Over the course of the last several years, China has experienced structural challenges that have impacted its ability to compete in global markets. Between rising labor costs, expensive raw materials, and pricey industrial real estate, China’s manufacturing base has found itself in competitive struggles with countries that include Malaysia, Vietnam, and Mexico.
With so much strain on Chinese supply chains, many companies are looking to Mexico as an option for both the purchase and sale of goods. Bolstered by a newly signed US-Mexico-Canada Agreement, US-based companies are finding that there are many advantages to doing business in Mexico, including a strong industrial base, competitive landed costs, shorter lead times, easier travel, and parallel time zones.
Overview
Finding a balance between landed cost advantages of low-cost countries in Asia, greater supply chain savings, and control in Mexico is the new hot topic; Section 301 Tariffs and the COVID-19 pandemic play a large role in this transition.
China once had absolute dominance in electronics manufacturing, but the US Government implementing Section 301 Tariffs has accelerated the move from China to Southeast Asia and Mexico for US importers. Now, there is a clear competition between Southeast Asia countries and Mexico to capture this business. Supply chain stability, sustainability, and cost are major drivers in making these decisions.
According to the Journal of Commerce (JOC), “US imports of electronics from China dropped 4.5 percent year over year in 2019, while imports from Mexico surged 112 percent.” The imports from Southeast Asia increased as well, while US electronics imports from North Asia dropped.
Last year, China imported a total of more than seven times the volume of second-place Vietnam at 105,370 TEU. Even though China continues to be the largest source of US electronics imports, disruptions caused by the coronavirus has impacted air freight. We have seen dramatic spikes in the cost to move freight from Asia to North America. This is primarily driven by steamship lines and airlines pulling most of their capacity.
Attractiveness of Mexico
Stability, lower supply chain cost into the US, ease of entry into Mexico, and favorable infrastructure help drive companies to Mexico from China. The advantages of manufacturing in Mexico may seem too good to be true. However, the reality of expanding to Mexico is not that difficult due to the ease of entry being one of the main benefits of doing business there.
The similar culture and language, strategic location between the U.S. and Latin America, favorable business climate, and access to shelter services through the maquiladora system makes launching an in the country simple. According to American Industries, Mexico has developed a “Soft Landing’ culture to help international manufacturers startup operations in Mexico with fast-track, [low risk] shelter programs. Additionally, tax incentives for manufacturers: no VAT and no income TAX [as well as] tariffs savings due to Mexico’s Free Trade Agreements with 46 countries” helps Mexico look more attractive for US importers.
Manufacturing in Mexico provides large cost savings to businesses in the country. With lower operating costs as a primary benefit of expanding to Mexico, companies have access to infrastructure that is modern and affordable. The favorable stability and lower cost in the supply chain from Mexico will drive decisions for electronic manufactures.
There is also a growing network in North America for the production of electronics, so “Mexico’s proximity to those suppliers and to the US market makes assembly of [electronics] a logical move” states JOC in their article, “Top US Shippers: US electronics importers turn to Mexico.” These goods can now just be trucked in across the border.
Market Instability
Many companies are realizing that this pandemic has crippled their business, so they now must take actions to diversify their supply chain, especially if this happens again. John Scannapieco, an attorney with Baker Donelson in Nashville, says, “it’s getting too bureaucratic now to be a foreigner in China. They are looking at other countries in Asia and Mexico. They are reducing their presence and hedging their bets, so they don’t get stuck from another pandemic, or politics.”
Decisions made in sourcing and supply chain in 2020 are more critical than ever. The United States is seeing the highest unemployment rate since the Great Depression in 1933 when it reached 24.9 percent. We are at depression-level unemployment.
The economic downturn is causing great stress on major shipping lines, especially the ocean steamships and airlines that support Asia to North American trade lanes. It is speculated that some container shipping companies may collapse if the global trade downturn stemming from coronavirus lockdowns extends to the end of the year or beyond. “The shape of the recovery is very uncertain,” Hapag-Lloyd AG CEO, Rolf Habben Jansen, said in an interview. They are looking at ways to cut costs as much as possible to make up for the missing volumes.
From this chaotic time, many airlines have already been driven into technical bankruptcy or in breach of debt covenants, if coordinated government and industry action is not taken. We are seeing many airlines that are severely stressed with little or no cash resources. Willie Walsh, head of International Air Group, thinks there is no guarantee for many European airlines to survive.
With the ongoing issues that have China becoming a harder and harder place to find cost savings and stability, we must find alternatives. The decision to move to Mexico, or Southeast Asia, will be largely driven by how the freight industry reacts, what the US government does to drive behavior, and how COVID-19 affects the economy and consumers.
For more information on Pegasus Logistics Group and how we can help you transition from China to Mexico, email us at info@pegasuslogistics.com, call us at 800-997-7226, or visit our website.
