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A few weeks ago, we did a webinar on moving manufacturing from China to Mexico. To watch the webinar, go here. To see the Powerpoints from the webinar, go here. We had nearly 1,000 registrants for that webinar and we got a ton of questions, both beforehand and during it — way more than we could even hope to answer.
During the webinar we promised to post answers answers to questions we were asked but were unable to answer during the webinar. The below are an initial set of questions and answers. We will follow up with a part 2, with more questions and answers, in a few days. These questions are in no particular order. We received a number of questions that were very particular to a company or an industry and we will not be answering those questions on here, but if you email us, we will do so to the extent possible.
What types of protection for IP can be used? Generally, the same answer for both China and Mexico. Trademarks, copyrights, and patents. Both countries also provide some trade secret protections, but it is usually a bad idea to rely on that. The key IP protections often are contractual and usually involve some combination of an NNN Agreement, a product ownership agreement, a product development agreement, a mold/tooling agreement and/or a manufacturing agreement.
Can you comment on the supply/demand of warehousing for shipments to the U.S, particularly for e-commerce shipments? It is relatively easy to find warehouse space in both China and Mexico, but, to a large extent it depends on exactly where you are looking within each country and how much you are willing to pay.
Do Shelter Agreements have a term where companies can use it to start up and then move to operate entirely on their own? This depends entirely on your specific contract. When our international lawyers represent a company on virtually any contract, we work with our client in determining/negotiating how long the term will be for their contract. The issues related to the term (or duration) of a contract involving shelter companies are not much different from the term issues involved in most other sorts of contracts. Shelter companies are typically going to want longer term agreements and either refuse short term agreements or seek to make you pay more, the shorter the term. It all really just depends on what you can negotiate.
Are there penalties for hiring shelter people? The answer to this question is very similar to the answer to the proceeding question. It depends on the length and nature of your contract. The bigger the contract and the longer the term, the less you will typically need to pay the shelter company for leaving with some of its people. We strongly advocate wisely negotiating this term with your shelter company when they want to bring you on board and before you sign the contract as this is when you have leverage. If you try to negotiate this a month before you plan to move on from your shelter manufacturing company, you may not have any leverage at all.
How common is it nowadays for foreign businesses to leave China? It is incredibly common for foreign businesses that manufacture in China to want to do their manufacturing elsewhere. China’s COVID shutdowns, forced labor risks/sanctions, higher wages, higher taxes, anti-foreign sentiment, increasing IP theft, tariffs, political and reputational issues have all combined to sour nearly everyone on manufacturing in China. However, moving out of China is almost never easy nor inexpensive and sometimes it is just flat out impossible. I can though tell you that we took on two new matters just this week for existing clients that are moving their manufacturing out of China. One of those companies is looking to Mexico and the other one is moving its manufacturing to Colombia. Two in one week is definitely an upswing and I will be talking with a company about Mexico manufacturing this week as well.
Is Mexico’s shelter program meant to attract only Chinese companies’ manufacturers, or are you interested in attracting other international manufacturers as well? Mexico’s shelter companies are private companies and they are interested in your business, no matter from what country you or your manufacturing is coming.
When is a good time to register IP in Mexico if you already have IP in the U.S.? You should register your IP in Mexico before someone else will want to register it in Mexico instead of you. What this typically means is that you should register your IP in Mexico before you go to or manufacture in or sell to Mexico. Some smaller companies choose to wait until they are certain they will be doing business in or with Mexico before they pay to register their IP in Mexico. They do this to save money and in most cases the IP risks are fairly low, but registering IP in Mexico is inexpensive and it is a best practice not to take chances with your IP and to register it in Mexico as soon as you decide to do business in or with Mexico.
Which products would you propose to shift from China to Mexico? The answer to this question depends not just on the pure cost of manufacturing in Mexico as compared to China, but on a whole host of other factors, including tariff rates, transporation costs, quality requirements, raw material requirements, etc. I have been shocked both by what product manufacturing has transitioned easily from China to Mexico and by what has not.
