Companies are moving manufacturing from China to Mexico to sell in the US market. So is this the end of “Made in China?”
When Marco Villarreal saw an excellent opportunity to manufacture complex products in Mexico, he did not hesitate to approach Hisun USA, a subsidiary of a firm based in China, to present his idea: transfer part of the manufacturing of its off-road vehicles from China to Mexico.
After determining it was a good strategy, the company crossed the border. Today it has two recently opened plants in Saltillo, Coahuila, in northeastern Mexico.
Hisun USA is linked to the giant Chinese conglomerate Hisun, which operates worldwide.
Given that connection with the multinational, Hisun USA ended up transferring the manufacture of some of the products that previously came from China to Mexico.
“The reality is that most of the US market can be supplied from Mexico,” says Marco Villarreal, the firm’s general director in Mexico.
“We manufacture the SUVs from scratch in Mexico,” he says, and only “the components are imported from Asia.”
The businessman, who knows the sector well after having worked for several years in global companies such as General Motors and Caterpillar, believes that the trend of moving manufacturing from China to Mexico will continue to grow.
“The opportunities are here, and you must take advantage of them,” says Villarreal.
What is nearshoring, and how will it affect moving manufacturing from China to Mexico?
Hisun is one of the large Chinese firms that have opted for “nearshoring,” the expression in English used to refer to the strategy of companies to manufacture closer to the market where they sell their products.
If decades ago, the trend was “offshoring” (taking factories to China to produce cheaper), now the tendency is to return to closer geographical areas.
In this case, global firms, especially Asian ones, have been looking for a better gateway to the world’s biggest market: the United States. Mexico holds the key to production for the US market. “The vast majority of companies are adding new production lines in Mexico to diversify from Asia,” says Bank of America economist Carlos Capistran.
Manufacturing in the north and center of the country has increased, employment in that area is well above pre-pandemic levels, and wages are also rising compared to other areas of the country, explains the expert.
He adds that there is a need for more industrial space in some manufacturing centers. This assertion is confirmed by the Mexican Association of Private Industrial Parks (AMPIP).
“There is more interest from foreign companies that want to come to Mexico, especially Asian ones. Many want to move manufacturing from China to Mexico,” says Claudia Esteves, executive director of the organization.
“There is little space left for rent in the industrial parks.”
According to data from AMPIP, only in the last year, the construction of 47 new industrial parks began in the country. Estimates suggest that nearshoring will generate approximately US $3 billion in the short term.
“Industrial space is being rented as soon as it is built. That never happened before,” says Pablo Monsivais, an analyst at Barclays Bank.
Recently, the Mexican Ministry of Economy reported that in 2022, foreign direct investment in Mexico increased by 12% compared to the previous year. The critical fact is that of all this investment, 48% is new. “This figure demonstrates that nearshoring is a reality,” adds Monsivais.
Moving manufacturing from China to Mexico has become popular due to the latter country’s geographic proximity to the US. However, also affecting decision-making are the cost of labor, the recent trade war between Washington and Beijing, and the advantages of the United States-Mexico-Canada Free Trade Agreement (USMCA) that entered into force in 2020.
When former US President Donald Trump imposed tariffs of up to 25% on imports from China in 2018, many companies looked for ways to replace ” Made in China” with ” Made in Mexico.”
Why would companies pay 25% in taxes to enter the US market if they can move manufacturing from China to Mexico and export their products from the latter country without paying tariffs? Many foreign firms with all their manufacturing concentrated in the Asian giant asked themselves this question.
The USMCA, for its part, facilitated the flow of products between the US, Mexico, and the United States. At the same time, with the covid-19 pandemic, supply chains were interrupted, generating a tremendous increase in the cost of maritime transport and time waiting to receive the products from China. These circumstances added to the rationale for moving manufacturing from Mexico to China.
Meanwhile, the White House declared nearshoring a “national security priority” in 2021. This was done to guarantee the availability of strategic products and augment the general resilience of the hemisphere’s supply chain. This is another point in favor of moving manufacturing from China to Mexico.
César Santos has witnessed all these changes since he entered into a business alliance with two Chinese business groups, the Holley Group and the Futong Group, in 2015 to build a gigantic industrial park.
Located on an 850-hectare piece of land in Monterrey, 220 kilometers from Texas, the park is called Hofusan. Starting in 2018, the company’s management began to rent spaces to Chinese companies interested in nearshoring to manufacture their latest products close to the US market. There are currently 21 companies operating the Hofusan Industrial Park.
Among the principal reasons for moving manufacturing from Mexico to China is that land and labor are affordable for Chinese companies, given that wages for workers have risen at home. Additionally, interest has increased since the United States imposed tariffs on Chinese goods.
The Hofusan Industrial Park houses companies such as the electronics multinational Hisense, the furniture manufacturers Kuka Home and Sunon Furniture, auto parts manufacturer Hangzhou XZB and Skyish, a manufacturer of gardening supplies.
According to a study by the international firm CBRE Research, the demand for factory relocation in Mexico between January and September of last year came mainly from companies seeking to move manufacturing from China to Mexico, followed by the United States, Japan, Germany, and South Korea.
The Mexican government needs to have accurate statistics on the magnitude and effects of the nearshoring trend on the country. There are no official data on the amount of investment, the number of companies that have relocated, or its impact on economic growth or job creation.
What is available is the partial information handled by each state and the different business associations. Analyzing data from these sources will most surely reveal a trend of moving manufacturing from China to Mexico.
Photo courtesy of Hisun https://www.facebook.com/photo.php?fbid=546802480914306&set=pb.100067536771366.-2207520000.&type=3