Shifting Manufacturing and Supply Chain Operations to Mexico

Companies have been sourcing and manufacturing in China for many years and enjoyed low labor rates, reasonable logistical costs, and a large supply chain base. However, the economic business model has changed as companies are looking to “localize” their supply chain and manufacturing closer to their customer base.

companies servicing US and North American customers are actively working to establish supply chain and manufacturing in Mexico to diversify beyond China.

The trend to diversify beyond China has been caused by a lot of issues, including significant logistical increases, expanding transit lead times, US/China tariffs, increasing Chinese production costs, Covid travel restrictions, etc.

As a result, for companies servicing US and North American customers, they are actively working to establish supply chain and manufacturing in Mexico to diversify beyond China.

For companies that serve Southeast Asian and even Chinese customers, we have seen a similar diversification trend from China to Vietnam and Thailand. Additionally, companies servicing European customers are diversifying to Central Eastern Europe for supply chain and manufacturing, rather than China. We do not expect these trends to slow significantly, even if shipping rates and lead times eventually moderate.

However, Mexico is not always a replacement for China. It does not have the same abundance of suppliers from multiple different industry sectors. Additionally, Mexican suppliers are currently being overwhelmed by the substantial number of requests from US companies looking to diversify beyond China.

In many cases, these suppliers are not responding to the large number of quote requests or are providing expensive quotes to determine if the company is willing to accept.

While Mexico does have good suppliers in specific industries, some components and products from China remain less expensive. Therefore, in our analyses, manufacturers are jointly reviewing the Bills of Materials (BOM) to determine which countries offer the best diversification alternatives, e.g., sourcing some products from Mexico and then, supplementing diversification efforts in Central Eastern Europe and Southeast Asia.

While Mexico has good suppliers in specific industries, some components and products from China remain less expensive.

US Automotive Manufacturer Example

As an example, a U.S. automotive manufacturer asked East West Associates to review their Bills of Materials (BOM). East West evaluated both Mexico-based and Thailand-based automotive suppliers for products shipped to the U.S.

Thailand was a good and less expensive supply chain source for particular automotive parts not currently produced cost-effectively in Mexico.

The company would have a long lead time sourcing from Thailand, as they do sourcing from China. However, they will not be paying applicable US/China Tariffs and are less susceptible to the geopolitical challenges between the US & China.

In this case, the Mexico and Thailand sourcing strategy worked well for the Automotive Manufacturer who need to cost-effectively diversify their supply chain network beyond China.

EAST WEST ASSOCIATES

About our Operations in Mexico

East West Associates seasoned executives are based in China, Southeast Asia, Central Eastern Europe, Mexico and the U.S. We are uniquely qualified to provide pragmatic support to companies that need to diversify their supply chain and manufacturing.

The East West Associates Mexico team has been operating in Mexico for many years and as a result, they provide on-the-ground support In Mexico. They have the existing business relationships to arrange meetings with Mexican companies, obtain qualified requests for quotes, support the product sampling phase, and develop new Mexican suppliers for U.S. manufacturers and distributors.

East West Associates supply chain and manufacturing projects in Mexico include:

- Supplier identification and qualification of Mexican suppliers, and generation of RFQs to selected suppliers. Industries include automotive parts, automotive aftermarket products, aluminum extrusion, specialty stainless steel, lead-free brass plumbing fixtures, machines castings, injection molded plastics, steel stampings and medical products.
- Supplier audits of Mexican vendors
- Background Checks of Mexican suppliers
- Cost & Feasibility Analyses of establishing operations in Mexico vs. the U.S.

We are very active in this diversification trend, and have conducted numerous webinars on developing successful Mexican suppliers and manufacturers.

For assistance with determining if Mexico is right for your company or if you have additional questions, please call or contact us at 704.807.9531 or abryant@eastwestassoc.com.

