The Big Supply Chain Migration: From China to Mexico
On September 22nd-23rd, 2022 the World Trade Centers Association (WTCA) hosted the “Point WTC Guadalajara 2022: Logistics Challenges in Latin America/WTCA Latin America” regional conference. It connected a global network of over 300 WTC locations in nearly 100 countries to discuss global phenomena that are shaping the future of globalized logistics.
At the conference, the heads of global logistics broached an important topic: “…several phenomena have altered the normal course of logistics in the world, among which it is worth mentioning the disruption of supply chains, particularly those that originate in Asia, the growth of cross-border electronic commerce with the logistical challenges that this implies and the shortage of containers.”
The conference itinerary consisted of topics including maritime and air logistics, post-COVID logistics challenges, cross-border electronic commerce and the transformation of logistics, and conversation on the new reality of near shoring.
This conference comes after the global associations of logistics watched in horror as the global supply chain crumbled during the pandemic.
In an effort to rebuild stronger, the WTCA is restrategizing where logistics is implemented throughout the world after years of being too reliant on sourcing products from China.
In 2017, you could ship a 40’ container for just ~$1,300; The current rate is ~$3,700—almost three times more expensive.
But since the world container index rate which reports spot container freight rates for major east-west trade routes dropped 29% year over year recently as the pandemic situation slowly rolls to a stop, it should be a case of reopen to China and start again as normal, right?
The heads of global logistics still stroke their chin in concern.
China also has an aging population. The number of citizens aged 60 or above is close to 267 million—that’s 18.9% of the population and this may reach 33% by before 2050. Statistics also show that fertility rate is falling and some experts believe the country’s existing welfare infrastructure could be stressed.
It’s hard to forget how hard China got hit with its Covid Zero policy that backed up the Qingdao port, the largest in China, more than it had ever experienced before.
The pandemic opened our eyes to the vulnerabilities of a global supply chain:
- Lead times escalated
- Companies stockedout uncontrollably
- Manufacturers closed for months at a time
As a result, 2020 was when the trade numbers started to plummet.
China-US imports dropped 3.6%, the US goods trade deficit dropped 9.9%, and the US trade surplus with China dropped 37.3%.
But almost by coincidence, the Americas supply market gained ground in 2019, right before the pandemic hit.
The Sneaking Growth of Manufacturing in the Americas
Data from the US government revealed the Americas creeping in through the back door. US imported 54% more goods from the Western Hemisphere in 2019 from 2009. These imports accounted for 31.5% of overall US imports in 2019.
Leading the rise of the Western Hemisphere is Mexico.
Onshoring to Mexico: Cheaper, Faster, Easier
Mexico was the second-largest supplier for the United States in 2019 and the number one supplier from the Western Hemisphere, providing 14.3% of imports to the US. The U.S. foreign direct investment in Mexico increased 5.2% in 2019. Mexican imports increased 4% from 2018 and 797% up from 1993.
Manufacturers in Tijuana can get components to San Diego or LA the same day. Needing to get products to customers during the pandemic, businesses turned to these local manufacturers. NC-based logistics company Jaggaer tracked an increase of Mexican suppliers receiving bids from US companies of 514%.
Naturally, shipping costs were a fraction of those from China.
Businesses also benefited from supply close to home as they were easily able to supervise products for quality assurance. It was common for plant managers to travel back and forth between the warehouses and the US.
The manufacturing infrastructure in Mexico has even been evolving.
According to a Harvard study, when productivity increases plateaued in a factory complex in Guadalajara, the manufacturing company moved small assembly lines to different areas of the complex, sometimes different buildings. Workers remodeled the production process to be more space efficient, boosting overall productivity.
While it was easier for businesses to manage inventory coming in from Mexico, it also helped their brands as they were able to proudly show the “Made in the USA” badge on their products.
So, why hasn’t everyone migrated over to Mexico?
Mexico Isn’t Quite There Yet
Supply and demand is the chicken and egg problem Mexico has been facing. Maybe the demand outweighed the supply or vice versa. Regardless, compared to China, it’s miniscule not just in geographical size, but in manufacturing infrastructure.
As of Q4 2022, 1,300 factory units are owned by the biggest ecommerce platform in China, JD. According to dataMexico, the whole of Mexico has just 3 more units than that single ecommerce platform owns.
Needless to say, companies find it tough to find suppliers with the right raw materials for their products in Mexico. Not to mention the production quality and networks—the infrastructure just isn’t big enough.
And because of the geographical size of China, it would be impossible to replicate its ecosystem in a country the size of Mexico (to put the size difference into perspective, you could fit more than 4 Mexico’s on China’s land.)
Many businesses are looking for particular materials for their products. It’s difficult to find regions outside of Asia that can produce quality cottons and synthetic fabrics used for many products consumed in the US.
You need deep connections in Mexico and you need to convince suppliers that your business is good for them, because they’re going to have to invest in you.
We’ve Built Our Bridge. It’s Going to Be a Lot Of Work to Move Cities
Because we’ve been importing from China for such a long time, we’ve built importing inroads that are inflexible. It’ll be a huge undertaking to shift production from one hemisphere to another.
But that doesn’t mean it isn’t happening. The data at the start of this article shows that money is being pumped into Mexico’s supply infrastructure and businesses are already making the shift; though not a complete shift. Most are migrating from a “just in time” to a “just in case” sourcing model as a backup.
The Early Bird Gets the Worm: How to Find Mexican Suppliers
It’s the early movers that get the biggest share of the spoils. By establishing your own Mexican supply network early, you build those relationships that others will find it hard to make once the industry grows.
The more Mexico proves it can deliver, the higher the demand will be. And when demand goes up, so does price. So getting in while you can allows you to get good prices for the future.
As for finding the suppliers, Zipfox is a tool that will get you ahead of the curve. It’s the world’s first product sourcing marketplace to include Mexican factories.
The team has spent the last 18 months finding suppliers to add to the platform where you can search for Mexican suppliers like you can any other.
The Partial Migration Is Happening
The KKR State of Play report shows that globalization has slowed down from 27% in 2008 to 19% in 2021. We’re certainly seeing movement, but not a complete 180° migration.
It’s time for entrepreneurs to re-asses and reflect. Identify where their supply chain was exposed, shore up those areas, and start to build support networks in case those vulnerabilities are attacked again.
However, this supply chain strengthening will take considerable time and resources that not all entrepreneurs have.
This is when it could be a good time to exit your business by selling it to someone who has the time and resources to scale it. You could cash out of your business for 35-40 times its monthly net profit and reinvest that capital into new businesses or other investment assets.
To find out if it’s a good time for you to sell your business, schedule a call with one of our expert business advisors for a free, no obligation consultation on selling your business.
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