Video: Manufacturers Under Pressure: Mexico Is the Answer to Tariff Chaos

Tariff uncertainty is pushing U.S. manufacturers like you to rethink where and how you operate. Mexico stands out as a convenient, cost-effective, and strategic alternative to faraway, low-cost countries like China.  

Entrada Group is a shelter service provider that helps manufacturers like you set up and run your own production in Mexico, without having to do it all on your own. Our approach will support your longterm growth and you’ll keep full control of quality, because we aren’t a contract manufacturer.  

In this discussion, Entrada’s Co-Managing Partner Doug Donahue — who has over 20 years of experience guiding manufacturers in Mexico — unpacks the questions manufacturers are asking now.

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Transcript:

Cameron Heffernan: Can you tell us a little bit about Entrada Group and what you do? And then what makes you credible as an authority on this tariff topic overall.

Doug Donahue: I'm not going to claim to be an authority on tariffs. But Entrada Group basically helps international manufacturers establish a manufacturing footprint in Mexico.

We provide the Mexican corporate infrastructure. We provide a suite of services that provide General and Administrative (G&A) services. And then our clients basically focus on manufacturing, so our clients have a strategic reason to continue to manufacture their own products.

In doing this over the last two or three months, we obviously have been getting numerous phone calls from people that are producing in China, Vietnam, Central America, South America, looking for the best solution to overcome the tariff obstacles on their products. I've spent 90% of my time over the last few months working on this. This is sort of trial by fire. I've become an expert on tariffs.

Ironically, my academic studies were in International Development and Economics 30 years ago and the studies at the time were about import substitution, which is basically high tariffs trying to protect markets and how it was the wrong policy and how they all needed to open up to free market economics. I've come full circle in all of that.

Cameron Heffernan: Wow! Who are the people that are inquiring about this? What kind of companies are they? What is their viewpoint?

Doug Donahue: Typically, they are companies that sell product into the U.S. In many cases, they're manufacturing the product. And in those cases, we have a lot to talk to them about. But in other cases, they're using subcontractors throughout the world predominantly, China. But throughout the world. And they're trying to just find a better subcontracting relationship.

I don't have a real solution for that. I try to push them into directions. In Mexico we have some clients that are contract manufacturers, but for the most part Mexico is really a captured manufacturing market. So those that are operating in Mexico really have one specific widget that they're producing. I don't have a great solution for 80% of the people I talk to. I can just push them in sort of direction. But for manufacturers I'll do a little sales pitch. I think Mexico really is either better off than most markets right now to manufacture in, or at least no worse off than other markets.

Cameron Heffernan: What we've done is we've put together some of those most commonly asked questions. You sent them over to my team. I'm going to fire those over to you and answer those as best you're able to. How does that sound?

Doug Donahue: Okay.

Cameron Heffernan: All right.

Doug Donahue: We'll be as fast as possible.

Cameron Heffernan: If we produce product in Mexico instead of China, what would be our tariff exposure? And how would we calculate it?

Doug Donahue: Okay as of today. And I make the caveat as of today; it's pretty simple. If your product can qualify for North American made, and it's not that complicated to do that. In most cases you will be able to continue to ship from Mexico to the U.S. tariff free. There are some exceptions to that, particularly in the automotive industry, which is very complicated, but that is the case for the most part.

To really be North American made USMCA qualifying, there's this one threshold, that 50% of the value added has to come from North America. But there's a second caveat that has to be evaluated on a case-by-case basis. If, after you bring in all your input, if you convert it and it turns to a new harmonized tariff number, those also qualify for NAFTA made. But each product has to be evaluated individually.

Cameron Heffernan: If someone were to come to you and say, could we talk to somebody to learn more? Look how deep you need to go to look at what qualifies, what doesn't, and how would that proceed?

Doug Donahue: My colleague, John Paul McDaris, who, if any manufacturers have a question, I would strongly ask you to reach out to him. You can reach out to him through our website. But his first step in these scenarios is, he does a bill of material BOM analysis. He looks at the bill of material in all of your products. We work with our customs brokers, evaluate that and see if it will qualify for NAFTA.

If it doesn't qualify for NAFTA, you still might want to look at what the tariffs are compared to where you're currently producing. But really the quickest, easiest way is to do that bill of material analysis.

Cameron Heffernan: Next question: Can I get duty-free treatment? If I manufacture in Mexico.

Doug Donahue: Again, it's a big caveat. If it qualifies for USMCA certification or a rules of origin, almost in every single case you currently are duty-free.

Cameron Heffernan: Okay. Now, that said, isn't USMCA about to come up for re-evaluation/re-negotiation next year? Does that change the equation? What are you advising.

Doug Donahue: It does change the equation. And theoretically all that's coming up next year is a vote to re-ratify USMCA. Obviously under President Trump's administration and not on all him, there are a lot in the Democratic party that want to renegotiate also, so there will most likely be some re-negotiation, but I have to emphasize that so many U.S. companies, so much investment in Mexico that it will be ratified under some terms. Will they change a little bit? Yes, but there is so much pressure from the business community to continue that it would be hard to see it dramatically changing.

I would like to make another point on this. You're just starting the process. Now about setting up a manufacturing operation: You've got a minimum of 6 to 12 months of analysis of your cost, modeling your location, and your supply chain. And it does cost time, and it does cost travel money. But you can be doing that during this period, and you will get a sense when you're done with that. And you've invested that you'll get a sense as to whether USMCA is going to change significantly or not, and if it does, yes, it's lost time. But it's not a wasted effort. You're planning for the future. You're strategically getting ready for the future.

