Because the Mexican automotive industry accounts for approximately three percent of the nation’s Gross Domestic Product (GDP) and Mexico is the third-largest exporter of vehicles and the fourth largest auto parts exporter in the world, representatives of manufacturers have outlined opportunities to increase the share of electric vehicle manufacturing in Mexico.

During a recent panel discussion on “The Integration of Mexico into North America of Electromobility,” which was part of the Latam Mobility Virtual Summit 21, Jone Orbea, leader of the electric mobility initiative of the United Nations for Latin America and the Caribbean, reported that Mexico has 10 cities of more than one million inhabitants.  These metropolitan regions have a combined fleet of 50 million light vehicles and approximately 14 rapid transit bus systems. However, it estimated that there are only seven thousand pluggable electric and hybrid vehicles in the country and only two electric buses in operation.  Given the present situation, there is much opportunity to expand electric vehicle manufacturing in Mexico.

Leonardo Beltran, a non-resident fellow of the Institute of the Americas, noted five important elements to consider concerning the United States-Mexico-Canada Free Trade Agreement (USMCA) and its notion of electromobility.  These elements include:

• The integration of Mexico into a market of more than 500 million inhabitants (the three countries are also part of the Group of 20, which implies great purchasing capacity).
• The USMCA free trade area is the largest technology and knowledge production market on the planet.
• Mexico is the gateway to Latin America and the Caribbean, adding another 600 million people as potential customers of electric vehicle manufacturing production in Mexico. The country already has an infrastructure that allows exporting both finished vehicles and different automotive value chain elements.
• The development of mining capabilities required for the battery production needed to expand electric vehicle manufacturing in Mexico.

The work of Volvo and Metrobus promotes electric vehicle manufacturing in Mexico

Leticia de la Torre, leader of the Volvo Group’s Mexico Electromobility Project, recently stated that the initiative underway with Metrobus, Mexico City’s Bus Rapid Transit system (BRT), has developed a synergy that strengthens commercial and growth relations in the city’s transportation network. The Volvo Group Mexico has collaborated with Bus Rapid Transit for more than 15 years and anticipates that the BRT will eventually benefit from expanded electric vehicle manufacturing in Mexico.

“As Mexico City is one of the largest globally, the demand for mobility is important, there are approximately 1.6 million transportation system users, so it is important to bring to Mexico a 100 percent electric passenger vehicle. We work together with Metrobus under the vision of turning it into a city with zero accidents, zero noise, and zero-carbon.

Mexico is ideal for electric vehicles

Sergio Martínez, CEO & Partner of Hispano Suiza, noted that Mexico City is ideal for implementing electric motor vehicles because it has many commuters and has developed transportation infrastructure. He also pointed out that the public sector is aware that noise and environmental pollution impact the city’s inhabitants’ health and the citizen’s overall quality of life.

Nazareth Black, chief executive officer, CEO of Zacua, a company that is pioneering electric vehicle manufacturing in Mexico, has observed that all the elements that are characteristic of Mexico, such as geographic position, the maturity of the automotive industry, and installed capacity, can lead to growth in the production of EV’s in Mexico. The leader of Zacua sees areas of opportunity that have arisen due to the implementation of the USMCA. To capitalize on these new opportunities, companies that make up the supply chain for electric vehicles have to work together to forge partnerships that result in greater production.

Infrastructure to support electric vehicle manufacturing in Mexico is being developed

Laramy Guadarrama Rojas, network development & E-performance Manager of Porsche Mexico, reported that the company he represents works in the manufacture of electric vehicles in Mexico and in the development of an electrical infrastructure system.  By 2022, Porsche will have invested more than six billion euros in electric vehicles and electrical infrastructure.

“In Mexico, there are more than 360 chargers located on customer properties. Porsche centers also participate in this electrical infrastructure with 95 chargers across the country’s power grid.  This capacity includes super-fast chargers that supply 80 percent of the battery capacity in less than 30 minutes.

Regarding public infrastructure, he indicated that through the Porsche Destination Charging program, they have developed a network together with commercial partners to have chargers in different locations such as hotel chains and shopping centers, among others. Porsche is also establishing charging stations for customers situated in places such as office complexes and is also working on a website that will allow users to determine where they can charge electric vehicles manufactured in Mexico.

Despite experiencing the continuing effects of the coronavirus pandemic, Mexican logistics centers are expanding.

At the beginning of the coronavirus pandemic in 2020, manufacturing was affected by the collapse of global production lines in the face of the suspension of operational activities of many companies. This set of circumstances constituted a turning point for rethinking the production model that had been established over the last two decades.

This model required that the supply of material inputs be in geographic proximity to final assembly centers, thus, driving the concept of nearshoring. This situation, in the case of Mexico, created an important commercial opportunity given its advantageous geographic location and its participation in the USMCA.   The USMCA, or the United States – Mexico – Canada Free Trade Agreement, is the most recent trade treaty that has been implemented between North’s three neighbors.

