Leaving China for Mexico: Lessons from the Ground, Part 2

In our last post, we discussed how leaving China for Mexico and alternative manufacturing destinations has been on many CEOs’ minds for years. We also provided a summary of the messages the Utah trade delegation led by Governor Spencer Cox conveyed to Mexican government and business leaders, the messages conveyed in response by Mexican public and private sector representatives, and things we learned on the ground for companies thinking about leaving China for Mexico or other Latin American (LatAm) manufacturing destinations.

Mexico is not the only country that will benefit from China’s current negative economic trajectory, and if Mexico’s government is paying attention, it should have plenty of motivation to eliminate hurdles to doing business in Mexico. For companies leaving China for Mexico, this cannot happen soon enough.

All together now: “¡Bienvenidos a México!”

But the Mexican government is not the only entity that should be paying attention: making Mexico a more attractive haven for international companies leaving China is a goal for which the Mexican business community should also bear responsibility.

There is a reason why China has not penetrated the Mexican economy as it has other Latin American countries. That reason is the United States – its proximity, and the interconnectedness of the Mexican and American economies. In general, Mexico is too focused on the U.S., and in particular, on the United States, Mexico and Canada Agreement (USMCA). That in itself is not a bad thing, unless you grow too comfortable to see business opportunities or challenges anywhere else.

During the past two administrations, the Mexican government has seemed to think that tackling business opportunities or seeking trade and investment diversification relies on negotiating new agreements, and indeed Mexico has one of the largest free trade agreement networks in force. However, the fact remains that in 2022, more than 81% of Mexican foreign trade is with the U.S., and the U.S. is by far Mexico’s largest investor (in 2021, 47.5% of all FDI flows came from the U.S.).

Mexico’s proximity to the U.S. and the increasing Latinization of the latter mean that both the public and private sectors in Mexico have evolved to create an economy that specializes in assembling finished products for the American market; a side effect is that Mexico is ill-suited to service companies that do not operate in industries in which Mexico has strong value chains. This is the moment Mexico needs to pivot, to create the on-ramps that will support North American companies that want to “nearshore” their manufacturing operations.

The Mexican government should take care of the fundamentals

In Mexico, there is a huge development gap among states that prevents them from having the same opportunities to attract foreign investment. The gap mainly comprises three aspects: security, infrastructure, and ease of doing business. This is nothing new and it has been voiced (even more loudly recently) by the American Embassy in Mexico, AmCham Mexico, and others.

International companies coming from China also need to be mindful of this. As we tell our clients, before proceeding with the implementation of your business plan, you need to ask yourself: is the location you have chosen safe for you and your expat/local staff? Is it easy/practicable to get your finished product out of your manufacturing facility and to the U.S.? What are the Notaries Public like in the state (province) of your choice? Are they efficient and/or do they push the Public Commercial Registrar so that your company incorporation can take place as quickly as possible? Is the local government you have to deal with business-friendly, so that the licenses and permits you need to operate will be easy to obtain?

The Mexican government needs to provide adequate security and infrastructure, as well as streamline administrative processes to create companies and do business throughout the territory. All this requires budget and qualified staff, which some current federal and local administrations seem to lack. As long as this does not happen, Mexico as a nation will have a hard time competing with other countries as an alternate manufacturing destination to China; only developed/safe states will be able to attract companies that want to relocate.

Mexico’s business community should help build the on-ramp

The recent visit of the Utah trade delegation reinforced that the Mexican business community will have to fend for itself, at least for the rest of this administration. As mentioned in our last post, businessmen are ready to act in spite of the government, but that does not necessarily mean they are ready to accommodate international companies coming from China specifically. Doing the latter will involve increasing interactions with foreign counterparts, conducting more effective lobbying with executive and legislative officials, and not hoping for business opportunities that may result from diplomatic initiatives or serendipitous encounters with foreign companies.

Mexican companies also need to build supply chains like China has: the fact that Mexico for the most part is merely an assembler (maquilador), but relies on Chinese- or other Asia-made materials to create finished products, greatly constrains it in competition with the Chinese contract manufacturing model, which provides a complete service. This in turn means that shelter manufacturing providers and industrial parks need to be prepared to accommodate companies that do not have in-house design or manufacturing capabilities.

Mexican business community members and service providers also need to be able to answer questions the way international companies coming from China expect their potential business partners to be able to, which is possible by understanding what companies are used to having in China: a business license, a local representative for hire, someone who opens a bank account for them, the ability to offer registered address services, etc. Many of these things require that a company’s legal representative come to the country; they also require registering a company before the Mexican Tax Administration Service and obtaining a Tax ID. Businesses willing to service or partner with companies coming from China will need to work in tandem to provide alternatives to these issues.

Fortunately, there are some in Mexico and the rest of the region who understand what is going on and what needs to be done and are trying to push different initiatives to change the current situation. In our next posts we will discuss these initiatives and how your business can benefit from them. After all, there are three things that make Mexico unbeatable as an alternative to China: i) geography, ii) the USMCA, and iii) the CPTPP.

Stay tuned!