from compliance to human resources, import/export to accounting, while the manufacturing company maintains complete control over production and intellectual property.
Click HERE to book a meeting with Jay Winkler, Director, Strategic Initiatives