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Advantages of Nearshoring in Mexico - A Cost-Effective Alternative to Asia

March 28, 2023

The integration of commercial trade within North America is moving forward, and companies are looking to take advantage of the benefits that Mexico has to offer. With the rise in labor and transportation costs in China, ongoing trade wars, the war in Ukraine and growing concerns over resiliency, many supply chains have been disrupted. As a result, nearshoring has emerged as a preferred alternative and Mexico has become a focal point for global companies. This is especially true for U.S. companies, given Mexico’s strategic location, lower costs, skilled labor force, infrastructure, wide range of free trade agreements and strong economic outlook.

As of today, Mexico is the United States’ second largest trading partner in goods. In 2022, the two countries’ bilateral trade of goods was US$779.3 billion, an increase of 15.21% from 2021, making Mexico United States’ second largest export market. Foreign direct investment (FDI) in Mexico increased 12% in 2022 to US$35.29 billion, and the United States continues to be Mexico’s top source of FDI, contributing 42.5% of all inflows to Mexico.

Main Advantages of Nearshoring in Mexico

Mexico's strategic location allows for easy access to the U.S. market and industry, offering an unrivaled competitive advantage in the global market through its ability to leverage advanced U.S. technology with a skilled and cost-effective Mexican workforce and technical staff. The country shares a 1,954-mile land border with the United States, which is a key market for many international businesses. This means that companies can take advantage of the close proximity to their clients in the United States, which can help reduce shipping times and costs.

With its proximity to the United States, nearshoring in Mexico allows for shorter lead times for product delivery, which can result in cost savings and increased customer satisfaction. Moreover, Mexico's proximity to the United States provides certain advantages over inbound freight from China, with fewer touchpoints, less complexity, and reduced risks. Also, by establishing operations in Mexico, U.S. companies can shorten their supply chain and foster closer communication with plant management. 

Mexico's labor costs are generally lower than those in the United States, making it an attractive option for businesses looking to reduce their operating costs. The minimum wage in Mexico is currently around US$1.50 per hour, which is lower than in many other countries, and in 2020 the average manufacturing labor cost in Mexico was US$4.80 per hour, compared to US$6.50 per hour in China.

With a highly educated and motivated workforce that possesses a wide range of industry-specific knowledge, from manufacturing and engineering to accounting and finance, companies can achieve cost savings without compromising productivity or quality. Further, establishing manufacturing operations in Mexico provides the added benefit of retaining U.S. personnel in key areas, including administration, research and development, warehousing and product finishing. 

Another advantage of establishing business operations in Mexico is the ability to effectively own, manage and control a Mexican entity and its operations. This includes the right to acquire ownership of land and buildings for industrial operations in both the border zone and throughout the rest of the country. This allows companies to have a greater degree of control over their operations and assets, and to obtain financing in Mexico.

Mexico boasts a well-established transportation and logistics infrastructure, which facilitates business activities by simplifying the transportation of goods and materials to and from the country. In addition, streamlined customs clearance procedures between the United States and Mexico further enhance the convenience and speed of cross-border trade. These advantages can be particularly valuable to companies that need to move large volumes of goods with efficiency and reliability. As an example, transporting goods from Mexico to New York can take about 6 – 12 days while going from Shanghai to New York can take about 35 days. Mexico to Los Angeles is 4 days where Shanghai to Los Angeles is 22 – 26 days.

While Mexican roads have undergone significant improvement over the past few decades, certain areas still face limited improved roads and bridges, and security concerns persist in certain regions. Railways offer a slower but somewhat more reliable transportation option to the border, with ongoing infrastructure plans set to make significant improvements in rail infrastructure to benefit North American manufacturers and distributors.

Mexico has one of the broadest networks of free trade agreements in the world, affording businesses hailing from Europe, Latin America and Asia the opportunity to export goods to the U.S. and Canadian markets, thereby enjoying the many benefits of the United States-Mexico-Canada Agreement (USMCA), NAFTA's successor.

Mexico currently enjoys a unique opportunity, making it a compelling option for companies seeking to nearshore their operations to stay competitive in the global market. For international companies, especially U.S. companies, looking to nearshore their businesses, Mexico may be an attractive option based on its strategic location, low costs, skilled labor force, robust logistics infrastructure, wide range of free trade agreements and positive economic outlook. By understanding the applicable legal considerations and taking advantage of the benefits that Mexico has to offer, international businesses can stay competitive in the global market.