What is a WFOE? A WFOE (sometimes referred to as a WOFE) is a Wholly Foreign Owned Entity. This was originally mostly a term for setting up a subsidary company in China, but it is increasingly being used for other countries as well.
Can you please comment on safety in Mexico and the dangers around drug cartels? I love this question because I know first hand of companies that refuse to manufacture in Mexico because of perceived dangers. In fact, I have a very good client that refuses to go to Mexico because of a bad experience one of its executives had there 20 years ago. I get asked this question a lot and my answer is usually something like the following. My family and constantly vacation in Mexico and visit friends there. We have been there more than a dozen time without even a hint of an incident. Once when in Puebla a $100 bill fell out of my pocket and I learned this because a cab driver was yelling at me, “tu dinero, tu dinero.” When I realized he was talking to me I looked up and a 15ish year old girl and her mother were coming towards me to give me my $100. The mother was clearly (and rightly) beaming with pride about her daughter. This is the Mexico I know and love.
But I am not naive and I know Mexico has a massive problem with drug cartels and there are definitely places in Mexico where I will not go and even more places where I would not take my family. But that is true of the United States as well. It is also true of China, where crime is not reported and the very real problems that happen to foreign businesspeople were until very recently shoved under the rug.
What I can tell you is that I know of many more foreign businesspeople being held hostage in China than in Mexico. Numbeo strikes me as farily accurate in providing crime statistics on Mexican cities. If you use Numbeo, I would urge you to compare Mexico city numbers with those in the United States and/or elsewhere in the world.
But there is no doubt that the cartels are a serious issue in Mexico. But they mostly stay away from foreign businesses and foreigners and if you choose your Mexican city wisely and you take reasonable precautions, crime is not likely to be an issue for you or your company. I cannot tell you how many times I have had a Mexican lawyer or businessperson tell me that foreign companies should be more concerned about Mexico’s labor laws than about its drug cartels. My view is that it is reasonable to be concerned about both, but you should treat both appropriately.
How do you deal with Mexico’s corruption? We deal with it the very same way we have dealt with corruption in China; we refuse to be a part of it. What that means is that we counsel our clients not to do deals that involve corruption, especially those that rely on corruption for their profits. Corruption in Mexico is definitely a problem, but it also definitely varies depending on the region and the city, and we help our clients in choosing their location accordingly, when possible. Corruption in Mexico is a bigger problem than it is in China, but a lack of business honesty and what I would call sanctioned IP theft is a much bigger problem in China than it is in Mexico. As a lawyer who started out mostly doing US-Russia cross-border fishing and timber transactions and deals, I can tell you that Russia overall is way worse than both Mexico and China and that the “hands” of our lawyers overall are about equally full when representing foreign businesses dealing with Mexico as when representing businesses dealing with China.
How does it work for an individual who doesn’t want to start a business in Mexico, but is only looking for a supplier of specific goods, for example, plastic goods? Is there a manufacturer’s directory available for that process? China is the best country in the world (by far) at helping foreign companies navigate its manufacturing maze. Mexico is not even close. The typical Mexican manufacturer has had good relationships with U.S. (and maybe some European companies) for many years and is good at manufacturing but not good at all at marketing their manufacturing. I am not going to sugarcoat things here because I see this disconnect as one of the primary reasons why considerably more small companies have not left China for Mexico. Most of our clients that have moved from China to Mexico got help from their respective U.S. trade associations or they hired a consultant to help them. We do have some that did it on their own, and this holds true for companies across the board in terms of size and industries.
Which industries are welcomed in Mexico? Pretty much all. It is very different in that respect from China where the CCP decides who shall be favored and who shall be shunned.