Despite the difficulties occasioned by the coronavirus pandemic, cities in northern Mexico have demonstrated their ability to attract investments by large companies and to create a robust industrial market even in adverse times.

Industrial demand for Mexican logistics centers in Mexico City, Monterrey, Guadalajara, and Tijuana far exceeded what was reported in the same period of the previous year. The gross demand for industrial space in the metropolitan area of Mexico City was 260 thousand m2 in the last quarter of 2020. The main sectors that contributed to this significant figure were e-commerce and logistics companies.  These services are essential for supply chains to strengthen and detect new strategies to improve their operability.

Demand for space in Mexican logistics centers in Monterrey closed in the fourth quarter of 2020 with a gross demand of 195 thousand m2, which translates into an upward trend of 58% compared to the same period in the previous year.  This dynamic has been driven by companies in the logistics, retail, automotive sector, and, mainly, manufacturing.

Guadalajara ended 2020 with a gross demand of 90 thousand m2 for the same period, thus reporting one of the best levels that has been achieved in recent years. Logistics companies, tobacco, storage, and medical device manufacturers were the main drivers behind this number.   As a result of this robust activity, Guadalajara has been a market with relatively little unemployment.

Tijuana gradually regained demand over the past three quarters, with annual growth of 43%. At the end of 4Q 2020, companies’ growth in the logistics sector, the medical, food, metalworking, and a major revival of the manufacturing sector was reported.

Ciudad Juárez, Chihuahua, is another market for Mexican logistics centers that continues to report strong numbers.   At the end of the last quarter of 2020, culminating with a total demand of 43 thousand m2.   The main sectors generating this activity included logistics, automotive, and manufacturing.

By contrast, markets in Mexico’s Bajío region show a decline in demand.  This is due to falling demand for the production of durable and semi-durable goods.   The manufacture of these items takes up much of the industrial space in this region.

Markets such as Querétaro and Guanajuato, traditionally a very dynamic region, continue to account for demand volumes that are much lower than those recorded in pre-pandemic periods. They are far below those that were reported four or five years ago. During the fourth quarter of 2020, Querétaro recorded an absorption rate at Mexican logistics centers of only 5 thousand m2, Guanajuato 67 thousand m2, San Luis Potosí almost 25 thousand m2, while Aguascalientes did not report any additional demand for Class A industrial space during this period.

Vacancies continue to maintain healthy levels in all major markets, with the highest vacancy rate being that of the state of Guanajuato.   Guanajuato closed the fourth quarter of 2020 with a rate of 8.6%, however, nationally the rate is 4.6%. Cities such as Guadalajara, Tecate, Saltillo, and Mexicali close the gap by reporting significant downward adjustments.  On the contrary, the metropolitan area of Mexico City, Puebla, and Querétaro currently have vacancy rates that exceed 30% more than what was reported in the same period last year.  Performance in Tijuana and Monterrey recorded numbers that are close to those reported previously.

Industrial rental prices for Mexican logistics centers have been impacted by two important issues, the first is the pressure generated by the low availability of vacant spaces.  In cities such as Guadalajara and Tijuana annual rental rates have increased between 5 and 10%.  The other factor that is affecting prices is the appreciation of the Mexican peso against the dollar.

The metropolitan area of Mexico City and Monterrey closed 2020 with prices similar to the same period of the previous year. Few markets have lower rental rates.  Among these is Queretaro with an annual decrease of 3.5% and San Luis Potosí with 2.9%.

The behavior that the demand, vacancy, and price indicators have had, has allowed developers to initiate projects that had been in the planning stage. Although construction activity remained at the same levels of the last quarter of 2020, the annual comparison shows a 25% increase year over year in the square meters under construction.

During the last quarter of 2020, the metropolitan area of Mexico City reported that almost 150 thousand m2 began construction.  This indicates that developers continue to expand their inventories in the north and near the center of the city. Tepotzotlán and Tultitlán were the most active areas with future developments that are planned for this region.

In the medium term, the development of new Mexican logistics centers is planned for the corridors north of the metropolitan area.   This is where land is available that can house industrial complexes.   This activity will drive new infrastructure and investment.

At the end of the fourth quarter of 2020, the inventory of industrial space in Mexico’s second-largest city, Monterrey expanded by approximately 177 thousand m2.   This was from the termination of 11 new developments.  Meanwhile, 13 projects began construction, 8 of them are speculative and 5 are build-to-suit.  This activity points to a gradual recovery, quarter over quarter, beginning in the fall of 2020.

In Tijuana, the construction of Mexican logistics centers reflected a downward trend, while Guadalajara’s experience has been the opposite.  Mexico’s third-largest city has recorded more than a 120% increase from the previous year.

