[Music] What's fueling the shift of manufacturing to Mexico? Carlos Sugich is a partner at the law firm of Snell and Wilmer. Hi, Carlos. Hi, Robert. Thanks for being with me today. Carlos, which industries are fueling increased manufacturing in Mexico right now? You know, I think right now probably the automotive industry is one of the industries that is gaining a lot of new momentum and traffic. Obviously, semiconductors as well, the aerospace industry, and I think I would say those are the top three of the industries driving this near-shoring phenomenon or manufacturing in Mexico. Is the US the sole market for this production, and if not, where else might it be going? The US is the primary market, but I think over the last five years, we've seen in Mexico a lot of new companies coming from Asia, specifically China or India, and some of them are to service their existing clients in the US for companies that are relocating their operations into Mexico, but also to serve their own

market. So, I think, you know, we've seen a mix, but definitely, uh, the US has been, uh, the primary market, and you know, as you know, the largest, uh, trading partner with Mexico. Now, you mentioned India, so the assumption there is that it's not all coming from China, although I imagine most of it, a lot of it is. I mean, what's the proportion there? No, not all coming from China. I think we've seen lately, uh, uh, and I personally represented, uh, two companies that are based in India that are trying to set up, uh, call centers or other operations in Mexico to continue to service their US-based clients. Uh, so, I think it's coming from India. Obviously, the majority is coming from China, uh, other than the US, obviously, uh, but I think India as well. We've seen a lot of foreign investment from India too. What about the subs suppliers that support manufacturing? Are they coming along as well? I mean, it's often the case that a manufacturing plant has to be surrounded by so-called supplier campuses around

assembly plants, and if that's not happening, where are, where is that stuff coming from? Yeah, no, definitely. I think we've seen all the satellite, you know, companies following the main company. As you see in Mon Tesla announcing that manufacturing facility, and all of a sudden, you know, all of their providers, if not most of them, also looking at space around the plant so they can continue to serve as their client. So, it's not just the primary, but I think we see a lot of the satellite or the incidental customers are also trying to secure locations in real estate so they can continue to serve their clients. Are there not, however, still some aspects of manufacturing, especially commodities and raw materials, that must continue to come from China and other parts of Asia? And does that present a potential problem? I don't think it presents a problem. I think, you know, Mexico has, in addition to the NAFTA or the USMCA agreement, has more than 30 free trade

agreements with other countries is a member of WTO. Uh, so I don't see that as a problem at all. I mean, you have those local content rules that determine whether a particular product does qualify under the USMCA, but you don't see that's an issue if they have to get some of that stuff from offshore. That's correct, so long as they meet those requirements. Now, we've seen this as an ongoing thing for the last few years, but a lot of things are changing in the economy right now. How are factors such as interest rates, inflation, and for that matter, energy costs as well, affecting the decision to move to Mexico? Uh, I think that the key decision to move to Mexico, obviously, is going to be the infrastructure. Uh, make sure that wherever you're located, your new plant has the, you know, the city or the town has the right infrastructure to, uh, to your plant. I think the electricity cost definitely is a factor, uh, but, um, I think something that can be overcome. I

think the other challenges would be security, uh, and you know, finding the right, uh, personnel for the type of product that you, uh, or the client would like to, uh, manufacture. Um, I think those are kind of the key challenges, but, uh, I think, you know, the risk far, you know, you know, they're not, they're not significant as the potential benefits of having a plan in your back door, right, in your backyard, I should say. And, you know, I've heard from clients that I represent that are based in the US, and if you think about it from a company perspective, it makes economic sense, but also from a CEO perspective, from a VP perspective, from a human perspective, uh, a lot of those, uh, folks would rather go to Mexico, uh, on a quick short flight, and then come back to the US rather than going to China or going to India. And, uh, so I think that is also playing a key factor on, you know, relocating closer to home. You mentioned infrastructure is a big concern or a big issue, at least a lot of these my

understanding is that a lot of these Mexican Mador or factories are in kind of the northern part of the country, uh, and thereby closer to the US border. But are there issues in Mexico with regard to infrastructure, the quality of roads, the quality of ports, the quality of airports, and rail that might serve as a damper on the near-shoring of this production going forward? Uh, yeah, for sure. I think that that's going to be the biggest challenge. I think it is a no-brainer for a lot of companies to relocate to Mexico, to be closer to home, to have a culture that is friendly, uh, but the challenge is going to be, is Mexico ready to receive the increase of direct investment and manufacturing plans? And that's going to be the challenge. So if the Mexican government steps up and creates this environment for people to start building now, I think the uh, the sky is going to be the limit. And any, you know, if Mexico is doing and is getting all this manufacturing despite the infrastructure.

