Mexico for China Managers, Part 2: China vs. Mexico as Supply Chain Hubs

Increasing enmity between China and the West, stemming in large part from China’s increasingly aggressive actions regarding Taiwan, China’s COVID-zero policy, and a whole host of other issues facing foreign companies that do business in or with China, has caused just about every foreign company involved with China to reassess. See Nancy Pelosi’s Visit to Taiwan is Really Bad for Your China Business and Sourcing Product From China Just Got Even Riskier.

With all that has been happening, the international manufacturing lawyers at my firm have been getting a steady stream of phone calls and emails from companies looking to leave China and many of those companies are curious about Mexico.

I asked my good friend Andrew Hupert to write a series of posts explaining what is involved in moving operations from China to Mexico, in large part by comparing the two countries from a business perspective. I turned to Andrew because he is that rare combination of academic (he’s a business school professor) and businessperson, and I have great respect for his real world views. When my law firm first began to step up our China practice (we had previously been focused on Russia and Japan), Andrew was one of my go-to people on all things China. Andrew was at that time living and working in Shanghai, and I would visit with him every time I went there.

But as much as Andrew had tied his life and career to China, he, like me, was one of the early proponents of a post-China manufacturing world. So much so that Andrew moved to Mexico, reinvigorated his Spanish language skills and began helping companies — especially companies looking to leave China — navigate Mexico. So, who better to write about what it takes to leave China (in whole or in part) for Mexico than Andrew Hupert? I asked Andrew to write a series of posts for us and he graciously consented and the below is part two of what will be a long-running series. For part one, go here: The China Manager’s Guide to Mexican Operations: Comparing and Contrasting China and Mexico Operations.

Over to Andrew for Part 2. . . .

1. China vs. Mexico as Supply Chain Hubs:

Let’s compare and contrast China and Mexico as supply chain hubs from the perspective of international managers with China experience.

Two sets of headlines from LAST WEEKEND encapsulate everything I’m about to explain.

Business in China has a bit too much government for most of us, but Mexico may have too little. 

What are the big picture differences between managing in China and Mexico? When one takes a top-down perspective, the situations are so strikingly different that important data points and key trends can get lost. I’ve picked the three most significant top-down issues China managers will encounter as they start researching operations in Mexico.

  1. Governance and planning. China’s highly planned and organized management of the economy vs. Mexico’s ad-hoc ambivalence to international business.
  2. New strengths and weaknesses. Mexico is not the new China. It’s different, and it’s your job to make the differences work.
  3. Supply Chain/International/Regional Center. What should you want from each economy?

2. Government Involvement & Planning

China is SEZ, Mexico is DIY. China’s highly planned and organized management of the economy vs. Mexico’s low-key but ambivalent attitude towards international business. The good news is freedom. The bad news – gaps in the supply chain.

Managers with China experience often get stuck in an SEZ (Special Economic Zone) mindset, in which they get used to having key benefits pre-negotiated, and many business decisions pre-decided. These zones are not as common or beneficial as they once were, but when China was on the way up, these government-partnered industrial parks offered manufacturers EVERYTHING they could want, all pre-arranged and well-prepared. I mean everything – major tax holidays, preferential access to resources, land, permits, construction, road access, utilities, workers, compliance, logistics, sourcing, labor unions, bonded warehousing, and paperwork. For a while it seemed crazy to NOT use an SEZ to host your factory. And though the tax holidays are now largely history, the mentality that “someone will take care of that” continues. Expat managers tended to concentrate in the same few Chinese business cities, comparing notes, sharing service providers, governed by the same regulations, and making basically the same decisions as all of their partners, suppliers, and competitors.

In Mexico, you’ll experience such an abundance of freedom and openness that at times you won’t know what’s going on. (The notable exceptions being TAX COLLECTION and international commerce regulations.) Announcements will be made. Regulations proposed. Crises will arise and subside. All the while, your local counterparties will maintain their focus on the task at hand. In Mexico, international exposure is measured in kilometers from the factory gate to the border. There are no Five Year Plans in Mexico. No sweeping initiatives or transformative programs. You also won’t find as many pricey expat bars and chamber of commerce happy hours at which to compare notes with your network friends. It’s not just about the level of development or technology.

Mexico doesn’t have some dark plan to steal your IP and undermine your international business. When the Mexican government undermines your business, it will be an accident. And there will be plenty of people who feel just terrible about it.

In Mexico (and the rest of Latin America), government officials benefit from appearing skeptical or resistant to international corporate “plundering”. In Mexico, the National Hero companies get nationalized.

Key Takeaway: China offers manufacturers infrastructure, organization, and regulatory compliance – often at the price of your IP or freedom. In Mexico you’ll be putting together more of the pieces of your supply chain on your own – but compliance is not as big a challenge as it is in China.

3. New Superpowers/New Kryptonite

For many, China is “the devil you know”. It’s taken a long time to get your China operation in shape – and once this Covid unpleasantness is behind us, you’ll be firing on all cylinders again. Or so you hope.

But smooth operations aren’t the only promise China is making. You also get markets. The Chinese middle-class may not feel quite as burgeoning as it did a few years ago, but there are still 300 million coastal Chinese willing to shell out good yuan for whatever trendy nonsense you’re putting on shelves or in online stores. And there’s always the potential of accessing China’s broader BRI network by extending your brand’s reach through SE Asia, Africa and beyond.