Current demand in the plastics industry in Mexico has expanded due to the present health crisis

According to Monica Conde, General Director, of Ambient Plastic, a company specializing in the production of the petroleum derivative, the recent growth in demand that the plastics industry in Mexico has experienced has been approximately 3%.

At a virtual press conference, Conde cited that 7.7 million tons of all classes of plastics were consumed in Mexico in the entirety of 2019.  By the end of 2020, as a result of an increase in demand occasioned by the global pandemic, consumption of plastics in Mexico is estimated to have increased to a total of 8 million tons.

The Director-General of Ambient Plastic asserted that the increase of activity in the plastics industry in Mexico is attributable to greater production of sanitary protection equipment such as masks, safety glasses, and new types of packaging.  Further growth in the use of plastics is linked to greater usage in the food industry, especially as regards products that are wrapped in their entirety to protect consumers from health risks.

Thus, among the industries that most benefited from increased production in the plastics industry in Mexico are those related to the health sector, the packaging industry, and the companies that are active in the food and beverage industry.

With the current demand environment in Mexico, it is estimated that the country’s need for plastics products will continue to grow.  In addition to domestic production, it is believed that the importation of plastics products will also continue to expand.  This will occur due to Mexican capacity constraints that are anticipated to affect the manufacture of finished products.  For instance, a greater volume of plastic products will be imported to manufacture items such as medical clothing, water covers, sheets, and take-out food containers for the restaurant and food processing industries.

Recycling in the plastics industry in Mexico

In addition to a plastics sector that is characterized by the manufacture of new, first-use products, Mexico is among the global leaders in the area of plastics recycling.  As a result of the participation of many of the world-class companies that manufacture in Mexico, the Mexican plastics industry recycles approximately 30% of the waste that it generates annually.  This is the case despite the high cost related to the processing of the material.  In addition to the energy cost associated with the recycling of plastics, poor waste management practices require that a considerable additional expense be incurred due to the need to clean and prepare the commodity for recycling.  Also adding to the costliness of recycling in the plastics industry in Mexico the fact that, unlike many nations, the Mexican government does not provide any incentives for the reuse of the material.  The recycling of plastics does, in fact, reduce the number of waste products in the environment.  Studies have shown that although plastics account for 12% by weight of garbage, other materials such as paper, cardboard, metals, glass generate greater amounts of waste.

Monica Conde went on to explain that the manufacturing policies that are formulated and promoted in many countries are geared toward the creation of a circular economy.  Circular economies decouple economic activity from finite resources and design waste out of their economic system.  They are underpinned by a desired gradual transition to renewable sources of energy.  She also went on to note that, although the plastics industry in Mexico is increasing its production on a yearly basis, much remains to be done to instill more awareness in the population in order to create a more widespread culture of reuse and recycling.

New technologies are being utilized by industry in Mexico to facilitate and optimize the production of a wide range of goods for foreign and domestic markets.

Among the trends currently found in industry in Mexico, advanced manufacturing has been quickly gaining visible ground. This type of production is increasingly encountered in Mexico’s maquiladora plants located throughout the Republic.

Given the consideration of the aforementioned, several questions must be taken into account. Among them are: What is advanced manufacturing? How does it differ from traditional manufacturing and automation? What is its presence in industry in Mexico?

According to specialists, we can see that, in the broader context of industry in Mexico, many plants in the nation’s manufacturing hubs are catching the wave of advanced manufacturing and will soon be on par with the rest of the world.  Although this is positive, there are existing challenges that regional industry will need to overcome in order for this new technological trend to be beneficial for companies and not a source of difficult problems.

Advanced manufacturing: a definition

In order to define advanced manufacturing, one must return to basics and consider what traditional manufacturing consists of.  According to Mexico’s Center for Advanced Technology, manufacturing, in its broadest sense, “is the process of converting raw materials into product”. Until now, industry in Mexico has primarily performed manual manufacturing that has been done by factory workers. Beyond this, advanced manufacturing includes “technology processes and those that complement the production chain”.

According to Martín Márquez, president of the Automation and Advanced Manufacturing Cluster (MACH) in Chihuahua, advanced manufacturing is the application of modern technologies for the purpose of optimizing manufacturing processes. Unlike automation, advanced manufacturing is a concept and trend of technologies applied to manufacturing, while automation is one of the specialized technologies that can be integrated into production to facilitate manufacturing processes. “It’s just the technical part of product making,” said Martín Márquez.

These technologies in industry in Mexico can have two important components: 1) processing technologies and 2) digital systems to monitor manufacturing processes. Processing technologies are varied and depend on the type of industry being considered and the class of product being made.  Some of these are as follows:

• Metal printing
• 3D printing
• Mold machining
• Material characterization
• Metal stamping
• Plastic injection molding
• Heat treating
• Laser welding
• Tool selection

3D printing, for example, helps product prototyping, as it allows industry in Mexico to quickly select new materials by being able to simulate products in 3D and to perform subsequent testing on them. “Ten years ago, this was complicated because companies had to send parts to print and had to wait in order to make changes to them. Today, however, a company can print one, and “If it doesn’t look good, it can be printed again,” asserts Martín Márquez.