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SUPPLY CHAIN SERVICES: GLOBAL EXPANSION (MEXICO)

SUPPLY CHAIN SERVICES:

GLOBAL EXPANSION (MEXICO)

SUPPLY CHAIN SERVICES: GLOBAL EXPANSION

BACKGROUND

EWA was engaged to develop and implement a Mexican supply chain footprint strategy, to identify and qualify local suppliers, evaluate options for assembly operations, identify 3rd party logistics providers, negotiate tax incentives, hire local senior management and evaluate existing DCs.

SUPPLY CHAIN SERVICES: GLOBAL EXPANSION

APPROACH

Define Project Objectives and Requirements

- Align on opportunities, volume requirements, cost targets

Deploy Formal Process & Develop Core Elements for Analysis

- Identify Products to be outsourced – one product was 48% supplied from China to US
- 80% of component spend can be supplied from Mexico
- Labor & Logistics savings favored Product Assembly in Mexico – faster than In-House

ID Potential Suppliers and Obtain Analytical Data

- Identified component suppliers within Mexico
- Interviews and factory visits to develop supplier “short list”
- Suppliers provided detailed proposals with pricing, QC control plans, price breaks for increased volumes, samples for performance testing
- Same process for identifying & qualifying Assembly and Packaging contractors

Hands-On Implementation

- Negotiations conducted with suppliers to finalize
  - Cost, payment terms, projected productivity improvements, forecasting lead times
  - Sharing of productivity/volume benefits, Inventory stocking requirements
- Negotiations conducted with contractors to finalize cost and value-added services:
  - Provide incoming QA inspection and manage supplier returns
  - Monitor and expedite deliveries from suppliers
  - Assemble and Package product & shipment to customers or distribution centers

SUPPLY CHAIN SERVICES: GLOBAL EXPANSION

RESULTS

(Outsourced Product Line)

- Cost Reduction
  - Reduced inventory vs China ($21MM cash) and shorter lead times, better cash flow
  - Cost reduced 5% ($6MM) vs sourcing from USA, with potential for additional reductions
  - Eliminated tariff impact
- Other Benefits
  - Quick set-up
  - Low cost to implement
  - Good access to suppliers for USA-based QA and technical staff
  - Good quality outsourced assembly and packaging
  - Elimination of 2 DC’s from proximity to Western USA customers
  - Stable trade environment

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curtiss-wright

federal-signal

greenheck

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hilite

HJ-Baker

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micromeritics

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tedia

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Webinar Executive Summary | How To Approach China Alternatives

WEBINAR EXECUTIVE SUMMARY:

How to Approach China Alternatives: Mexico, Southeast Asia & Central Eastern Europe

East West experts Mark Plum and Dan McLeod discuss how companies can approach finding alternatives to China for their manufacturing and supply chains, providing examples of companies they assisted diversifying from China while answering questions from the audience.

As manufacturing for export and sourcing in China is becoming more difficult for Western companies due to cost of inflation going up, increasing labor costs, high production expenses, volatile tariffs, political tensions, not to mention new and challenging rules and regulations that continue to evolve – companies are looking for other locations.

These trends are applicable to companies who are operating on the ground in China facilities and relocating them outside or sourcing them out of China for components or raw materials.

The questions to ask when looking to relocate are these:

- Where is your market?
- Where are your components and finished goods?
- Where are they to be consumed?

These three questions will help determine the best solution for your operations.

Attractive alternatives exist for relocating China supply chain & operations, including Mexico, Southeast Asia, and Central/Eastern Europe.

Client Case Study #1

Moving Operations to Mexico, Client is in US and North America

The first example was a very successful US-based manufacturer of electronic equipment selling into industrial markets and was established in China since the early 2000s. In addition to manufacturing, they had developed a sourcing office there, and they were sourcing components for their US factories. They had a strong operation with a strong domestic market, growing steadily, and were satisfied with the performance of their operations.

We were engaged a few years ago to initiate a search for suppliers in Mexico after the introduction of the tariffs in China. They also experienced logistics challenges, increased cost and transit times, problems with container availability, along with becoming increasingly concerned about the political situation between China and the US.

The company was looking forward into the future and had some concerns, particularly where their marketplace was somewhat of a high-tech product, were concerned about China’s 2025 policies and the potential for the loss of intellectual property and the loss of control of production.