International Trade and Customs

Preparing a Mexican Company for Legal Due Diligence in Cross-Border or International Transactions

March 22, 2023

In general, it is common for the legal due diligence of a Mexican company’s operations in cross-border or international transactions to cover the period up to the time a potential buyer requests information from the company. Such situation may or can result in a delay of the sale, reduction of the price, withholding of the price until the seller meets certain conditions or, potentially, express exclusions in the insurance policies used for the purchase of the business.

In most cases, preparing the Mexican operation for a legal due diligence is convenient and profitable. Such preparation may result not only in the reduction of time and expenses for the implementation of the sale, but also in the maximization of the purchase price and the value received by each party. In the end, the main purpose of preparing the operation for a legal due diligence is to identify potential issues before the business is put up for sale and to find solutions or actions that mitigate such, which in any form will be helpful for purposes of making proper disclosures in the purchase and sale documents. Moreover, this preparation can generate value to the business itself, as it will allow the seller to understand the status of the business at a deeper level.

That being said, some of the suggestions one should consider in these types of transactions include the following:

1. Timing and efforts. The suggestion is: (i) appointing one or two individuals or an internal team of the company who knows the Mexico operation at a deeper level. In more detail, the suggestion is that the team has members that are based at or have worked at Mexico; (ii) assign sufficient authority to obtain and organize company information, and (iii) carry out these efforts three to six months in advance to the potential sale.

2. Include an external legal counsel in advance. Many times, one may think that including an external legal counsel ahead of the sale can be costly or redundant. However, such inclusion can result in relevant savings and the involvement tends to be minor. Such means that if the company already has a local team with a certain degree of experience and knowledge regarding the company’s operations, the involvement of external legal counsel tends to be reduced significantly. Further, legal counsel should focus only on providing guidance to the local team on those items that are most relevant, such as: (i) who is the potential buyer; (ii) what type of questions or documents the potential buyer may do or request; (iii) what areas of the operation in Mexico are most sensitive for legal purposes, such depending on the industry, products and services, and type of business model, and (iv) how to organize the information that the potential buyer may request?

3. Planning around key areas of the legal due diligence. It is suggested to review what areas are key or most relevant for a legal due diligence depending on the operation. An external legal counsel would be able to guide the parties on which areas are most important, and provide extensive checklists of information and documents. Typically, the key areas that are most relevant in Mexico, and the related questions, include:

a. Corporate. Where are the corporate documents of the Mexican operation located (public instruments, shareholders and management resolutions, corporate books, etc.), and are such up to date?

b. Labor and Social Security. Is there a list of all the employees and their benefits? Are those employment relations properly documented, and documents are available? Is there a list of specialized service providers?

c. Material agreements. Is there a list of contracts and purchase orders with customers and suppliers in Mexico? Does the company have documents to support those relations? What precautions need to be taken regarding confidentiality or restrictions on the potential sale of the business?

d. Compliance and foreign trade. Does the company have proper evidence related to the purchase or importation of all the assets into Mexico? What are the licenses, programs, permits and authorizations used for the Mexican operation? Which ones can represent a  potential advantage against competitors?

e. Real estate, and machinery and equipment. Is there a list of real estate owned, leased or used for the Mexican operation, as well as the documents to support such, either property titles, lease or bailment agreements, among others? Is there a list of machinery and equipment, as well as the documents evidencing its ownership, use and possession?

f. Tax. Are there any active (or potential) audits and what is the status of such? Does the Mexican operation have an existing tax and accounting advisor who has the experience on how to sell a business?

g. Litigation. Is there a list of active and past litigation matters and a report as to their status?

4. Mini-audit. With the assistance of a specialized external legal consultant, it is suggested to consider the option of carrying out mini audits with regard to certain areas of the business or the operation in general for those situations where there are substantial legal issues or a lack of legal documentation. Even when this could be seen as a costly practice, the remediation efforts will be seen very positively by potential buyers and their advisors. Such practice could also result in the maximization of the purchase price and the mitigation of risks related to the sale of the business.

5. Searches. On the other hand, it is advisable to carry out research in the different public registries in Mexico, as well as different databases owned by private service providers. Such practice will give a good idea of the type of information that the potential buyers could find related to the operation.

6. Virtual Data Room. It is advisable that an external legal advisor provide guidance on how the documents should be organized for a legal due diligence, including how the files, sub-files, and documents should be named. This will reduce the time needed for review by the potential buyers and their advisors, which can result in recued times for the implementation of the sale.

In any case, consulting a Mexican attorney specialized in mergers and acquisitions on how to prepare an operation for legal due diligence can yield many benefits. In the majority of the cases such consultation could increase the purchase price and reduce the time needed to implement the sale. Also, if the sale does not take place, in most cases the due diligence review will result in a more efficient exit for the company as it will be better positioned against its competitors.

Mergers and Acquisitions