Moving Manufacturing to Mexico from China: The Questions We Got

A few weeks ago, we did a webinar on moving manufacturing from China to Mexico. To see the Powerpoints from the webinar, go here. We had nearly 1,000 registrants for that webinar and we got a ton of questions, both beforehand and during it — way more than we could even hope to answer.

During the webinar we promised to post answers to questions we were asked but were unable to answer during the webinar. The below are the bulk of the additional questions posed to us, along with our answers. These questions are in no particular order. We received a number of questions that were very particular to a company or an industry and we will not be answering those questions here, but if you email us, we will do so to the extent possible.

What types of IP protections can be used?  Generally, this answer is the same for both China and Mexico. Trademarks, copyrights, and patents are what you should be looking to protect via government IP registrations in Mexico (and China). Both Mexico and China also provide some statutory trade secret protections, but it is usually a bad idea to rely solely on that. The key IP protections often are contractual and usually involve some combination of an NNN Agreement, a product ownership agreement, a product development agreement, a mold/tooling agreement and/or a manufacturing agreement

Can you comment on the supply/demand of warehousing for shipments to the U.S, in both Mexico and China, particularly for e-commerce shipments? It is relatively easy to find warehouse space in both Mexico and China, but to a large extent it depends on where you are looking within each country and how much you are willing to pay.  

Can Mexico Shelter Agreements be written so companies can use them to start up and then move to operate on their own? This depends entirely on your specific Mexican contract. When our international lawyers represent a company on virtually any contract — be it in Mexico or China or anywhere else — we work with our client to determine/negotiate how long the term will be for their contract. The issues related to the term (or duration) of a contract involving Mexican shelter companies are not much different from the term issues involved in most other sorts of contracts. Mexican shelter companies are typically going to want longer term agreements and either refuse short term agreements or seek to make you pay more, the shorter the term. It all really just depends on what you can negotiate with your particular Mexican shelter company. 

Are there penalties for hiring away people from a Mexican shelter company?  The answer to this question is very similar to the answer to the proceeding question. It depends on the length and nature of your contract with your Mexican shelter company. The bigger the contract and the longer the term, the less you will typically need to pay the Mexican shelter company for leaving with some of its people at the conclusion of the contract. We strongly advocate wisely negotiating this term with your shelter company when they want to bring you on board and before you sign the contract, as this is when you have leverage. If you try to negotiate this a month before you plan to move on from your Mexican shelter manufacturing company, you may not have any leverage at all.

How common is it for foreign businesses to leave China? It is incredibly common for foreign businesses that manufacture in China to want to do their manufacturing elsewhere, and Mexico is often at the top of the list for American companies. China’s COVID shutdowns, forced labor risks/sanctions, higher wages, higher taxes, anti-foreign sentiment, increasing IP theft, tariffs, and political and reputational issues have all combined to sour nearly everyone on manufacturing in China. However, moving out of China is almost never easy nor inexpensive and sometimes it is just flat-out impossible. I can, though, tell you that our international manufacturing lawyers are keeping plenty busy with helping both old and new clients move their manufacturing out of China to other countries.

Is Mexico’s shelter manufacturing program meant to attract only Chinese company manufacturers, or are they also interested in attracting other international manufacturers as well? Mexico’s shelter manufacturing companies are private companies and they are interested in your business, no matter from what country you or your manufacturing is coming. Very few Chinese companies have moved their manufacturing to Mexico so far; it’s been mostly American companies that are looking to avoid the China tariffs and the high shipping costs, and companies from other countries that sell their products into the United States. 

When is a good time to register IP in Mexico if you already have IP in the U.S.?  You should register your IP in Mexico before someone else will want to register it in Mexico instead of you. What this typically means is that you should register your IP in Mexico before you go to Mexico to have your products made there or and before you seek to sell any of your products or services to or in Mexico. Some smaller companies choose to wait until they are certain they will be doing business in or with Mexico before they pay to register their IP in Mexico. They do this to save money and in most cases the IP risks are fairly low, but registering IP in Mexico is quite inexpensive as compared to most other countries (including China). It is a best practice not to take chances with your IP and to register it in Mexico as soon as you decide to do business in or with Mexico.

Which products would you propose to shift from China to Mexico? The answer to this question depends not just on the pure cost of manufacturing in Mexico as compared to China, but on a whole host of other factors, including tariff rates, transportation costs, quality requirements, IP issues, raw material requirements, etc. We have been surprised both by what products have easily transitioned their manufacturing from China to Mexico and we also have been surprised by products that did not make sense to move their manufacturing from China to Mexico. 

