Mexico’s One Big Advantage Over The US Right Now Could Stall The ‘Made in America’ Push

Time:2024-01-26

– Many U.S. businesses have taken steps to reduce supply chain risks.
– Some companies are bringing manufacturing jobs back to the United States, but finding workers has been a challenge.
– Mexico’s growing manufacturing base makes it an attractive option for U.S. businesses.

American businesses’ efforts to produce more products in the United States face a continuing challenge: It’s hard to find workers.

Christian Ulbrich, chief executive of real estate services firm Jones Lang LaSalle, said part of the reason is low U.S. unemployment, which could make it difficult for companies to bring manufacturing jobs back to the United States.

“No one is doing the job,” Ulbricht told Business Insider editor-in-chief Matt Turner at the recent World Economic Forum.

That’s in contrast to Mexico, where a growing manufacturing base could entice companies to make supply chain investments there rather than in the United States, Ubrich said.

To the delight of the Biden administration, some companies, such as General Motors and Intel, have announced plans to move more supply chains and manufacturing back to U.S. shores, often referred to as “onshoring” or “reshoring.” The U.S. government is also investing billions of dollars to boost domestic production of electric vehicles, semiconductor chips and batteries.

But labor shortages have proven to be an obstacle to the “Made in America” movement. While pandemic-era labor shortages have eased, demand for construction workers and factory workers still outstrips supply.

Facing U.S. labor challenges, some companies turn to Mexico

Since 2020, the COVID-19 pandemic, the Russia-Ukraine war, global climate change and, most recently, the Houthi attacks in the Red Sea have all impacted global supply chains. These factors, along with growing concerns over the Taiwan Strait, have persuaded some U.S. companies to manufacture their products closer to home.

Companies like Ford and Tesla have “nearshore” or “friendly-shore” parts of their supply chains, relying more on countries like Mexico that are geographically and politically closer and often cheaper than the United States. Mexico received $29 billion in foreign direct investment in the first half of last year, a 5% increase from 2022, Reuters reported. More than half of these investments are in the industrial sector.

If countries like Mexico can reduce supply chain risks and provide some businesses with an adequate supply of labor, the surge in “near-shoring” might be a good thing for the U.S. economy. Lower labor costs could mean cheaper goods for U.S. consumers, and if most Americans have jobs — or don’t have the skills required for manufacturing jobs — maybe losing some jobs isn’t a big deal bad thing.

On the other hand, Susan Golicic, a supply chain professor at Colorado State University, said manufacturing jobs created by outsourcing typically pay better than many service-sector jobs and should therefore be attractive to many Americans. , whether they want it or not. Already have a job.

Mexico is also displacing other U.S. trading partners
Partly as a result of this nearshoring, Mexico surpassed Canada and China last year to become the United States’ largest trading partner, accounting for more than 15% of U.S. imports and exports. Last May, Mexico’s global exports hit their second-highest level on record.

“Many companies are looking to Mexico to replace Asian countries for production to be closer to any major supply chain disruptions that often occur in Asia,” Golicic said. “Mexico is close and the labor force is still much lower than in the U.S.,” he added. .

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, told BI that manufacturing labor costs in Mexico are also cheaper than in China, where manufacturing wages have risen in recent years. The average age in Mexico is about 30, while in China it’s closer to 40, helping to provide a strong labor supply, he added.

“Companies that move to Mexico will have greater visibility, control and influence over human resources and product quality, and will enjoy shorter delivery times,” he said.

But Mexico’s manufacturing industry also faces challenges. Limited infrastructure, unreliable energy and water supplies, and the threat of gang violence are all likely to face greater scrutiny if investment continues in the country. U.S. manufacturing may result in fewer supply chain disruptions for businesses and lower transportation costs compared to Mexico.

“There are many disadvantages to nearshoring production in Mexico, including complex labor laws, crime and violence, ease of doing business, and regulatory and legal barriers,” Abadia said.

Why the United States and Mexico are best suited to complement each other?
Luis Torres, senior business economist at the Federal Reserve Bank of Dallas, told BI that in fact, many companies will make supply chain investments in the United States and Mexico. He recalled a recent visit to an automaker’s manufacturing plant in San Antonio, where he learned the plant was sourcing some parts from Mexico and others from Tennessee and Alabama. Likewise, he said many Mexican factories use U.S.-made components.

“Mexico manufacturing complements U.S. manufacturing,” he said. “It’s not like they’re competing.”
But if the United States wants to shift its focus to domestic manufacturing in the coming years, there are steps it can take to increase its labor supply. Colorado’s Golicic said companies can offer competitive pay and benefits to attract workers and may also need to hire more contract or subcontracted workers.

When it comes to the lack of skilled workers, investments in training programs can help fill some of the gaps. If there simply aren’t enough workers, increasing immigration levels could be part of the solution.

While the government can encourage outsourcing, the value of “Made in America” investments will be determined by business leaders.

“Ultimately, companies have to determine whether this makes sense in the cost-benefit equation,” Golicic said.

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