Leaving China for Mexico: Lessons from the Ground

Leaving China for Mexico and alternative manufacturing destinations has been on every CEO’s mind for years. A couple of weeks ago, I joined a trade delegation to Mexico City and Guadalajara, led by Utah Governor Spencer Cox. This was the first trade delegation to Mexico by any U.S. governor since Covid rocked the world, and it was Governor Cox’s first trade delegation since becoming governor last year. This blog post contains a high-level summary of the messages we conveyed to Mexican government and business leaders, and things we learned from them.

I specifically attended so that alongside my Mexican colleague Adrian Cisneros Aguilar, I could write this and future blog posts for companies looking for lessons from the ground when they decide to leave China for Mexico or other LatAm manufacturing destinations.

Mexico is Highly Focused on the USMCA

The U.S. Mexico Canada Act (USMCA) was touted as NAFTA 2.0. This renegotiated treaty came into effect July 1, 2020 and redoubled these three countries’ commitment to one another. Here are some key points:

  • In effect until June 30, 2036, with rolling six-year mandatory renewals and additional 16-year extensions possible during any of the six-year mandatory reviews.
  • Contains key provisions on rules of origin, goods market access, manufacturing, intellectual property, digital trade, small and medium-sized businesses, agriculture, and labor.
  • The U.S. is also committed to the rest of the Central American countries and has been since March 1, 2006, with the Dominican Republic-Central America-U.S. Free Trade Agreement (CAFTA-DR). This multilateral treaty includes the U.S., Dominican Republic, Costa Rica, Guatemala, Honduras, Nicaragua, and El Salvador. Mexico sees itself as the gateway to LatAm, including these other treaty countries and the Spanish-speaking South American countries.
  • China-related tariffs are still in play and may continue.
Mexican Agriculture Has Lessons for the U.S. and Beyond

Some members of the Utah delegation came to Mexico to research Mexico’s agricultural successes, especially its innovations to facilitate agricultural innovations in an arid environment. This is less applicable to companies leaving China for Mexico, but it is very relevant to companies looking to increase arable land in the U.S., especially in the face of the global food shortages from the Russian war in Ukraine.

Leaving China for Mexico? Mexican Manufacturing Cannot Replace China Yet

Mexico is well known for its maquiladora (“shelter manufacturing”) environment. Unlike China, which specializes in arm’s length product sourcing, Mexico’s maquiladoras are most similar to a turnkey manufacturing operation. This shelter manufacturing model works well for companies that have in-house design, sourcing, and manufacturing expertise. These companies traditionally include medical device and auto parts manufacturing and assemblies.

But as China’s economy continues its downward trend stemming from zero-Covid policies and increasing friction with the West (not to mention the tariffs on most Made in China products), both U.S. and foreign companies continue to look for viable manufacturing alternatives to China. The Covid-induced spike in global shipping costs has caused U.S. and global companies to rethink manufacturing in Asia, not just China.

All these factors make Mexico the heir-apparent to China’s current manufacturing dominance for purchasers in North America. While in Mexico, I repeatedly warned and urged Mexican business and government leaders to be prepared for and not squander their once-in-a-generation opportunity. The maquiladora manufacturing model will need to be expanded to include outsourced manufacturing services. The model perfected by sourcing agents in China should be duplicated at least in part for Mexico and greater LatAm.

And the Mexican government will need to provide a more business-friendly environment. The populist Mexican President Andrés Manuel López Obrador (AMLO) has taken steps to root out corruption and transfer much government oversight and execution to the military. This has hobbled many of the surviving government organizations. AMLO is not exactly pro-technology, either, and the Mexican government has few plans for streamlining business registrations and other applications by the smart use of technology.

Mexican Business Leaders are Ready in Spite of Their Government

Mexican business leaders are enthusiastic about welcoming companies leaving China for Mexico. AMLO campaigned on an anti-corruption platform, which means that under the (much-needed) banner of rooting out government waste and corruption (estimated to cost at least 10% of Mexico’s GDP), he has significantly cut government departments and services. This retrenchment sends strong messages to the various stakeholders, with both positive and negative repercussions.

His administration is focused on rural development and lifting the southern and southeast portion of Mexico, as evidenced by announced (but slowly implemented) government programs and infrastructure development. These plans will result in a better-trained Mexican workforce and an alternative transit route to the Panama Canal. At the same time, AMLO pulled the Mexican energy sector back into the government’s orbit, which was not well-received in either the Mexican or international business community.

Despite these challenges, Mexican business leadership is still very optimistic about Mexico’s future. They understand Mexico’s treaty obligations in the USMCA and the opportunities it presents for Mexico. They wring their hands about AMLO’s trajectory, but they are determined to succeed by continuing to build the business environment with or without the government’s help.

Utah is Focused on Mexico’s Success as a Solution to Several Problems

Utah has a difficult and unique (but great) problem: its 2% unemployment rate is the lowest in the U.S. This means that Utah needs to look beyond Utah to alleviate this significant growth to the tune of manufacturing and services, while promoting LatAm partnerships for companies looking to expand into LatAm.

During the trade mission, Governor Cox mentioned that 15% of Utah’s residents have Mexico roots. He said, “Mexico is Utah’s third largest trading partner, but Mexico is our most important trading partner.” He became more convinced as the trade mission continued. Toward the end, he repeatedly committed to our hosts that he would return with a trade delegation to Mexico annually.

More than one businessperson in Mexico said to our delegation that they wished Utah’s governor was their governor. What was Governor Cox’s secret to engendering such strong responses from Mexican business leaders? This recipe is something not uncommon in Utah. Governor Cox spent two years as a church volunteer in Mexico as a young man, where he learned Spanish and was warmly welcomed by the Mexican community. It is difficult to describe being in a business meeting in which the lead negotiator (and many members of our trade delegation) expresses his love, admiration, appreciation, and dedication to his counterparts across the table. Trust me that it is a powerful and transformative experience for all who are there.

Governor Cox is also a pragmatic strategist and humanitarian. He believes the U.S.’s border difficulties with Mexico will be alleviated in large part by lifting Mexico’s economy and its people. He is committed to collaboration across many areas because he sees Utah’s holistic model as the model for all other U.S. states. That is a lofty position for Governor Cox to take, but Utah has the accolades to back it up: last month alone it received three awards (#1 State for the Middle Class, #1 State for Covid-19 Performance, and Best Economic Outlook (this last award for the 15th year in a row).

Mexico is not the only country that will benefit from China’s current negative trajectory, but if Mexico’s government is paying attention, it will have more fuel to root out the less desirable hurdles to doing business in Mexico. For companies leaving China for Mexico, this cannot happen soon enough.