What is a WFOE? Does Mexico have WFOEs? A WFOE (sometimes referred to as a WOFE) is a Wholly Foreign Owned Entity. This was originally mostly a term for setting up a subsidiary company in China, but it is increasingly being used for other countries as well, including Mexico. But by far, the more common term internationally for a subsidiary company — and this is also true of Mexican subsidiary companies — is just subsidiary.

What is required to form a company in Mexico and do I need a Mexican company to have my products made in Mexico? For what is required to form a Mexican company, I urge you to check out How to Form a Company in Mexico. If you are having someone else make your products in Mexico, you likely do not need to form your own company in Mexico, though you still should be sure to secure Mexican trademarks for any brand names or logos that are going on those products. If you will be doing the manufacturing in Mexico, you almost certainly will be legally required to have your own Mexican entity, and there are many reasons why you should want one.

Can you please comment on safety in Mexico and the dangers around drug cartels?  We are aware of companies that will not manufacture in Mexico because of the perceived dangers of doing so there. In fact, we have a very good client that moved its China manufacturing to about a half dozen new countries, but refuses to go to Mexico because of its bad reputation for safety. We get asked this question a lot and our answer is usually something like the following. Mexico is a huge vacation spot and  very few tourists are ever crime victims, and the same holds true for those who come to Mexico to conduct business.

What we can tell you is that I know we are aware of many more foreign businesspeople being held hostage in China than in Mexico. Numbeo is fairily accurate in providing crime statistics on Mexican cities. If you use Numbeo, we would urge you to compare Mexico city numbers with those in the United States and/or elsewhere in the world. We would also urge you to look at the safety notices on Mexico that are put out by the U.S. State Department and by various other foreign countries. These notices/reports can be very useful in distinguishing between the crime rates in various different parts of Mexico.

But there is no doubt that Mexico’s drug cartels are a serious problem in Mexico. But they tend to stay away from foreign businesses and from foreigners and if you choose your Mexican city wisely and you take reasonable precautions, crime is not likely to be an issue for you or your company. Mexican lawyers and businesspeople will ofetn say that foreign companies should be more concerned about Mexico’s labor laws than about its drug cartels. Our view is that it is reasonable to be concerned about both, but you should treat both appropriately.

How do you deal with Mexico’s corruption? We deal with it the same way we have dealt with corruption in China; we refuse to be a part of it and we stress to our clients that they do likewise. We counsel our clients not to do deals that involve corruption, especially those that rely on corruption for their profits. Corruption in Mexico is definitely a problem, but it also definitely varies depending on the region and the city, and we help our clients in choosing their location accordingly, when possible. Corruption in Mexico is a bigger problem than it is in China, but a lack of business honesty and what I would call sanctioned IP theft is a much bigger problem in China than it is in Mexico. As a lawyer who started out mostly doing US-Russia cross-border fishing and timber transactions and deals, I can tell you that Russia overall is way worse than both Mexico and China and the time our lawyers need to spend in dealing with corruption/theft are about equal when representing foreign businesses dealing with Mexico as when representing businesses dealing with China.

How does it work for an individual who doesn’t want to start a business in Mexico, but is only looking for a supplier of specific goods, for example, plastic goods? Is there a manufacturer’s directory available for that process? China is the best country in the world (by far) at helping foreign companies navigate its manufacturing maze. Mexico is not even close. The typical Mexican manufacturer has had good relationships with U.S. (and maybe some European companies) for many years and is good at manufacturing but not good at marketing their manufacturing. This is one of the primary reasons why small companies especially have been having trouble moving their manufacturing from China to Mexico. Most of our clients that have moved their manufacturing from China to Mexico got help from their respective U.S. trade associations or they hired a consultant to help them. We do have some that did it on their own, and this holds true for companies across the board in terms of size and industries.

Which industries are welcomed in Mexico?  Pretty much all. It is very different in that respect from China where the CCP decides who shall be favored and who shall be shunned.

I know that the intention of having an assembly line in Mexico is usually to export to the U.S. Do you think the U.S. government could restrict this in the future? This is very unlikely. Mexico borders the United States so it only makes sense for the United States to want Mexico to thrive and for US-Mexico relations to be good. Something like 65 cents of every dollar spent on manufacturing in Mexico finds its way back to the United States, whereas only around five cents of every dollar spent in China does.

Also, the U.S. just recently agreed to the United States-Mexico-Canada Agreement (UCMCA) and that ought to remain in place for a very long time. This Agreement is also a good indicator of the importance of the US-Mexico relationship. China is in territorial disputes with most of its neighbors and it has human rights issues with Hong Kong, Tibet, and Xinjiang, and then there is Taiwan. These are all big risks to the US-China relationship and there is nothing comparable to any of these with respect to Mexico. The United States has already started using carrots and sticks (tariffs) to wean American businesses from China and with US-China relations in a free-fall (and almost certainly to get worse due to the Russia-Ukraine conflict), one should view Mexico as considerably safer on this score. 