We provided the company with options for suppliers Mexico to be closer to their clients in the US and North America and visited the top candidates.

Currently, in Mexico, we are finding:

- Suppliers are fielding more requests than the previous 5-10 years. This is stressing capacity and their ability to respond. Having good relationships with suppliers in Mexico is key to getting their attention, and having local people able to facilitate these relationships is critical.
- Finding local individuals who can support your negotiations, particularly around freight and logistics, standard terms and conditions, and trade compliance issues is important.
- For companies that move to Mexico, they can reduce the number of distribution centers they operate in North America since they’ve shortened their supply times by getting closer to the market and have a quicker response time. This also can reduce their inventory holdings.
- Incentives are not as transparent as other parts of the world – and more time and investment can be required. There is much more raw, undeveloped land on the market that requires more investment in time and capital to get set up as a manufacturing site.
- Many more small-to-medium sized suppliers, where capital is tight and when faced with the need to expand to supply a significant customer, there are discussions about financing the expansion, unlike you would with a supplier in China for example.
- When transferring technology to Mexico, it requires more work to develop the specifications and techniques than expected, which can slow the transition process down. This creates a requirement for technical skills within your company to help the transition.

Client Case Study #2

Moving Operations to Poland and Czech Republic, Clients are in Western Europe

Our next example was US global HVAC business, with manufacturing in the Guangzhou province in the 90s. Back then they were able to reduce their bill material cost and total cost between 25-30%. They could have long shipping lead times of 9-11 weeks to get to their different global distribution centers.

We were engaged to look at a new facility to help move it closer to their European markets to ease the shipping times to those markets. We determined the best area was along the Polish and Czech Republic boarder to get their goods into Western Europe, bringing the shipping times down to 10 hours by highway with a strong labor force in place.

Currently, in Eastern Europe, we find:

- Excellent suppliers for metal fabrication – bending metals, heavy construction, is extremely good, with a strong, skilled workforce.
- A good source of electronic components relating to automobiles, such as PCB boards, basic chips, etc.
- A high quality of labor, with a strong work ethic, skilled in industrial, appliances, and automotives. Only difficulty can be with availability, and this is where having someone local who can help sourcing can assist.

Client Case Study #3

Moving Operations to Thailand, Clients in Southeast Asia

Our last example was a very large iconic manufacturer of electronic equipment selling into industrial markets and was established in China since the early 2000s in Guangdong Province, with growth of their markets in ASEAN.

We were asked to do a study to find a larger facility close to their current one so they would be able to keep their labor force. We demonstrated to them it would be better for their market base if we broadened it to ASEAN to keep their facilities on the cutting-edge, looking at Vietnam, Thailand, and Malaysia.

After negotiating with Thailand’s Board of Investment, we brought our client’s second design center which included their R&D first tier products and the internet of things connected products to Thailand, and the Thai government gave them a 10-year corporate tax holiday and 5 more years at a 50% tax. This saved the company an enormous amount of money compared to if they built a new facility in China.

Currently, in Southeast Asia, we find:

- Their productivity levels and R&D are equal to those you would find in China with half the labor rates for manufacturing.
- Your IP is much more protected, and you don’t have to worry about the government of where you are dealing with to try to compete with you.
- There is still the Treaty of Amity that goes back 150 years where there are no duties, so if your content is over 60% coming back to the US is zero duties from Vietnam.

Helpful Tips

For Closing a Plant or Operation Center

When you are going to close a production center in China, you need to anticipate the time involved and put together a solid, upfront plan.

Set aside a two-month period working with corporate management and local leadership to develop solid plans around:

Understanding required severance
Understanding market practices around severance
Communication plans
Inventory disposition
Whether you need to build up or draw down inventory.

The need for a multifunctional or cross-functional planning is key for a successful plant closing.

For assistance with a plant closing or if you have additional questions, please call or contact us at 704.807.9531 or abryant@eastwestassoc.com.