Cameron Heffernan: But doesn't Entrada Group, walk companies through that due diligence process and system?

Doug Donahue: We can actually help them with that. No problem with it. You know we talked about the analysis of the product. We can also do some cost modeling in terms of what an ongoing operation will look like. Again, a manufacturing operation. And then we also can help them look at a number of different locations, and then we can also help them evaluate what their initial capital investment costs would be to get going.

Cameron Heffernan: New topic and question. What do we need? What does the manufacturer need to document to evaluate where all the parts that go into their product are made.

Doug Donahue: This is critical, particularly if you are a manufacturer importing into the U.S. – Manufacturing offshore nearshore, or whatever right word you want to use – and you're importing it, you have your bill of material and that's where you get started.

If you're thinking about manufacturing, and you're currently with a contract manufacturing. And you're thinking about that in-house. You really got to document all the components, get a harmonized tariff number to them, get a rules of origin of where they come from, and that in and of itself can be a lot of work.

We even have a client right now that we're working with. We have a subcontractor as a client of ours, a contract manufacturer. They are bombarded every day with people who are moving electronics – and I want to emphasize electronics – and are trying to get electronics out of Vietnam, China, Philippines, and what they have to do is they actually have to re-engineer the product to figure out all the components. And that's not an easy process. But if the project is the right size. They're more than willing to do it.

Cameron Heffernan: Are there other benefits that someone that's maybe moving production from China to Mexico would realize beyond the tariff mitigation.

Doug Donahue: I just got off a call right before I was talking to you about somebody who's thinking about that. And he was in Mexico City last week on tourism, and what really appealed to him is that he was in and out of Mexico in two and a half hours. You're working in the same time zone. It's much easier just in terms of the amount of work that your people are doing and the amount that you have to staff. You're not working 24/7 as you are in China you actually work the same hours. That's one benefit.

Second benefit depending on your industry is obviously intellectual property protection. Mexico for any emerging market or low-cost country, whatever the term you want to use is, has some of the best intellectual property protection and enforceable intellectual property protection of any emerging market country.

Cameron Heffernan: That's a unique selling point!

Doug Donahue: Yep.

Cameron Heffernan: Where would we start to evaluate the return on investment for moving production to Mexico or complementary production to Mexico?

Doug Donahue: Again, the first thing we like to do is analyze the bill of materials. To make sure that you're tariff free, and if you're not tariff free, what's the tariff going to be. But then the first step that we always use is, we build a model that may duplicate an operation you have somewhere else or might be something new you want to do. And we build that model of what it costs to produce in Mexico on a monthly basis, and that takes into all the factors of production in Mexico.

Then we what we will also do is, if that makes sense, the bill material makes sense, we'll then talk about what it takes to outfit a facility in Mexico. The truth is, is outfitting a facility in Mexico is no cheaper than the United States, maybe even a little more expensive. After all of that is done, we can then work on your supply chain. What we try to recommend to everybody is, you should only move to Mexico to manufacture your product, if it makes sense using your current supply chain, then, when you have that established, your next phase is really about switching the supply chain to more local where you get extra savings, usually not on the cost of the input, but on the freight.

Cameron Heffernan: You mentioned that people might be a little surprised at the startup costs about the startup time working with Entrada Group. What would that look like?

Doug Donahue: Depends on what your product is. We've gotten a wire harness company up and running in 9 to 10 weeks, and we've gotten a pretty sophisticated medical device company, needing everything up, in 3 months.

Cameron Heffernan: Is that typical?

Doug Donahue: Yeah, yeah.

Cameron Heffernan: But the due diligence can take up to two years?

Doug Donahue: That's correct. If you do it right, due diligence should take you no less than 9 months, and to your point can take up to two years. So that's why, if anybody is considering moving, manufacturing to Mexico, I would say, don't hesitate in doing your due diligence work, because by the time you get done you'll have a better sense of what's going to happen with USMCA.

Cameron Heffernan: Any other common questions that you're hearing or wanted to throw into the mix before we close out?

Doug Donahue: The most common question is, what's going to happen in a year or two from now? And I can say, Mexico has probably done better than most countries in putting together a solution for the Trump administration, as far as I can see right now, other countries are taking their time and negotiating with the Trump administration, and he's pulled the tariffs back, then he hasn't, then he's released them, and then he has not. It's unpredictable. Mexico takes a little bit of the chaos off of that, and that's what companies are looking for. How do I get around the chaos? We've even had people who are willing to pay a little more out of Mexico than China if they can avoid that chaos. Most companies are concerned about that.

The second thing is really the availability of labor, and this has nothing to do with tariffs. The ironic part of it is we're cutting down on immigration. There's an enormous amount of open manufacturing positions in the United States. During the Biden Administration and before President Trump, most of the people who were contacting us were contacting us because they were short of labor. They couldn't find labor. Our newest company, who basically had a very good operation in Michigan. They were happy with it, and they're not going to shut it down. But they couldn't quote a new business. They only could keep their ongoing business because they couldn't find the labor to be able to do it. Now they've lucked out. Talk about getting lucky. They have set up this operation to win new business, and then when the tariffs hit, they've been shipping out of the U.S. to France, India, and China, and all those countries put reciprocal tariffs on the United States. They move that production to Mexico, and they can ship from Mexico to those countries at a much lower tariff level.

Cameron Heffernan: Wow! Nice added benefit there.

Doug Donahue: Yep.

Cameron Heffernan: Doug Donahue, of Entrada Group. Thank you for your time.

Doug Donahue: I appreciate it. Thank you.