I know that the intention of having an assembly line in Mexico is usually to export to the U.S. Do you think the U.S. government could restrict this in the future? This is very unlikely. Mexico borders the United States so it only makes sense for the United States to want Mexico to thrive and for US-Mexico relations to be good. Also, the U.S. just recently agreed to the United States-Mexico-Canada Agreement (UCMCA) and that ought to remain in place for a long long time. It also is a good indicator of the importance of the relationship. China is in territorial disputes with most of its neighbors and it obviously has serious human rights issues with Hong Kong, Tibet, and Xinjiang and then there is Taiwan. These are all pretty big risks to the US-China relationship and there is nothing comparable to any of these with respect to Mexico. The United States has already started using carrots and sticks (tariffs) to wean American businesses from China and with US-China relations in a free-fall (and almost certainly to get worse due to the Russia-Ukraine conflict), one should view Mexico as considerably safer on this score.
How does a China Plus One strategy impact the issues one might face in reducing one’s China footprint? If you are going to reduce your business with Chinese companies, it nearly always makes sense to set up protections before you do so. This is true no matter what your reason is for reducing your China footprint or for seeking to leave entirely.
From your experience, what are the biggest cost differences for businesses when they transition from China to Mexico? The transition itself. Figuring out how to manufacture in Mexico and finding the right people to do this is expensive. And it is even more expensive if you get it wrong on your first try.
One of your speakers said that the wages are 15-20% higher in China compared to Mexico. What is the basis for this statement? Statista lists the average wage in China at $6.50 per hour and at $4.82 in Mexico. Quality engineers and IT people in Mexico tend to cost quite a bit less than in China as well. But, your own mileage will almost certainly vary, depending on industry and region, among other things.
What is your opinion on the import/export logistics infrastructure comparing China to Mexico, and the future outlook? China is amazing at this and Mexico is very good. But with shipping costs so high and with their being so many delays at U.S. ports and in China due to COVID, Mexico wins, at least for now. Much of Mexico has a very good road system and so if your product is amenable to trucking, Mexico wins. Mexico’s airports are mostly pretty good as well, though probably not as ubiquituous or as good as China’s. In terms of getting product to the United States, it will almost be faster, cheaper and easier to do so from Mexico than from China, for obvious reasons. If you are trying to get product to Europe, I would think it will very much depend.
What are the government incentives in Mexico compared to China? Neither country offers much in the way of government incentives for foreign companies and this is especially true if you will not be setting up your own factory.
Why are Chinese companies hesitant to relocate to Mexico? To the extent this is true, I think it is mostly because it is usually easier for Chinese companies to relocate to Vietnam/Cambodia/Laos/Thailand or Taiwan, than to Mexico and this is for reasons of location, familiarity, language and culture.
What are the estimated cost savings of manufacturing in Mexico compared to the U.S.? That is going to very much depend on the product and, in particular, on the material and labor inputs for that product. We have clients whose costs in Mexico are 10-15% lower than they were in China and we have had clients that chose not to go into Mexico because it would be 30% more expensive. We also have had plenty of clients who have chosen Mexico over China even though the costs in Mexico were higher. They did this because they see the risks in Mexico as lower and/or because they see costs rising faster in China than in Mexico. Your mileage may vary.
Has the pandemic and supply chain shortage caused companies to reshore/nearshore to the main consumer markets? It certainly has, but not as much (or at least as quickly) as we would have expected. We have learned that even products that look very simple from afar are usually not and that switching one’s manufacturing from one country to another involves a lot more and costs a lot more than choosing to buy a product from Target this time as opposed to from Amazon. We have way more clients who want to move out of China or are studying moving out of China than have moved out of China.
Does Mexico have a stable domestic raw material supply, or does i need to import items such as steel, polypropylene, and silicone? Mexico both produces and imports all of these things, but every year for at least the last five years it has been producing more of its product inputs domestically and this domestication has increased during COVID and we expect that to continue. Mexico and its companies — like the U.S. and its companies — realize the risks on being dependent on China and other far away countries.
For electronic manufacturers who use subcomponents from China, how will the tariff situation between China and Mexico affect completed assemblies sent to the U.S. and Canada? This is actually an incredibly complicated and product-specific question. And by product specific, I don’t mean just a product overall, I mean the specific product that you are making in Mexico using subcomponents from China. I would urge you to read this article, which holds true for China-Mexico products shipped to the United States as well.
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