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How to Approach China Alternatives: Mexico, Southeast Asia & Central Eastern Europe

Webinar:

How to Approach China Alternatives: Mexico, Southeast Asia & Central Eastern Europe

How to Approach China Alternatives

About The Webinar

Your Global Supply Chain & Manufacturing Footprint Strategy

East West Associates Manufacturing and Supply Chain Roundtable with Senior Executives

Manufacturing for export and sourcing in China is becoming more difficult due to increasing labor costs, high production expenses, volatile tariffs, political tensions, as well as challenging and changing rules & regulations.

Attractive alternatives exist for relocating China supply chain & operations including Mexico, Southeast Asia, and Central/Eastern Europe.

But how do you create a coherent strategy for your global footprint?

Developing a global footprint strategy requires analyzing your goals, markets, manufacturing operations, and supply chain network. It includes identifying new manufacturing and supply venues that could maintain quality, increase efficiencies, decrease duplication, control costs, and reduce risk.

We provided 3 real-life examples of US companies diversifying their supply chain & manufacturing to Mexico, Poland and Thailand.

The webinar discussion focused on why corporate executives selected these 3 countries.

The webinar addressed key questions such as:

- What questions should executives be asking to determine whether to diversify their supply chain & manufacturing?
- What metrics does a company use to determine what is the best country and site location?
- What are the costs involved in diversifying supply chain & manufacturing?
- What are the unique challenges in Mexico, Southeast Asia & Poland?
- What type of industry sectors are diversifying into these 3 markets?
- What problems can we anticipate if we close our operations in China?

How to Approach China Alternatives

Speakers

Mark Plum | Director, East West Associates

Former President of Briggs & Stratton Asia (NYSE: BGG)
VP Sales & Marketing, American Standard Thailand & American Standard China

Dan McLeod | Director, East West Associates

Former Director Asia Pacific Operations-Ashland Specialty Ingredients (NYSE: ASH)
General Manager-Eaton Corporation (Philippines)
Director of Asia Pacific Manufacturing and Supply Chain-Hercules

Relocating or Expanding Operations & Supply Chain From China to Vietnam and Thailand

View Webinar

Relocating or Expanding Operations & Supply Chain From China to Vietnam and Thailand

Presentation

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OUR CLIENTS

accessdata

Adler Pelzer Group

Accuride

aseptia

alliance

amercable

americhem

anisa

calient

corning

chemco

climate-master

curtiss-wright

federal-signal

greenheck

flexco

gore

hilite

HJ-Baker

Icee

mascoat

merichem

micromeritics

nanotex

oerlikon

plasticolors

rudolf-group

silfex

sweco

tile-shop

tedia

titeflex

weber

Relocating or Expanding Operations & Supply Chains From China to Mexico

Webinar:

Relocating or Expanding Operations & Supply Chain From China to Mexico

About The Webinar

Find out why C-level executives are now migrating from China to Mexico to improve the reliability of their supply chains.

U.S. manufacturers are motivated to act due to economic and geopolitical challenges in China: COVID lockdowns; China/Taiwan/U.S. tensions; constantly rising Chinese labor costs; higher logistical costs; unreliable transport to customers; volatile U.S./China tariffs; and an increasingly bureaucratic and regulatory environment in China.

Why are companies moving operations to Mexico?

- For a reliable, timely and stable flow of products and components nearer to customers and assemblers in the U.S. and North America.
- To assure an available supply of local raw material and components.
- For access to competitive and qualified labor.
- To establish manufacturing & supply sources where it’s easy for U.S.-based management to visit and oversee them to control costs and maintain quality.
- To operate under the USMCA, avoiding the expense, volatility and hassle of China/U.S. tariffs.

Relocating or Expanding Operations & Supply Chain From China to Mexico

SPEAKERS

Stefan Lachner | East West Associates

Former VP Production and Logistics Planning, Robert Bosch GmbH (Mexico)
Manager Operations and Engineering, Leoni AG (Mexico)
Business Unit & Key Account Manager, Continental Teves Automotive (Mexico)

Dan McLeod | Director, East West Associates

Director, East West Associates