On the other hand, when it comes to advanced manufacturing that includes the digital systems used in industry in Mexico, these can help to measure process efficiency.  Additionally, according to Martín Márquez, digital systems can have a significant impact on the production process because they enable manufacturers to generate savings, identify problems with workflow, measure the efficacy of production operations, and, also, to find ways to minimize the human and material waste that is generated by faulty manufacturing processes.   It is important to keep in mind that when errors are made not only is the worker’s time wasted, but also the material that was used to make the faulty part.

Problems with advanced manufacturing encountered by industry in Mexico

The situation that Martín Marquez has observed in the maquiladora industry is that beyond automation advanced manufacturing presents a great opportunity to jump-start economic growth in the country. “Making the transition from traditional manufacturing to “mind-facturing” will not be automatic or without its downside. Changes that will necessarily be implemented to move towards an advanced manufacturing environment will result in an overall fewer number of jobs.   These positions will require a properly educated and trained workforce.

After Vietnam, Mexico is the country that has benefited the most from an ongoing China-US trade dispute.

The dueling escalation of punitive tariffs between the United States and China has enabled Mexico to rectify a negative trade balance and to address the economic effects of the coronavirus pandemic from a strengthened position. According to several recent studies, Mexico is the second country, after Vietnam, to benefit the most from the ongoing China-US trade dispute.

Two years after the levying of the first tariffs on China by the US, Mexican exports gained significant market share in that nation.  Mexico made sales totaling an approximate additional $4.66 billion per quarter. This firmly guaranteed Mexico’s position as the second-largest US trading partner and increased its ability to address the impact on global trade caused by the coronavirus pandemic and the measures that have been taken to contain it.

Mexico is among the twelve largest economies in the world and is one of the most open. In 2019, its combined imports and exports amounted to 72% of the country’s GDP.   Of the world’s 20 largest economies, only Germany and Thailand have higher percentage rates of this measure than Mexico.  This is according to the World Bank data.

Mexico, an exporting country

When we think of Mexico as an exporting country, things like avocados and tequila may come to mind for some. But, although it is indeed the prolific exporter of both products, the largest volume of its sales abroad consists of goods such as vehicles, auto parts, electronics, aerospace parts and components, medical devices, and other manufactured items.

As an illustration prior to the China-US trade dispute, Mexico was the source of 19% of all computers imported into the United States.  By the last quarter of 2019, this share had grown by six percentage points to 25%. This increase in the sale of Mexican made computers to the US alone accounted for nearly an additional $2 billion for Mexican exports.  This figure equals approximately $650 million per month in overseas sales.

“There will be no winners in the China-US trade dispute”

Chinese Trade Minister Zhong Zhang was the source of the above-cited quote in April 2018.  He made the statement as soon as US President Donald Trump announced his policy of tariffs on Chinese goods.  This started an escalation of trade barriers between the two countries. At the time, the International Monetary Fund anticipated that the trade dispute would cause a 1.6% drop in China’s GDP, an 0.9% reduction in that of the United States, and an 0.8% loss in the world economy’s combined GDP. Those that opposed the measures in the US maintained that the big losers would ultimately be American consumers.

A predictable effect

A study conducted by the United Nations Organization for Trade and Development (UNCTAD) estimated that, before the implementation of tariffs, only 6% of taxed imports from China would be replaced by purchases within the United States itself.  Twelve percent would continue to come from China and the remaining 82% would be replaced by imports from other countries. UNCTAD already anticipated that the country that would benefit the most from import substitution in the US would be Mexico (with 5.9%), followed by Vietnam (5%) Australia (4.6%).

A year later, a study by Japan’s Nomura Holdings established Vietnam as the country most benefited by the China-US trade dispute and relegated Mexico to a position of seventh place.  The study noted that an explanation for this outcome may include the indirect effect of tariffs on Mexican exports to the United States, many of which use components or raw materials that have their origin in China.

An interesting study by the Center for Globalization of the Kiel Institute for World Trade, with the title “Friends like this: The Impact of the U.S.-China Trade War on Global Value Chains” put concrete figures on the indirect effect of tariffs. One of the co-authors of the study, Holger Gorg, director of the Centre and Professor of International Economics at the University of Kiel, considers Nomura Holding’s conclusions to be correct. Although he qualifies his opinion by saying that “with the important assumption that the only reason to explain changes in exports between the last quarter of 2017 and 2019 has been the China-US trade dispute.”

What types are there and what services do they offer?

