Now, more than ever, Mexico’s manufacturing industry is drawing attention from global experts. In part, one could think this was to be expected. After all, Mexico is currently the 14th largest economy in the world and a powerhouse for global trade, exporting over 474 billion USD of goods in 2021 alone. Moreso in the world of manufacturing, where companies have invested millions of dollars to set up shop in Mexico accessing large industrial facilities, a network of existing trade agreements, and relatively low labor costs. The sector is of such prominence that, in 2022 alone, it accounted for 36% of all Foreign Direct Investment (FDI) to the country (roughly 12.7 billion USD). 

But Mexico’s manufacturing industry is now the center of attention for a different reason besides its already prominent size. As the United States has sought to regionalize supply chains, it has set eyes on its southern neighbor—a process commonly known as "nearshoring." Given their close proximity, and ongoing disputes with China,  Mexico is now a natural choice to relocate complex supply chains, even surpassing China in recent months as the United States’ largest trade partner. In turn, manufacturing in the country has increased significantly, from contributing 17.4% of GPD in 2020 to 18.8% in 2021—a number that might seem small until one recalls Mexico’s economy is roughly worth 1 trillion USD. 

For all the above, Mexico’s future seems to be deeply tied to manufacturing, making it crucial to fully understand the state of this sector and its core components.

Share of Mexico’s GDP from Manufacturing

(Data from Statista)

Mexican Manufacturing: From Protectionism to Maquiladoras

The rise of Mexico as a manufacturing hub is not a recent phenomenon. On the contrary. It has deep roots in the country’s past.

Mexico’s relationship with manufacturing goes as far back as the mid-19th century, when Esteban de Antuño, a leading businessman, opened the country’s first mechanized factory in Puebla. However, the sector would only explode after the Mexican revolution came to an end in 1921 and the country’s leadership sought to push the economy forward. The shift in priorities became prominent when President Lázaro Cárdenas, hoping to industrialize the country, began an aggressive policy to develop an internal industry. His policies, now referred to as Import Substitution Industrialization (ISI), required an active participation of the Mexican government, which would foster the development of local industries by imposing high tariffs on foreign goods. Thus, Mexicans had to produce most of their products in house, and, as a result, establish an early form of industrialized manufacturing.

Eventually, ISI proved to be an inefficient means to power the Mexican economy on its own and nowhere was this clearer than in the northern border. Given its proximity to the United States, Mexico’s northern states had always been dependent on the economy of their close neighbor. So, in an effort to counter this influence and develop local economies, the Mexican government developed the National Border Program (PRONAF) which offered tax subsidies on Mexican products across the border and invested in key areas of interest such as tourism and the development of shopping centers. Yet none of these efforts proved to be successful in creating a self-sustaining economy and would soon be met with an even larger opportunity.

In 1965, Mexico was faced with a unique scenario. For years, the country had exported workers to the United States through the Bracero Program—an agreement that allowed millions of Mexicans to enter the country temporarily to cover for missing production during WWII. As the Bracero Program came to an end in 1965, Mexico sought to create labor opportunities for the millions that were soon to return. Amongst the ideas of the time came the first attempt to open Mexico’s economy and take advantage of growing demand in the United States: the Border Industrialization Program (BIP)—later expanded into a whole category of companies called under the name Manufacturing, Maquiladora, and Export Services Industry (IMMEX). At its core, the BIP (and the later IMMEX) sought to lure North American manufacturing companies (specifically, those from the U.S.) to set up shop in Mexico’s northern states, creating large factories to assemble goods and later ship them once more across the border. Companies which engaged in this practice would temporarily become exempt from paying import taxes for the inputs they employed in manufacturing a final good as long as it was later exported upon conclusion. These factories came to be known as “Maquiladoras” and opened a new era of Mexican manufacturing. In 1987—little over 20 years after BIP was established—Mexico had over 700 maquiladoras. By  2020, the number had grown to 6,313 companies benefitting from Maquiladora status.

By the turn of the century, Mexico would further its bets on foreign manufacturing through the North American Free Trade Agreement (NAFTA), which significantly increased trade with the United States and Canada, while encouraging the arrival of new factories from North American manufacturing companies and increasing the number of manufacturing jobs, by some accounts, to as much as 32.8%. While much can be said of NAFTA’s success, it is difficult to deny its impact on manufacturing. Before the treaty was established, Mexico’s manufacturing sector contributed roughly 280 billion MXN to the economy. Now, nearly 30 years after its establishment, the sector contributes 5.48 trillion MXN (roughly a 19-fold increase). Once could even say the treaty was crucial in creating an integrated ecosystem for North American manufacturing companies.

Mexico’s Quarterly GDP from Manufacturing

(Data from Mexico's Secretary of Economics)

Is It Cheaper to Manufacture in Mexico?

Compared to manufacturing in the United States—and most recently, in China—Mexico certainly proves to be a meaningful alternative with lower costs. On the one hand, the country has a strategic location to supply the booming market of the United States, with over 1,900 miles of shared border. As a result, transportation times from Mexico to the US (ranging from 1 to 4 days) are significantly lower than those from China (roughly 26 days). So, if we consider that China and South East Asia in general have been prominent  offshoring locations for western countries, we can already see an initial advantage of Mexican manufacturing.