The potential downside of this option? The CPP, Taiwan, IP theft, and Covid. So, yeah.

Over Mexico way, the unquestioned economic superpower is the 2,000-mile land border with the U.S. It crosses four states with 25 official PoEs (points of entry) for freight. We’ll discuss that in more detail below, but it’s a big deal. Other Mexican benefits include Free Trade Agreements (FTAs) and Treaties. The USCMA (NAFTA2 or T-MEC as it’s known in Mexico) is the most important, but that’s just the beginning. Mexico is also a founding partner in the CPTPP agreement, plugging it into ASEAN (Vietnam, Singapore), Japan, and Australia. All told, Mexico is part of 14 FTAs involving 50 different countries.

Mexican business, however, definitely looks North, and everything south of Puebla tends to get pretty much ignored. Though there are plenty of treaties and FTAs in place, Mexican sourcers and decision-makers don’t take much of a regional role. Your average Mexican manager will be knowledgeable about half a dozen towns in Texas and up to speed on all of the current gossip in every big U.S. city – but will be hard-pressed to know even the basics of the economies of Colombia or Peru.

Mexico is also good on natural resources, plentiful labor, and a quite significant domestic consumer and industrial market. Businesses here are accustomed to working with U.S. brands, and the customs and logistics systems are completely harmonized.

So, what is Mexico’s kryptonite? Crime, cartels, and drought. The main answer you get in Mexico when you ask about cartels is that you shouldn’t talk about cartels. Another favorite line is that if you need to worry about something in China, it should not be the cartels, it should be the employment laws. The prevailing opinion among expats is A) cartels don’t bother tourists or legit businesses because there is no money in it for them, and lots of headaches, and if you DO run into problems, it’s because you got caught in the crossfire of rival gangs; B) you shouldn’t be in situations where street crime or violence is occurring. You’ll find that this accepting attitude toward crime definitely starts at the top.

Key Takeaway: Mexico is not the New China. If you are looking to produce the same output as you did in China, it’s possible. If you are looking to create the same operation that you had in China, it’s probably impossible.

4.  Supply Chain / Management Center Potential     

China is the place to be if you are marketing to China or Asia, if your business model requires global coverage, or if you can manage two separate supply chains simultaneously – one that meets U.S. requirements and OTHER. If you are marketing to the U.S. and you are involved in auto, aerospace, electronics assembly, and/or labor-intensive assembly, Mexico is becoming the place to be.

China wins the award for “Best Existing Infrastructure and Supply Chain Network”, hands down. Not just hardware, either. China has everything organized and regulated, often by the government. Maglev trains and bureaucrats’ stamps. In China, cutting-edge technology and antiquated bureaucracy coexist and the only thing that will change is that the stamps will become digital.

The big problem for China is at the national government level, and we have to all face some tough facts about that. I don’t see relations between Washington and Beijing improving until late 2025, if then. U.S. politicians will fight over who can be seen as being most anti-China and pro-Taiwan. Trade with China will be increasingly burdened with bad regulations from all sides until at least then. In the near term, U.S.-China trade can and will be disrupted by new anti-China regulations and adverse enforcement of existing rules. I see roughly the same for the EU as well.

In Mexico you should plan on putting in serious amounts of time, money, and energy developing relationships and connecting the dots of your new supply chain. For some of you who chafed under PRC regs and restrictions, this will be your competitive advantage. Mexico has a lot of untapped potential and a universe of possible new partners for those willing to put in the time and bandwidth to develop them. Building networks and finding sources may not seem like the best use of your time, but in Mexico there was never a “race to the bottom” on pricing, or a government-directed ramp-up of capacity. The ability to put together deals and develop networks is a valued skill here. Those whose main professional experience has been Shenzhen or Shanghai will find much of their experience isn’t exactly on-point in Mexico City or Monterrey.

Key Takeaway: If the phrases “super-charged, ratified FTA with the U.S., and well-developed 2,000-mile land border” don’t get you excited (or relaxed, for the first time in a while) Mexico maybe isn’t for you. If you have global plans, it will be hard to avoid China as an operational center, but you should make sure you are making provisions for the further deterioration of relations between China and the West.

Bottom Line: Setting up an operation in Mexico will be more management-intensive than it is in China, at least in the short-term, but it will pay off with better access to the U.S. and Canadian markets. Global players will continue to rely on China for manufacturing, supply chain, and markets. The big players can afford to split their supply chains, but small and medium players have some big decisions to make.

 

Andrew Hupert lives and works in Mexico where he helps international businesses get their supply chains under control.  After over 20 years in Asia (Shanghai, Taipei, HK, Saigon), Andrew decided to follow his own advice and move his operations closer to home.  He is now based in Saltillo, Coahuila, the ‘Detroit of Mexico’, where he shows companies how to expand or adjust their supply chains for 2023 and beyond.  He sums up his new effort very simply: “Bosses who don’t control their supply chains and sourcing don’t control their own business.”  Contact Andrew Hupert to talk about the future of your supply chain:  [email protected] , or connect on LinkedIn.