The selection of a logistics company in Mexico is not limited to organizations that provide third-party logistics services (3PL). The comprehensive character of this industry means that its main players can cover and specialize in a wide range of supply chain services that have a significant impact on how a product reaches the final recipient.

Familiarizing oneself with the different types of logistics companies in Mexico and the services that they offer is the best way to understand how they can affect one’s business or customers.  The information that is provided below is important to consider prior to contracting with any one of them.

Which type of Mexican logistics company best suits my business?

In broad terms, it can be noted that there are logistics companies in Mexico that are specialized in three activity groups:

1. Storage – While some companies choose to have their own independent warehouses, many opt to work with third-party logistics vendors.  The choice of such a company in Mexico in this case is due to a decision based on financial profitability or business conditions. A company that hires an external service provider to take care of the receipt of goods, as well as warehousing and shipping, eliminates the need to bear the cost and responsibility associated with the management of an entire warehouse on its own. This can be viewed as a flexible alternative that facilitates better control over the expenditures that are associated with this important function.
2. Transport: Sometimes the transport of goods may involve a combination of different conveyances that may include trucks, trains, and cargo ships, among others. Intermodal transportation is a complex and constantly changing field. Using a logistics company can simplify the management function and help to avoid problems that are caused by continuous fluctuations in demand, labor shortages, or pressures associated with shipping times.
3. Coordination: Ensuring that all of the services and actions performed by each of the individual partners in the Mexico supply chain flow smoothly requires considerable coordination, organization, and excellent time management. Not every company in Mexico has the talent and capabilities to ensure this kind of efficiency.  In such cases, contracting with a logistics partner is the best decision. Such companies have the technology, experience, contacts, and professionals that guarantee impeccable customer service and operational efficiency

The trial and error method is not valid in an environment that requires choosing a logistics company in Mexico. Committing costly and avoidable errors can result in loss of positioning in the marketplace and being displaced by competitors. Given today’s ubiquitous use of social media, any negative action or case of company recklessness becomes instantly magnified in online reviews.  Therefore, it makes good strategic sense to avoid these situations by contracting with a reliable logistics company in Mexico.

However, when choosing such a firm, it should be noted that not all of the companies that exist in this space have the same service offerings and solutions. Among the different types of companies in Mexico that provide supply chain services to manufacturers are:

• 4PL (Fourth-Party Logistics Provider): This is an association model based on value generation. Typically, this type of logistics company in Mexico is constituted as a supply chain partner and, from this position, offers advanced services ranging from generating and maintaining strategic relationships, making technological capabilities available, or sharing knowledge.
• LLP (Lead Logistics Provider): is a contractual model where risk is shared. Such a logistics company can manage others at lower levels, thus becoming the single point of contact for all of the members of the supply chain. Its main value is technological integration.
• 3PL (Third-Party Logistics Provider): Third-party logistics services enable the outsourcing of transportation or supply chain services. Such companies can be involved in any activities related to shipping, storing, or delivering a company’s Typically, a 3PL provider takes an embedded, strategic approach to managing a client company’s transportation and supply chain.

Multinational companies should be aware of the new USMCA labor provisions in order to improve the rights of their workers and to avoid sanctions imposed by the newly established Interagency Labour Committee.

The NAFTA was often criticized in the US for inadequately addressing issues related to Mexican wages and labor standards.  As a condition of approving the United States-Mexico-Canada Free Trade Agreement (USMCA), the US Congress has sought to influence Mexico to strengthen the legal rights of its workers.

In addition to establishing the Interagency Labor Committee, new USMCA labor provisions include the implementation of a Rapid Response Mechanism to sanction companies that are in violation of workers’ rights of free association and collective bargaining.

What is the Rapid Response Mechanism?

This new labor provision for companies under the USMCA applies between the U.S. and Mexico, as well as between Canada and Mexico.  It does not, however, apply in relation to labor matters that exist between the U.S. and Canada.

The Rapid Response Mechanism is activated when a worker alleges that a company has denied his or her labor rights. In Mexico, such a case would be brought before the Interagency Labour Committee.  The Committee would then request a review of the company’s actions in order to determine whether there has indeed been a denial of employee rights. If the company that is under examination does not agree to conduct the review, the Interagency Labor Committee may request that a panel be summoned to perform a verification of compliance under the rules of the USMCA.

Under the new USMCA labor provisions, the U.S. may suspend its negotiations with a Mexican company while the Rapid Response Mechanism is being implemented. In the event of a verified denial of worker rights, the U.S. may not only suspend preferential treatment of products manufactured at the facility of the violating company but can also impose additional sanctions or even deny the entry of products.

What is Mexico doing to comply with the new USMCA labor provisions?

