As a result of China's COVID-19 restrictions, semiconductor shortages and the global supply chain crisis, Santamarina + Steta has received multiple requests from U.S. and Canadian companies to provide legal advice and support on how to establish new manufacturing facilities in Mexico and even relocate manufacturing activities from China and Southeast Asia to Mexico.
Despite the many advantages of relocating to Mexico, such as preferential tariffs under T-MEC, lower labor costs and the undeniable proximity to the United States and Canada, moving from one side of the world to the other can be more complex than expected.
From a strictly real estate perspective, and in addition to any assessment related to areas such as security, skilled labor and tax strategies, in this article we have attempted to identify the main real estate issues to consider when relocating manufacturing activities to Mexico:
Geography of North America. THE U.S., CANADA AND MEXICO HAVE COASTLINES ON BOTH THE ATLANTIC AND PACIFIC OCEANS. The U.S., Canada and Mexico have coastlines on both the Atlantic and Pacific Oceans and the U.S.-Mexico border extends from coast to coast. However, the decision on where to locate a manufacturing plant in Mexico should be influenced by the market or region that the plant will serve.
For example, while locating a manufacturing plant in Ciudad Juarez, Chihuahua, may be a good idea for supplying goods to Texas, there may be better options for exporting to other countries. In the same vein, while moving to Tijuana or Mexicali would be the best option for supplying the California/Arizona markets, there may be better alternatives for supplying goods to the northeastern U.S./Canada or Europe. Also, the Yucatan Peninsula has become one of the main destinations chosen by multinationals due to its proximity to Florida.
Availability of real estate. Since the beginning of the phenomenon nearshoring, it has become apparent that, although Mexico has world-class industrial parks along the U.S.-Mexico border and in other industrial cities, Mexico was not prepared to receive the surge of new companies interested in establishing facilities closer to the U.S. and Canada.
Fortunately, land in northern Mexico is not extremely limited and real estate developers have the capacity to serve new customers. However, this would normally mean that new companies would have to wait for real estate developers to build new industrial facilities or would have to invest additional resources to acquire and build their own facilities in Mexico.
To accelerate this process, many of our customers have opted to enter into a "custom construction" (“built-to-suit agreements”) with Mexican companies.
Infrastructure and transportation.While there are significant tracts of land to be developed in Mexico, it is important that the chosen location is well connected by roads, railroads or nearby ports to simplify logistics and reduce transportation costs and risks.
Availability of water and services. An additional issue that our clients have considered has been whether the desired location has the capacity to provide them with the necessary services and resources for their processes.
For example, since industrial activities may have a high demand for water, it is crucial to locate new facilities in areas where there is sufficient capacity to support water exploitation by new companies, without being overexploited. The former, as overexploited aquifers, are often subject to prohibitions on the issuance of new water concessions. Hence, water supply could be more costly. In this sense, while the north of Mexico has extreme drought problems, other regions have enough water to meet the needs of new actors.
Another issue under consideration is the capacity of the electrical grid in the area and the existence of Natural Gas/LPG pipelines in the area.
Incentives and permits. When deciding on the location of a new facility, it is relevant to consider whether the Federal and State governments offer incentives for the investment to be made, as well as the permits, licenses and authorizations required to start operations of the manufacturing facilities and to keep them in good standing.
Relocation to Mexico has proven to be a viable and cost-effective option for many companies. However, a thorough assessment of how, where and when to relocate is essential.