With the increasing global need for medical care and greater pressure on the healthcare system as people live longer, the medical device manufacturing industry has significant opportunities for growth. But with this growth potential comes increased competition and a need to find ways to become more efficient and cost-competitive, without compromising quality. Mexico offers the ideal, proximate solution, particularly for the U.S. export market. The country boasts a talented and available labor force with desirable demographics, proximity and open-trade bona fides.
In the past year, Mexico has overtaken China as the leading exporter to the U.S., according to Bloomberg and Market Watch, yet the two countries continue to compete monthly to maintain this top position. But not all locations in Mexico are created equal. As this question-and-answer piece will explore, the State of Guanajuato presents a clear advantage for medical device producers seeking an alternative to near-border locations, where cost and competition are rising quickly.
Doug Donahue has been guiding global manufacturers in setting up and running Mexico operations for nearly three decades. He is co-managing partner of US-based shelter provider Entrada Group and was recently named Director of Foreign Direct Investment and Manufacturing for Guanajuato’s Medical Device Cluster.
Why should medical device manufacturers be looking at Guanajuato, Mexico, over anywhere else in the world?
Donahue: Manufacturers have a lot of options within Mexico. But Guanajuato offers a unique combination of benefits that is hard to duplicate anywhere else in the country that make it ideal for global medical device-makers, in particular. Chief among those three key strengths are Guanajuato’s track record in the manufacturing industry, workforce demographics and strategic location.
In Mexico, a job in manufacturing is still viewed as a highly desirable profession and long-term career option. This contrasts with how manufacturing is viewed as a vocation in the U.S. or Europe, areas of the world where the workforce is aging and where, particularly in manufacturing, baby boomers are retiring without clear candidates lined up to replace them.
The Celaya area, for instance, where Entrada Group is located, is already home to many of the world’s leading automotive and aerospace OEMs. This creates a synergistic environment that is conducive to medical device manufacturing. The population is already primed and trained for jobs in manufacturing and ready to work.
While Mexico’s strengths in other sectors of manufacturing may be better known, it’s expanding quickly within medical device manufacturing. For instance, Mexico is currently the largest exporter of medical instruments to the U.S. and the third largest in the world. The state of Guanajuato has targeted medical devices as a key growth sector, which I’ll expand on in more detail later.
Next, Guanajuato’s demographics are highly desirable. The population has been rising steadily over the last 20+ years with no signs of slowing down. The median working age is just 29, with many drawn to the vibrant, cosmopolitan atmosphere and beautiful weather year-round in the Bajio region, of which Guanajuato is a part.
In addition, Mexico has a huge advantage over medical device production locations in Asia, due to proximity to the U.S. export market and a strong multi-modal logistics network. Guanajuato features a central location that coincides with major trucking linkages; the two most trafficked highways in Mexico (45 and 57) cross right through Guanajuato. Mexico’s freight rail system also offers convenient access to the U.S. as well as proximity to 85% of Mexico’s major cargo seaports. The Guanajuato International Airport, one of the busiest airports in Mexico, makes it easy and convenient for overseas investors or customers to visit.
Finally, the U.S. and Mexico share a long tradition of low- or tariff-free trade, going all the way back to the early 1990s with NAFTA and now USMCA. The U.S. and China are weary of each other, to say the least. The Trump administration imposed tariffs on goods imported from China and the Biden administration has yet to remove those tariffs. Mexico has a big advantage in terms of geopolitical stability, transparency and protection of intellectual property.
Aren’t locations closer to the U.S. border more attractive to American medical device manufacturers in particular?
Donahue: Yes and no. Manufacturing is strong in states near the U.S. border, including Baja California, Nuevo Leon and Chihuahua. However, with U.S. proximity in those areas comes higher costs and competition, especially for labor. Labor costs near the border are as much as 50% higher than what you’d find in the interior of Mexico. Wages across Mexico have been rising consistently over the past five years, as President Lopez-Obrador (better known AMLO) has kept his promise to increase incomes for the working poor, by boosting the minimum wage annually by 15-20%.
Near the border, increases in the minimum wage have been even higher over the past five years. In some states, the increase was as much as double in certain years. At the border, the escalation is exacerbated by a greater number of companies (mostly American, but a rapidly growing number of Chinese companies are investing there too) in areas like Monterrey competing over a lesser supply of workers.
Guanajuato offers a significantly lower cost of labor, without sacrificing quality. In fact, due to its rich manufacturing history from other industries, the workforce in central Mexico has a wide variety of skills that are transferrable to medical device-makers entering the area.
How is the state helping to promote the medical device industry?
Donahue: Now, more than ever before, the state is responding to the needs of private manufacturers and is providing financial incentives and educational training for companies that qualify. In addition, the state of Guanajuato has targeted medical devices as a sector for diversification and growth.
Guanajuato’s Life Innovation & Technologies Cluster recently launched in the state. It is designed to help promote Guanajuato as a leader globally and in Mexico in the life sciences field. The Cluster has eight founding member companies, of which Entrada Group is one. The cluster aims to develop alliances worldwide with a range of key stakeholders, including research and development organizations, advocacy groups, institutions of education and medical device manufacturers.
One of the missions of the cluster is to foster partnerships between these different entities, as we work to improve healthcare outcomes in the region and around the world. The cluster will hold an opening inauguration event this coming fall.
What are some challenges for medical device and diagnostics manufacturers that are considering establishing production in Mexico for the first time?
Donahue: Rising labor costs is one challenge, as I mentioned earlier. The current political party is expected to maintain the Presidency in the next election, so this trend of continuing to increase the minimum wage is likely to continue. It’s important that companies considering Mexico be aware of this trend, while viewing it against a historical and comparative backdrop: Wages in Mexico for medical device production are still a fraction of similar costs in the U.S. and Europe.
Another common challenge lies with the unknown. For companies looking to setup and produce in Mexico for the first time, there will be a lot of new obstacles to overcome, such as figuring out Mexico’s policies on compliance and Customs, import/export, Human Resources, facilities, supply chains and more. For instance, obtaining the desirable OEA Certification, where cross-border shipments are subject to quicker and less stringent Customs inspections, can take two to three years to obtain, and navigating COFEPRIS, Mexico’s agency for overseeing the quality of medical device products, can be as difficult if not more challenging than navigating the FDA.
What advice do you have for medical device manufacturers considering nearshoring in Mexico?
Donahue: I’m not big for giving advice, especially to founders and owners of companies. But I can speak about the experiences our clients have had over the years in Mexico. One common challenge is that getting an entirely new operation up and running in a new country is a lot of work, and even with the resources to do it, there will always be unforeseen circumstances that will delay the process further. Of course, there are significant benefits, in the end. To avoid hitting those roadblocks, partner with an experienced provider in Mexico that has a proven track record of supporting not just entry, but the ongoing support required for a successful and profitable operation.
Entrada Group has been operating for more than 20 years in Mexico, so we’ve already established the heavy lifting, such as building a 20-person team of Customs and Compliance experts to save our clients the hassle of doing it on their own.