Mexico’s labor law reform, adopted in May 2019 in response to negotiations under the USMCA, drastically changed labor issues in the country.   In particular, this occurred through the implementation of a new labor justice system and the creation of the Federal Center for Conciliation and Labor Registration (CFCRL).  The main task of this new entity is to oversee the proper development of collective bargaining affairs and to act as a conciliation authority before any judicial proceeding.

The CFCRL will be in charge of carrying out the internal investigation process that is the first step of the Rapid Response Mechanism in Mexico. In the meantime, Mexico’s Secretariat of Labor and Social Security and the Federal Conciliation and Arbitration Board will conduct the internal investigation process.

What are the labor new labor provisions for companies under the USMCA?

Chapter 23 of the United States-Mexico-Canada Free Trade Agreement focuses on labor rights.  These include freedom of association, the recognition of the right to engage in collective bargaining, the elimination of forced labor, the effective abolition of child labor, and the elimination of discrimination with regard to employment and occupation. The USMCA states that each party should prohibit discrimination against any individual on the grounds of sex, pregnancy, sexual orientation, and gender identity.

With respect to production in the North American automotive industry, the USMCA has introduced the concept of labor value content (LVC), which, together with a higher regional value content threshold (75%, up from 62.5% under the NAFTA), determines whether the importation of a car qualifies for duty-free treatment.  The new LVC rule requires that at least 40% of a light vehicle be manufactured by workers earning at least $16 per hour.  This new rule will be fully implemented within three years. 

How do the new USMCA labor provisions affect multinational companies?

One of the main objectives of the USMCA is to make positive changes to the rules that govern Mexico’s labor environment. A major reform of Mexican labor legislation was implemented in May 2019 in anticipation of the trade agreement’s implementation.   This effort dealt with rules guaranteeing workers’ freedom of association and collective bargaining.  Additional changes to the law are still in the process of being made, which means that it could be years before the new legislation is completely crafted and implemented. That is, multinationals that moved parts of their operations or factories to Mexico to take advantage of the NAFTA face a changing landscape in terms of industrial relations in the coming years. This is as Mexico updates its laws to comply with the USMCA’s new labor provisions.

Multinationals should also be attentive to the activities of the Interagency Labour Committee, as it is tasked with receiving requests from private companies as part of the Rapid Response Mechanism. In addition, the Interagency Labor Committee has the power to monitor Mexico’s compliance with the new labor provisions for companies under the USMCA.

On the other hand, a hotline has been created for workers to report labor violations in Mexico. Coercive actions caused by these requests and reports may result in factory inspections, loss of preferential tariff treatment, or the denial of imports of products.

What should companies do now that the USMCA is in force?

The U.S. Customs and Border Protection Service has announced that, during the first six months of implementation, it would show restraint in its implementation of the new rules and would instead focus on supporting companies’ efforts to comply with the new USMCA labor provisions.

It is therefore recommended that employers in Mexico invest the time and make the effort that is necessary to understand the various labor provisions and reporting and enforcement mechanisms incorporated in the USMCA.  Companies that have operations in Mexico must be sure to update their labor rules and agreements. If they have not already done so, they must align themselves with Mexico’s new 2019 labor reforms and monitor any upcoming changes to legislation. Additionally, it is important that they make the effort to review their suppliers to ensure that they are properly complying with the new USMCA labor provisions.

Mexico has progressed from a nation that offers cheap and unskilled labor using obsolete infrastructure to being one of the top ten modern industrial producers worldwide. Over the last several decades, the country has made great progress through its development of a high level of sophistication in manufacturing, product design processes, and process development.   Additionally, Mexico now has a high degree of experience in technology and knowledge acquisition. Because of these circumstances, the metal fabrication industry in Mexico has made great strides forward.

By definition, the metalworking industry is dedicated to the use of the products obtained in the metallurgical processes for the manufacture of parts or finished products, such as machinery, equipment, or tools.  These items are indispensable for the functioning of industrial production lines.  The objective of the metalworking industry in Mexico is to transform raw materials into sheets, wires, plates, and other materials that are used in a variety of different manners in other well-developed Mexican industrial sectors.

Today, the industry in Mexico represents an essential part of the world economy’s productive capacity.   Among other features, this is greatly due to its attractiveness to foreign investors, its geographical location, and its robust network of 11 free trade agreements that govern the conduct of duty-free commerce with 45 partner nations.  Mexico currently supplies North America, and the rest of the world, with a wide range of high value-added manufactured products.

The metal fabricating industry in Mexico is one of the manufacturing economy’s pillars

The metal fabrication industry in Mexico is one of the most relevant value chains of any that is found in the country.  It is, to a great extent, linked to Mexico’s capacity to manufacture products that require high levels of sophistication in its productive capacity.  The metal fabrication industry has brought about an increase in the nation’s technological acumen and ability to innovate.

