Interesting perspective from a Mexican LSP point of view on why/how manufacturing companies domiciled in the US and Canada are expanding their footprint into Mexico

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3 Signs US-Mexico
trade will boom in
2019-2020
January 4th, 2019

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The recently finalized Nafta negotiation
created a lot of speculation regarding the
future of the business relationship between
USA, Canada and Mexico. The Nafta trade
agreement signed in 1994 was threatened by
White House’s approach which generated
frustration, panic and even cancelled
investments in some cases. All of that is
history now! A new trade is being signed and it
will be renamed “USMCA”.
A once uncertain future for “Mexico” has turned into one of the greatest opportunities to increase business
trade with our neighbor country, USA.
Don’t get me wrong, this is not solely due to the new USMCA. The new USMCA agreement certainly has an
impact but in my opinion Trump’s 250 billion in China tariffs is the main contributor for this.
Sign 1. United States-Mexico-Canada Agreement or U.S.M.C.A.

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A 25% duty is a massive increase and
many companies have initiated an urgent
sourcing campaign. They are looking to
relocate their business to a place that can
offer the competitive advantages they
need to maintain the business profitability.
We will soon witness a company relocation
that may be compared to bird migration in
size. That is why supply chain and logistics
experts are advising US and Canadian
shippers to use reliable third party logistics
providers with proven cross border
experience.
Are trade compliance and transportation matters complicated?
Yes, especially due to the fact that border processes and systems are so different. Automation is one of the main
discrepancies among the three countries. However this is a well-known road for many corporations.
Sign 2. Trump's $250 billion in China tariffs

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1. Labor – Low cost, 40% between 20-29 years, skilled.
2. Distance – Neighbor country, with nearly 3,100 meters of
border and 48 border crossing points and a significant low
transit time compared to Asia.
3. Recently signed new trade agreement for NA “USMCA”.
Value of imports and exports between US & Mexico
(in billions)Source: United States Census Bureau
Sign 3. Cross Border success do exist.
The numbers speak for themselves, import from Mexico to US has grown 535% since Nafta was signed.
What are the key factors that investors will take into consideration to relocate a manufacturing operation?
Year Exports Imports Balance
2017 243,314.4 314,267.3 -70,952.9
1994 50,843.5 49,493.7 1,349.8

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A simple summary of our prediction:
Source : Jose Ruiz @ Alder Koten, published in Nov 2016
Mexico has replaced China as American companies’ most favorite manufacturing base. It is favored due to various
reasons, one of which is it helps to boost the American economy since most raw materials used in those maquiladoras
are imported from the USA. While the ultimate advantage of offshoring the manufacturing to Mexico is the reduced
expenses and increased profits for US companies, there are at least ten other advantages.
1. Mexico has free-trade agreements with 44 countries.
With the USA, the American Free Trade Agreement (AFTA) allows manufacturers in Mexico to access businesses in USA and Canada. The Mexico
government provides an environment where foreign investments are encouraged.
2. Labor productivity is high and wages are relatively lower than China.
Labor wages in Mexico is 30 percent lower than in China. Mexican laborers are also renowned for their strong skills in equipment parts and labor-incentive
industries, which is a plus.
3. Low energy cost due to inexpensive gas.
Electricity costs are relatively high, but Mexico’s gas price is renowned for being significantly lower than in USA and China. This fact would encourage US
businesses to use gas, which is relatively cleaner for the environment.
4. Better control of intellectual property rights.
With various bilateral agreements between USA and Mexico, American companies have better control of patents, copyrights, and trademarks.
5. Lower transportation and warehousing expenses.
Cross-border land transportation and warehousing drive cost even lower. Thus, expenses saved can be used for other profit-centric activities.

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6. Availability of highly skilled laborers in the manufacturing of certain industries .
Mexican laborers are known for their strong skills in automating and equipment industries, and other labor-intensive industries, such as clothing and
textile industries.
7. Similar cultures, minimal language barrier, and closer time zones between USA and Mexico for more efficient
management.
Many Mexicans have relatives residing in the USA and the cultural exchanges have occurred for centuries. Spanish is also a popular language in the
USA, making communication barrier almost non-existent. Moreover, English-speaking middle management workforce are plenty.
8. With increased standard of living, Mexico would make a great market for products manufactured there.
With $10,000 annual GDP per capita, Mexicans have plenty of disposable income. More American products find their market in Mexico, and for
products manufactured there, it translates to even lower distribution and warehousing costs.
9. Excellent access to highly-educated workforce, as Mexico City is the home of 38 colleges and universities.
These higher education institutions produce thousands of skilled and educated young individuals, who are ready to be trained to perform as managers
and liaisons.
10. Lower medical costs for laborers and educated workforce .
The USA is notorious for its high medical costs. With lower medical costs in Mexico, American companies can afford to hire more employees.
In conclusion, manufacturing in Mexico allows American companies to save costs and use a greater portion of their profits for research and product
development. This, in return, would increase more production to be manufactured in Mexico. The maquiladora industry provides Mexico with good
employment, economic stability, and foreign exchange. A win-win relationship, indeed.
Source : Jose Ruiz @ Alder Koten, published in Nov 2016, https://alderkoten.com/the-advantages-of-manufacturing-in-mexico/

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Discover the joy of supply chain management, Vitti Logistics is here to help, give us a call and talk
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By Antonio Luna, Managing Partner