But even excluding transportation costs from Asia, Mexico still offers significant savings in the form of lower labor costs. If we look at a time series of average hourly wages in manufacturing, we will notice that Mexico is an extremely attractive alternative. Compared to the U.S., hourly wages are nearly six times lower in Mexico—and still, two USD lower than those in China. Thus, by placing a factory in the country, a company could experience significant savings from labor costs alone (not to mention the added benefits from existing trade deals and the Maquiladora system we turn to in the next section).

Hourly Manufacturing Wages in the US, Mexico, and China (2016-2020)

(Data from St. Louis Fed and Statista)

Is Mexico a Good Place for Manufacturing?

Most data suggests that Mexico is, indeed, a great alternative for the manufacturing industry. This is because of at least three reasons: (1) the existing program for IMMEX companies, (2) a plethora of trade deals, and (3) a highly skilled labor force. These, put together, help understand why a number of countries have spent millions of dollars investing in Mexico. While the U.S. remains the largest investor, providing 56.64% of FDI, other countries such as Canada (10.21%), Argentina (6.41%), and Japan (6%) have brought in meaningful amounts of investment. And, not to mention, the growing amount of Chinese investors in recent years, going from 55,7 million USD in FDI during 2015, to a peak of 611 million USD in 2021.

FDI to Mexico by Country of Origin

(Data from Statista)

Chinese FDI to Mexico

(Data from Mexican Secretary of Economics)

But let us look at each of the three components in turn. To start, and perhaps most noticeably, Mexico’s current legislation around IMMEX companies—a clear descendant of the Maquiladora system—allows manufacturing companies to open factories in the country with relative ease and many advantages. As long as the company’s products are meant for exports, it will be subject to prominent tax exemptions. Amongst them is the possibility to avoid import taxes on raw materials as well as Mexico’s Value Added Tax on services provided. For the case of the United States, this means that a company can open a factory in a country with lower labor tax burdens than if it were to look at other countries—not to mention the lower labor and transportation costs previously mentioned.

But IMMEX is just one area of opportunity when it comes to Mexican legislation. The country also has 12 free trade agreements with other countries, which allows companies to further export their products without incurring significant import fees. Amongst them is also the USMCA, which could further lower tax burdens for North American manufacturing companies or even provide benefits for particular industries. Put together, Mexico's free trade agreements prove to be a meaningful added value to companies seeking a location to offshore a segment of their manufacturing.

Most importantly, however, for a sector such as manufacturing is the fact that Mexico has a highly skilled workforce. In fact, the country is capable of competing not just with developing economies, but also with the developed world. OECD data shows that, year to year, Mexico produces nearly 221 thousand STEM graduates, equivalent to 26% of all students receiving a degree, putting it above the U.S. and Japan. This number has also been growing in recent years as other countries in the region, such as Brazil, have faced stagnation. While the country produces nearly 221 thousand engineers today, in 2015 the number was just 171 thousand STEM students—an increase of 50 thousand graduates a year.

Percentage of Yearly STEM Graduates in a Graduating Class by Country

(Data from the Center for Security and Emerging Technology)

What Does Mexico Manufacture the Most?

While it is difficult to know the exact number of all goods produced in Mexico, we do have very accurate data on the country’s key exports. Since such a significant portion of the country’s GDP comes from its exports—currently valued at 41.1% of GDP—we can use trade as a proxy for the results of the manufacturing sector. 

Looking at Mexico’s exports we directly notice the prominence of manufacturing. The country’s top export category, as of 2021, was that of cars and other vehicles, ie, automotive manufacturing (equivalent to 23.4% of all exports), followed by electrical machinery (18.7%), mechanical machinery (17.5%), and optical, film, and medical equipment (5.44%). Put together, these four sectors deeply tied to manufacturing, are equivalent to 65.04% of the country’s entire exports.

Mexican Exports by Sector (2021)

(Data from the Observatory of Economic Complexity)

If we wish to further break down trade into categories, whole cars are the leading source of exports (equivalent to 8.76% of all exports) followed by car parts and accessories (6.49%), computers (6.39%), and delivery trucks (5.72%). Once again, automotive manufacturing is dominant. Other advanced manufacturing products produced by the country include video displays (3.34%), and medical instruments (2.58%). But, overall, there is a key tendency towards manufacturing

The main destination for these products, overwhelmingly, is the United States which has consistently ranked as Mexico’s top export destination. As of 2022, 78.3% of the nation’s exports were all destined to its northern neighbor. To put this into perspective, the second place in terms of exports is Canada, representing 2.7% of Mexican exports, followed by China with 1.9%.

Main Destinations of Mexican Exports (2022)

(Data from Santander)

Benefits of Mexican Manufacturing

In summary, Mexico is already a powerhouse in the world of manufacturing and is set to become an even larger force given the current interest of the United States to relocate supply chains away from China. The country offers lower labor costs than western nations—and even compared to key competitors such as China—, combined with prominent tax benefits for the manufacturing industry, not to mention the abundance of Mexico's free trade agreements that make exporting to the entire world a relatively simple endeavor. The above, paired with a highly skilled workforce and prominent investment of foreign companies proves international interest in Mexico’s well established manufacturing sector.