How does a China Plus One strategy impact the issues one might face in reducing one’s China footprint? If you are going to reduce your business with Chinese companies, it nearly always makes sense to set up protections in China before you do so. This is true no matter what your reason is for reducing your China footprint or for seeking to leave entirely. We urge you to read How to Leave China Safely, for a list of some of the things you should do to protect your company before you start leaving China for Mexico or for anywhere else.

From your experience, what are the biggest cost differences for businesses when they transition from China to Mexico? The transition itself. Figuring out how to manufacture in Mexico and finding the right people to do this is expensive. And it is even more expensive if you get it wrong on your first try. Mexico product costs tend to be higher than China’s, but the tariffs and shipping costs on products from Mexico tend to be much lower than the tariffs and shipping costs from China, especially for U.S. companies.

One of your speakers said that wages are 15-20% higher in China than in Mexico. What is the basis for this statement? Statista lists China’s average wage at $6.50 per hour and Mexico’s average wage at $4.82 per hour, which makes China wages 15-20 percent higher than in Mexico. Quality engineers and IT people in Mexico tend to cost quite a bit less than in China as well. But, your own mileage will almost certainly vary, depending on your industry and the region (be it in Mexico or in China) in which you are manufacturing, among other things.

What is your opinion on the import/export logistics infrastructure comparing China to Mexico, and the future outlook? China is amazing at this and Mexico is very good. But with shipping costs so high and with their being so many delays at U.S. ports and in China due to COVID, Mexico wins, at least for now. Much of Mexico has a very good road system and so if your product is amenable to trucking, Mexico wins. Mexico’s airports are mostly pretty good as well, though generally not as ubiquitous or as good as China’s. In terms of getting product to the United States, it will almost always be faster, cheaper and easier to do that from Mexico than from China, for obvious reasons. If you are trying to get your product to Europe, I would think it will very much depend.

What are the government incentives in Mexico compared to China? Neither country offers much in the way of government incentives for foreign companies and this is especially true if you will not be setting up your own factory.

Why are Chinese companies hesitant to relocate to Mexico? To the extent this is true, I think it is mostly because it is usually easier for Chinese companies to relocate to Vietnam/Cambodia/Laos/Thailand or Taiwan, than to Mexico and this is for reasons of location, familiarity, language and culture.

What are the estimated cost savings of manufacturing in Mexico compared to the U.S.? That is going to depend on the product and, in particular, on the material and labor inputs for that product. We have clients whose costs in Mexico are 10-15% lower than they were in China and we have clients that chose not to go into Mexico because it would be 30% more expensive than China, not to mention the United States. We also have had plenty of clients who have chosen Mexico over China even though the costs in Mexico were higher. They did this because they see the risks in Mexico as lower and/or because they see costs rising faster in China than in Mexico. And we even have had clients who built their own highly robotized factories in the United States and reduced their costs as compared to both China and Mexico. In other words, your mileage may vary.

Has the pandemic and supply chain shortage caused companies to reshore/nearshore to the main consumer markets? It certainly has, but not as much (or at least as quickly) as we would have expected. We have learned that even products that look very simple from afar are usually not and that switching one’s manufacturing from one country to another involves a lot more and costs a lot more than choosing to buy a product from Target this time as opposed to from Amazon. We have way more clients who want to move out of China or are investigating moving out of China than we have that have actually moved out of China. I estimate that around half of our clients that have moved their manufacturing out of China — either in whole or in part — have moved the bulk of that manufacturing to Mexico.

Does Mexico have a stable domestic raw material supply, or will I need to import items such as steel, polypropylene, and silicone? Mexico both produces and imports all of these things, and every year for at least the last five years it has been producing more of its product inputs domestically and this domestication has increased during COVID and we expect that to continue. Mexico and its companies — like the U.S. and its companies — realize the risks of being dependent on China and other far away countries. And yet, there are certain materials and components that Mexico does not make and some of those it has to import from China and that can certainly take away from the benefits of moving your manufacturing from China to Mexico. 

For electronic manufacturers who use subcomponents from China, how will the tariff situation between China and Mexico affect completed assemblies sent to the U.S. and Canada? This is actually an incredibly complicated and product-specific question. And by product specific, I don’t mean just a product overall, I mean the specific product that you are making in Mexico using subcomponents from China. I would urge you to read this article, which holds true for China-Mexico products shipped to the United States as well. What you want to be sure to avoid is a situation where you move your manufacturing from China to Mexico but U.S. customs still deems your product as having been made in China for U.S. customs and tariff purposes. We have international trade lawyers who look at this issue for our clients before they actually move their manufacturing from China.