challenges that may pose to some companies. If the Mexican government or the private industry in Mexico gets together and invests in water and infrastructure and roads and railroads, I think the sky is going to be the limit when it comes to near-shoring. Now, keep in mind too that the existing manufacturing plants are normally located in the US-Mexico border, not only from a supply chain perspective or strategic perspective, but also you have to go back to the original days of the maquila where it was only authorized in the US-Mexico border. The original maquila program was in the border, it was not in central Mexico. What has happened since then is now this tax benefit of bringing your products into Mexico, manufacturing, and shipping them back tax-free. Now this concept has been taken all over the country. So now if you're a company, you can decide whether you want to be in Mexico City or you want to be in Tijuana or you want to

be in s the whole country. Yeah, interesting. Yeah, yeah. Um, what's the labor picture in Mexico right now, car, in terms of manufacturing, in terms of labor availability and skills? I think that's part of why, in my mind, it made a lot of sense to expand this maila region, if you will, because now, if you go to places like kereto noon or montere or Mexico City, uh, you have a pretty, uh, vast, uh, labor resources in those areas that were no longer available in the border cities. Uh, so people are shifting towards the main cities where you can just get not just the workforce, the blue-blue color work, but also you can get, you know, the professional that are close to universities, the engineers, the, uh, uh, the IT workers. So, I think, uh, you know, labor plays a significant part of, of what the benefit of doing this near choring, and I think that there's, you know, so long as the labor laws stay, stay, I think the, uh, workforce is not going to be an issue if you can handpick where

you're going, and depending on your industry, you can go to k of your Aerospace, of your, uh, you can go if you're a different industry. Yeah, you mentioned security, uh, fairly or not. Mexico does have a reputation for violence and for security problems, not only around the plants but also for product and transit. Uh, what's the situation there? Yeah, I think, you know, that that's one of the challenges, right, to make sure that, um, not just the, uh, personnel of the companies that go back and forth between the US or in Mexico feel safe, but also the product and the transportation and everybody. And I think, you know, that's going to be, you know, up to the government to make sure that they crack down on, on crime and they protect the, um, the, the investors and the companies that are relocating into, into Mexico. So, if you ask me, that's probably, you know, that and the infrastructure are the two biggest issues, but I, I think they can definitely be easily overcome. Uh, you know, you have insecurity anywhere.

in the world. It's not just Mexico, uh, but I think, you know, the government can do a better job of, you know, making sure that everybody is feeling safe and protected. How about the outcome of Mexico's 2024 presidential election set for June 2nd? F economic policies and manufacturing activity in Mexico. Yeah, that's a good question, by the way. Not just Mexico, uh, as you know, we in the US, we're having elections in this year, so we are going to see two new presidents in the country. And, you know, like during campaigns, as you know, in politics, you know, most people kind of focus on the negative and the trade benefits, uh, in a way they take a backseat in the, uh, political discourse, right, in political debate. But, um, if you ask me, I think if anything is going to, after the campaigns are done, once the two presidents have settled, I think they're going to, both are going to recognize that huge potential of a complete integration when it comes to near Shan. Uh, the way I look at this near Shan is

now a complete integration of plans. Remember back in the day, it was just, I'm going to hire this third party, and this third party is going to manufacture these products for me. Then it became the shelter company, like, Oh, you know, I'm going to use this company, but I don't want to incorporate in Mexico, so I'm going to use this shelter arrangement where somebody else is going to hire the employees, lease the space, and I'm just going to go down and manufacture. And now, I've seen like an actual direct manufacturing or direct operations, and with the political climate between China and the US and the supply chain disruptions after COVID, I think both presidents, once they're settled, they will definitely recognize that the value is here in the region, and the more we can integrate this region, the better it's going to be for everyone on this continent. Carlos Sugich of Snell and Wilmer, I want to thank you so much for spending the time with me to kind of paint a picture of the situation with

regard to near-shoring in Mexico and the future prospects for Mexico as a manufacturing center as well. Thank you very much for being with me. Thank you, Robert. Appreciate the time.

What’s Fueling the Shift of Manufacturing to Mexico?

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What’s Fueling the Shift of Manufacturing to Mexico?

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