A Long Time Coming: Accelerated Exodus of Companies Leaving China for Mexico Due to Prolonged Trade War and Tariffs

Decoupling has begun between two of the largest economies in the world: China and the United States. This is no longer a short-term trade war, but rather a new world order.

Though escalating to the point of chaos in a battle of media headlines and the tit-for-tat retaliatory tariffs between the two nations, manufacturing companies aren’t sitting around flat-footed waiting for the next shoe to drop. Companies are leaving China and a lot of them are moving production to Mexico.

Major Factors Contributing to Relocating Production Now and Prior to the Trade War

• Escalating trade war and new U.S. tariffs on Chinese goods
• Manufacturing labor rates in China continue to be higher than in Mexico ($4.12/hour in China versus $2.66/hour in Mexico)
• IP theft and counterfeiting harder to control and not well enforced in China
• Longer and more expensive logistics and transportation (approximately 30 days by container ship to North America)

In a member survey by the American Chamber of Commerce in Shanghai, approximately 40% of respondents are considering or have relocated manufacturing facilities outside of China with many moving production to Mexico.

An Overview of U.S. Tariffs on Chinese Imports

The trade war started with U.S. tariffs on $34 billion dollars of Chinese imports in June of 2018. Now upwards of $550 billion dollars’ worth of Chinese goods subject to tariffs, manufacturers are no longer hedging their bets that this will settle down and instead are looking to permanently shift their supply chains. Geographic and supply chain diversification along with a desire to reduce their exposure to tariffs has manufacturers looking at three main targets for sourcing manufacturing or wholescale site relocation: Mexico, Vietnam and Thailand. 

This is all about margins and a disruption of their supply chains. As they stand now, the tariffs make staying in China impossible. Even Chinese manufacturing companies are looking outside their borders in order to keep supplying to the United States. Some manufacturers, often through corporate relocation firms, are finding that other ASEAN countries like Vietnam and Indonesia offer the low-cost labor rates they seek but find that these developing, and less mature markets are lacking.

Supply Chain Risks in Moving Production to Vietnam and Other ASEAN Countries

• Lack of specialized supply chains
• Poor roads and transportation infrastructure
• Labor shortages, especially in the highly skilled and advanced processes areas
• Facility safety issues: Over 80% South Asian factories surveyed by QIMA structural auditors in 2019 were found in need of improvement in the short or medium term (compared to 57% globally), including
• 6% of facilities presenting immediate risks to worker life and health.
• Product quality issues: Inspection failure rates over 33% and 37% in India and Pakistan, while 40% of products inspected for export from Cambodia did not meet inspection standards

It’s like starting from scratch. Only massive amounts of government investment and development workplace and facility quality and safety regulations, in addition to a decade or two, could see these emerging economies get up to speed.

Enter Mexico: A Manufacturing Powerhouse with Next Door Proximity to the U.S.

Manufacturing companies were already leaving China prior to the trade war kicking off. Despite decades supporting high-tech manufacturing in Mexico, nearshoring production to our southern neighbor increased in 2012 when labor costs in China became 14.6% more expensive than in Mexico and the gap continues to widen. Coupled with poor intellectual property protections and excruciating long times in transit, China began to fall out of favor. There’s only so much a company can overlook. (Too 10 Reasons for Manufacturing in Mexico vs. China). 

The exodus has now accelerated due to the trade war, but that doesn’t mean manufacturers are making this choice out of desperation. It’s about better opportunities, better margins and Mexico’s major manufacturing industries that for decades have been home to thousands of leading multinational firms in aerospace, electronics, auto parts and automobile, medical device, furniture, metal mechanic and related industries.

Mexico's Major Manufacturing Industries

Why Manufacturers Are Relocating to Mexico over Other Overseas Locations

• Mexico has the most free trade agreements of any country in the world, including: NAFTA/USMCA (North America) and the new CPTPP gives manufacturers and suppliers tariff-free access to 11 countries throughout the Asia-Pacific (Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam)
• Duty free temporary imports of raw materials and machinery under Mexico’s IMMEX program when working with a shelter company
• Less volatile trade relationship, we are geographical neighbors with deeply integrated economies
• Highly skilled and plentiful workforce that is largely bilingual and bicultural
• Ability to transfer knowledge base, some of the Chinese workforce to Mexican facilities
• Decades of foreign direct investment and governmental investment in the billions of dollars for modern facilities, infrastructure, import/export efficiency, roads, electricity, and water
• Stone’s throw proximity to the United States with dedicated commercial border crossings and deep-water port connected to the world

Soft Landing in Mexico: How Companies Get up and Running with Minimal Risk

Because of the acceleration of tariff announcements and changes, companies are looking towards shelter company providers with relocation services when looking to nearshore production to Mexico from their overseas locations.

Shelter companies in Mexico allow manufacturers to operate under their existing corporate entity, utilize existing permits, and reduce ramp up times to just a few months. They also provide site selection services, administrative support, HR, recruitment, and in effect handle every aspect outside of the actual manufacturing. Shelter companies can even assist with knowledge transfer and immigration of some overseas workers to reduce training needs. This is the speed and cost savings needed for smoother transitions during these unpredictable times in international trade and manufacturing.

What Companies are Leaving China

These are some of the companies who have moved or who have signaled plans to move some or all their production out of China.

Click here for full list of companies.

Sources: Nikkei Asian Review, Politico, USA Today, New York Times, The Business Times, and Taipei Times.

Where Do Manufacturers Go from Here?

We’ve got the lay of the land, the downsides to shifting production to other ASEAN countries, and a good understanding of Mexico’s robust industrial sectors. Leaving China isn’t a temporary move while the two countries sort out their trade differences – it’s a new shift in best practices that focuses on supply chain redeployment and minimizing risk regardless of what the future holds.