This sector represents a differentiator and a strength for the Mexican economy. The range of applications of the metalworking industry in Mexico is as broad as the opportunity offered today by the global market.  This is particularly true in North America.  Mexican fabricators are engaged in a wide range of processes from metal laminating and forming processes for storage racks, to manufacturing very complex parts in the aerospace or medical industry.  Noteworthy is the case of the automotive industry.  In this sector of Mexico’s manufacturing base, global companies are working on the transformation of metals in order to design lower weight parts without neglecting the resistance and safety that people expect in the vehicles that they purchase.

The metal fabrication industry in Mexico is important to other industries

The diversity of the productive sector of each economy is different from country to country.  The development of the metal fabrication industry in Mexico has earned the nation an important place within the global economy.  This is due to its continuous growth, and because of its significant investment in the automotive, aerospace, medical, electronics, and appliances industries.  Additionally, in recent times, Mexico has become adept at the manufacture of molds, dies, and tooling.

The capacity of the latter sector has increased significantly due to the location of large automotive, aerospace, and other manufacturing industry clusters in Mexico.   The continuous addition of these industries to Mexico’s expanding manufacturing base not only brings new operations and processes to the country but also promotes the widespread transfer of technology and knowledge.  These developments have played a major role in making Mexico one of the 10 leading manufacturing countries in the world.

According to figures provided by the Tariff Information System Via the Internet (SIAVI), based on registered imports, the metal fabrication industry in Mexico receives just over 7,000 units of metalworking production equipment annually, which, in recent years, has increased this Mexican industrial sector’s levels of technology transfer, innovation, and sophistication in its manufacturing capabilities.

While in past decades manufacturing in Mexico solely represented a cheap labor alternative to high-cost countries, reusing and adapting outdated or old infrastructure from other countries, Mexico now boasts a production capacity and infrastructure that is comparable to that which can be found in other modern and industrialized nations.

The potential for the further development of the metal fabrication industry in Mexico is significant and the challenges are great. The evolution of the digital transformation of manufacturing called Industry 4.0 will undoubtedly have a measurable effect on the way each country copes with technological changes. Because of this emerging reality, Mexico must accelerate the pace of its investment in technology, and in the further installation of high value-added processes that can be utilized in the metal fabricating industry, as well as in other manufacturing sectors.

The coronavirus has propelled Mexican medical industry production to new heights to supply much-needed equipment.

The leadership of the Mexican Association of Innovative Medical Device Industries (AMID) has recently reported that production by companies in the country’s robust, diversified, and highly developed health care product industry has multiplied by a factor of four.

According to Fernando Oliveros, president of AMID, companies that are located in Mexico have met the challenge of the global pandemic by significantly increasing their installed capacity and making new products in order to handle the increased demand for their products.

The largest share of Mexican medical industry production is destined for consumers in the United States.  In addition to making sales to its northern neighbor, Mexican made medical products are also consumed domestically, as well as throughout Latin America as a whole.

AMID is an organization that has a membership that is comprised of 34 companies that employ approximately 140,000 workers in the aggregate.  These firms are located throughout the country.

Recently AMID engaged Mexico’s current President Andrés Manuel López Obrador in order to urge him to increase government expenditures on Mexican medical industry goods.   His country’s spending in the healthcare sector has seen a decrease of almost 8% over the last year.  This has had a proportionate effect on the profitability and income of AMID associated companies.

Despite the current set of circumstances, the president of the Mexican Association of Innovative Medical Device Industries, Fernando Oliveros, maintains that the focus of Mexican medical industry production should be increased efficiency and quality.

Although Mexico is the largest exporter of medical devices in Latin America and the eighth largest in the world, it ranks 45^th in the consumption of healthcare devices.  This is in spite of the fact that, in terms of size, the Mexican economy is ranked 14^th globally.  Mexican medical industry production has increased by 7.9% over a period of the last 10 years.

The disparity between exports and consumption is explained by the fact that the lion’s share of Mexican medical industry production is manufactured to be sold in overseas markets.

Mexico makes ventilators

In response to global demand, Mexican medical device production now includes the manufacture of much-needed ventilators.  These life-saving machines enable patients that have been hard hit with the coronavirus to breathe effectively.

As of now, there are three companies that are located in the city of Tijuana in the state of Baja California that produce the machines.  According to Flavio Olivieri, an economic development specialist and director of the Cali Baja Bi-National Mega-Region, a cross-border business group, the companies that are producing ventilators in Tijuana are able to consider donating a percentage of the respirators that they manufacture for U.S. customers to Mexico’s local and state governments.

According to Olivieri, the regional approach has been “to leverage local capabilities of medium-sized manufacturing contract manufacturing companies in Tijuana to produce a low-cost respirator for the export market and for regional needs.”

In addition to the demand for ventilators, Mexican medical device producers in Tijuana and Baja California has seen a spike in orders for equipment such as gowns, masks, and other personal protective equipment (PPP).

