Is nearshoring to Mexico right for your company? (Part two)

As supply chains are increasingly affected by near-constant disruption, it’s more critical than ever to minimize risk in your supply chain. Many US companies are considering nearshoring as a viable option to make their supply chains more resilient. There are multiple factors to consider when evaluating Mexico as a manufacturing and distribution hub, one of them is cost. Cost considerations include labor and materials costs, and tax rates.

Labor and materials costs

Mexico offers a couple of benefits over China for manufacturing labor. First, Mexico has the benefit of a lower manufacturing labor cost of US $4.80 per hour, as compared to China’s rate of US $6.50 per hour. (Wage rates confirmed as of May 2021, additional guidelines to be released in July 2021.) Second, Mexico recognizes a longer workweek of 48 hours before overtime is paid. These benefits offer employers increased productivity at a lower operational rate.

Material freight costs are also decreased for American companies when compared to China, as a result of Mexico’s close proximity. There are fewer touchpoints in transport, less complexity, and generally reduced risk. As an example, a typical inbound truckload to Memphis costs $3,111 and takes four days. If shipped from China, that same shipment would cost $6,453 and take 31 days.

Tax rates

Mexico enjoys one of the most favorable composite tariffs with the United States (0.04%)—compared with China’s composite tariff rate of 19.2%. This rate is also attractive when compared to other manufacturing countries including Brazil, Indonesia, India, and Germany.

Another potential benefit is Mexico’s current tax rate of 30%, which has not changed since 2010. There are no indications that it will change in the near future. Although the Biden administration has proposed increasing US corporate tax rates, further investigation into the tax policies of both countries may offer potential tax savings based on actual operating footprints.

Lastly, Mexico’s IMMEX program (Decreto para el Fomento de la Industria Manufacturera, Maquiladora, y de Servicios de Exportación, or Decree for the Promotion of the Manufacturing, Maquiladora, and Export Services Industry) offers tax and duty savings to companies.  Broadly, this allows U.S. companies to move select manufacturing inputs from the U.S. to Mexico to assemble or process within a prescribed window before re-importing the ‘finished’ or ‘assembled’ goods back into the U.S. with little or no tax consequence.  

Points to consider  

When US manufacturers and distributors consider Mexico’s role in their supply chains, they should evaluate the makeup of their cost base and trade-offs between labor cost/productivity and logistics costs.  Supply chain characteristics related to cost that favor nearshoring to Mexico include:

• Lower levels of sensitivity to higher labor costs and lower productivity levels compared with other sourcing hubs
• Higher levels of sensitivity to logistics costs versus manufacturing input costs