Photo credit: Seagate drives being tested by Robert Scoble
Flavius Vegetius Renatus (Circa 375 AD), writer of Epitoma Rei Militaris (The Military Institutions of the Romans) is often quoted for: “If you want peace, prepare for war”. Business was way more simpler back then, and this kind of advice applied easily to every day trades. Today, globalized and technology-based world has created a more complex and competitive business world with multinationals with no nationalities or boundaries.
As we speak, one trend is challenging business in Mexico … There is a re-shoring war upon us. So, if Vegetius allows me, I would re-quote him for the present time: “Mexico-based operation: If you want profits, prepare for re-shoring war”.
There are several advantages of Mexico that US or China may use for making profit on the current re-shoring trend into America, and eventually will allow Mexico to keep some of that re-shoring inside the country.
1. Location, location, location. As in real estate, in manufacturing, location offers the big advantage of working on-time, reducing delivery times and costs. Plus, Mexico has good infrastructure. Mexico has broad cross borders with the US, as well as 102 Ports and 15 hinterland ports to handle charge and export all over the world. It has 78 airports, 264,000 miles of road and 16,000 miles of railroad. Government has been discussing increase of its railroad infrastructure to meet demand by automakers in the center of the country.
2. Free Trade Agreements and Double Taxation Treaties. Mexico has signed 12 FTAs with 44 countries, 28 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). In addition, Mexico is an active participant in multilateral and regional organisms and forums such as the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) mechanism, the Organization for Economic Cooperation and Development (OECD) and the Latin American Association for the Integration (ALADI). Since 2010, Mexico is negotiating its incorporation to the Trans-Pacific Partnership (TPP) with Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. After this Agreement, Mexico will be a world-class connector with reduced or non-existing trade barriers with almost all countries.
3. Export incentives (IMMEX). Through the years, Mexican Government has implemented several export and manufacturing incentive programs for investors. Currently, IMMEX is the program that supports manufacturing companies for exporting. The main benefit is that raw materials are imported under 0% VAT rate (instead of 16%) or certain import duties, and could be transfer among IMMEX companies with same 0% rate. Machinery/tools could be temporary without paying VAT or import duties, too. Finally, at the end of supply chain, if this product/part is exported, VAT is not paid and machinery/tools could be re-exported without paying taxes. One of the main unexploited features of the IMMEX is that the same provisions apply to services. Then, outsourcing services of any kind (i.e. call centers, digital media rendering for video production, etc.) could apply for the same IMMEX benefits.
4. Engineers. Mexico is producing more engineers than ever, having a base of 400,000 software engineers and 65,000 graduating every year, Mexico is an “Engineering Powerhouse“. This number is powered by the fact that Mexico has qualified and skilled employees that have helped to success of diverse industries like consumer electronics, automotive/aerospace, textile and home appliances. In fact, Mexico has become a good ecosystem for clusters of auto/aero and consumer electronics to flourish.
5. Reliable legal framework. As labor law was amended to provide a more flexible labor system, and wages are reasonable, Mexico is competing with labor conditions in Asia. Government and politics are pushing amendments to free telecom and energy markets, and promised to set a more fair tax system. This could happen as soon as this year. El Pacto Por Mexico, a political alliance between the three major political parties, has outlined some of these amendments, and has guaranteed a majority in the Congress to pass the bill.
6. Domestic market. Mexico has a big domestic market of over 110 million people, with an average age of 26 years, Mexico has a great potential for growing inner market with products manufactured in the country.
Globalization is about producing in a place where business conditions, quality and price meet. Many companies will re-shore from China to US and/or Mexico forming a kind of North America manufacturing hub. Mexico has potential for landing any type of manufacturing operation, partially or totally, as can harbor either Chinese or US foreign investment.
As this re-shoring war is showing their first signs of hostility with companies moving away from China, it is time to apply some advice from Sun Tzu´s “The Art of War”: “Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted.”