NAFTA at 20: how to make the most of it two decades later
The North American Free Trade Agreement (NAFTA) celebrated its 20th anniversary in January of this year. Now, two decades into the agreement, the overall impacts appear to be positive. Whether you’re talking automotive, aerospace, consumer packaged goods, electronics or medical devices, doing business in Mexico has never been more appealing.
As always, the numbers tell the story. In 2012, Mexico weighed in as the world’s most competitive country in terms of manufacturing costs. In fact, the costs of manufacturing in Mexico are approximately 21 percent lower than the U.S., 11 percent lower than China and three percent lower than India.
Not surprisingly, cross-border activity with Mexico accounted for more than $216 billion in imports[1] in 2012 alone. Since 1993, U.S. manufactured exports have more than doubled. And the momentum shows no signs of slowing down. The Mexican government recently unveiled a six-year transformation plan (through 2018) that will direct more than $300 billion toward improving infrastructure – including road projects, passenger railroads, ports, airport and telecom satellites.
Top 5 Reasons to Manufacture in Mexico …
Clearly, the business case for manufacturing in Mexico is stronger than ever. And while there are many reasons to manufacture in Mexico, here are the top five:
- Large, increasingly skilled, experienced labor pool: that’s significantly more affordable than its global competitors. According to a 2010 U.S. Dept of Labor survey, hourly manufacturing pay was $4.30 in Mexico, half that of Taiwan
- Sophisticated technology & infrastructure, including industrial parks, utility infrastructure and $226 billion invested in rail, infrastructure since 2006.
- Inexpensive land: as Mexico seeks to attract jobs, business and manufacturing.
- Duty-free imports, tax credits & incentives: that enable the import of materials and equipment without paying taxes or duties & re-export finished products
- Proximity to the U.S. and Canada: you don’t have to worry about the complexities and costs of a longer supply chain when you manufacture in Mexico
Top 5 Challenges to Consider if You Do …
Given the cost and supply chain benefits, manufacturing in Mexico sounds like a slam dunk- and for many companies it is. However, before you relocate operations south of the border, know what you’re up against. Mexico is not without its problems. The top five include:
- Theft, smuggling and violence: while crime is far less of an issue at manufacturing facilities located in safe industrial parks, it remains a problem when it comes to operations near the border or border crossings.Drugs and contraband, including illegal immigrants, often find their way onto trucks headed for the border, and some 1,500 freight hijackings are recorded in Mexico each year.[2] The best way to cross the border without incident is to team up with a CTPAT-certified partner.
- Issues with documentation and border crossings: beyond security concerns, border crossings create other challenges. If you work with carriers, brokers, or other partners that aren’t certified to move goods into and out of Mexico quickly and consistently, transit times grow long and impossible to predict.Some shipper’s report delays of up to 72 hours because of issues with documentation or failure to handle the paperwork and electronic filings required to cross the border. The key? Have processes in place to minimize delays or team up with a CTPAT-certified partner to facilitate smooth border crossings.
- Equipment and LTL network capacity crunch: both trailers and LTL networks are in short supply. For every three trailers headed north from Mexico, one heads south. The result is an imbalance that can make capacity an issue when exporting to the U.S. or Canada. Meanwhile, LTL networks are essentially non-existent in Mexico, so it can be costly and challenging to find carriers that can consolidate loads and deliver them efficiently and economically.
- Infrastructure issues: while much of the infrastructure is advanced, some roads are not in the best condition. It’s important to choose qualified partners/regional carriers that know the terrain.
- Cultural/language barriers: while many Mexicans speak English, language can be a barrier. Moreover, failure to understand cultural differences can derail near-shoring relationships in Mexico. For example, Mexicans place more value on personal relationships than professional ones and may have a less strict sense of time than American businesses.
Thinking about moving production to Mexico, but concerned about the challenges? Have experience overcoming the roadblocks? Share your advice in the comments section below.
To learn about how companies are moving freight across the border in a secure and efficient manner, download Armstrong & Associate’s report on border crossings.
Written by:
Ricardo Alvarez, Director Business Development, Ryder Mexico, and Brandon J. Brissette, Director of Product Development, Ryder Supply Chain Solutions
Ricardo Alvarez, Director Business Development, Ryder Mexico, is a professional with 16 years of supply chain, international negotiations and foreign trade compliance experience. Throughout his career, Ricardo has collaborated with different functional areas on both sides of the border on a number of projects, developing solutions to support more efficient supply chains for Ryder customers across a variety of industry segments.
Brandon Brissette, Director of Product Development for Ryder Supply Chain Solutions is a logistics professional with 16 years of experience in warehousing, transportation, manufacturing support, and inventory control. Throughout his career, Brandon has played an active role in engineering design, supply chain analysis, operations management, program management and sales for Ryder customers across numerous industry segments.
[1] Logistics Management Magazine, May 1, 2013, Global Trade: U.S./Mexico Trade—7 steps to close the gap
[2] Source: FreightWatch International