In order to increase the manufacture of these and other medical goods, manufacturers in Mexico are working with their partners in Latin America to meet the market’s needs.  For example, most medical devices that are produced in Baja California are sent to Costa Rica to be sterilized there and then shipped back before being sold.  Given current conditions, however, two companies in Baja California are changing their operations to have the capacity to sterilize products locally.

Luis Hernandez, the current president Baja California chapter of the Mexican Maquiladora and Export Industry Association (INDEX), has stated that medical device manufacturers operating in Mexico need assistance from the United States to encourage Mexican authorities to expand their operations in a timely manner.  Presently, it is difficult to do this due to the need to comply with rules and regulations and bureaucratic paperwork.

For its part, AMID is working closely with Mexico’s Secretariat of the Economy and its Ministry of Health in an effort to boost Mexican medical industry production by attracting more foreign direct investment to the sector.

There is continuing speculation as regards to how the world will be in a post-COVID-19 environment.  Will people return to crowded restaurants, sporting events, and other high-profile public places?  Will workers return to their offices, or will they continue to work from home?  It is a near certainty that the coronavirus pandemic will leave an indelible and lasting impact on these behaviors.  In addition to this, however, we also can also be sure that the spread of the COVID-19 virus will motivate manufacturers to increasingly turn to nearshoring in Mexico.

Nearshoring in Mexico brings production closer to home

According to Matt Brady, executive vice president, and Andrés Galvis, regional director of Latin American operations at the Ware Malcomb design company, it is clear that many foreign operations of US companies are examining prospects for manufacturing close to home, i.e. in Mexico.  These activities will lead to a resurgence of nearshoring in Mexico in a post-pandemic world.

The presence of US manufacturers in Mexico is not a new scenario.  The United States has relied upon its neighbor to the south to be a solid manufacturing partner since the 1960s.  However, in the late 1990s and early 2000s, many US producers turned to China as a lower-cost alternative.  As is the case with any business strategy, moving manufacturing to China had its pros and cons.

Companies found that one of the major risks associated with the production of goods in the Chinese marketplace has to do with the issue of product imitation.  China’s rules and regulations in the area of intellectual property protection are notoriously lax or, even, absent at best.  Often, Chinese made imitations of goods developed by US manufacturers appeared and undercut the prices of the latter and, as a result, reduced US manufacturers’ market share and profitability.  Despite this, however, the cost of labor in China was so low that US firms were often willing to risk the long-term loss of intellectual property for immediate economic benefits.

Labor costs in China have risen in recent years

Nearshoring in Mexico became an increasingly attractive alternative to Chinese production when, beginning in 2015, the cost of labor in China began to rise appreciably.  As the cost of labor rose, so did the cost of the products being manufactured in China.  In addition to labor, companies manufacturing in China shouldered the considerable added cost of carrying more inventory.  With the key component of a supply chain located an ocean’s distance away, the average time necessary for goods manufactured in China to reach busy ports in California ran from 30 to 40 days.

In contrast, today the cost of manufacturing labor in China is double that of Mexico and workers continue to demand more compensation for their efforts.  With regard to the transportation of goods, Mexican made products can ship to the US via truck and rail in a matter of 2-3 days.  Because of this, shorter supply chains that are in place result in manufacturers’ ability to reduce the size of their inventories, and, thus, reduce associated carrying costs.   In addition to these two very important considerations, it is also relevant to additionally note that nearshoring to Mexico, rather than manufacturing in China, enables foreign investors to protect their intellectual property, as well as to avoid tariffs that the US government may have levied on Chinese made goods.

Prior to the emergence of COVID-19, the Trump Administration sought to renegotiate trade agreements with China.  As a result of these efforts, the North American Free Trade Agreement (NAFTA) was modified and renamed the United States-Mexico-Canada Free Trade Agreement (USMCA).  The approval of the agreement removed the uncertainty of nearshoring in Mexico that could possibly be felt by both US and Canadian companies.

Nearshoring to Mexico eliminates tariff risk

China, on the other hand, remains embroiled in a trade war with the United States.  High tariffs levied on Chinese goods continue to transform or drastically limit the benefits of its production over other alternatives.  In addition to this, the recent dollar-to-peso exchange rate has made Mexico-based manufacturing even more attractive.

Nearshoring to Mexico became a better option than manufacturing in the Far East as the COVID-19 virus spread throughout China.  Delivery of products made in the Orient was reduced, or, in many cases, halted altogether.    An example of this was the production of the coveted N95 masks that were in demand throughout the world.

For many companies, nearshoring to Mexico is not entirely about eliminating Chinese production.  In some instances, establishing production closer to home is about diversifying the supply chain.  While Mexico is not the only opportunity available to manufacturers, it offers close proximity to US markets, a young workforce with competitive wages, and the protection of intellectual property.  These things make Mexico a highly desirable site selection option.