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Manufacturers trying to leave China increasingly view Mexico as an attractive base of operations to serve the North American market. Pulling out of China the wrong way, however, can have serious consequences.

Geoff Giordano

February 24, 2023

5 Min Read
broken chain with Chinese symbols
summerphotos/iStock via Getty Images

Reshoring operations from China back to North America doesn’t always mean coming to the United States, according to experts spotting recent trends. And, even China is taking part in the latest wave of manufacturing relocation.

Everyone — including Chinese manufacturers — is “looking to diversify away from China,” asserted Raine Mahdi, CEO and founder of manufacturing sourcing platform Zipfox. “Walmart used to insist that any potential vendors they considered [had to] produce their goods in China. Now, they will not consider new vendors who don't have at least one supplier outside of China.

“This shift is why the list of Chinese companies moving operations to Mexico is growing by the day. They understand that US buyers are keenly focused on diversifying their supply — and they're even willing to pay a bit more to do so. If you're looking to skate where the puck is going, that's where it's headed.”

For plastics manufacturers or buyers, any potential downsides to sourcing from Mexico “are few, and reasonably overcome,” Mahdi explained.

“Establishing a partnership with a reliable factory to produce molds is key, as they are not as prevalent in Mexico as they are in China. The culture of innovation and problem solving is not as strong in Mexico — yet — as it is in China. This will evolve in time, especially as incoming Chinese companies and executives make an impact on Mexico's business culture.”

The increased flow of goods northward from Mexico via Laredo, TX, is a clear indication of the value manufacturers are placing on sourcing from south of the border, he added.

“If you visit Laredo now, you will see new warehouses under construction everywhere, as companies expand to handle the increased volume of goods. This trend began during the pandemic and has not stopped. Last year, Mexico exported about 20% more to the United States than in 2021. If that becomes a pattern, even in the short run, Mexico will become the number one supplier to the United States. It is already our number one trading partner because the flow of goods is bilateral, whereas with China it mostly flows one way.”

The pitfalls of leaving China the wrong way

To be clear, there are certain downsides to leaving China that experts Dan Harris and Andrew Hupert of the international law firm Harris Bricken detailed in a Feb. 23 webinar titled, “Moving Your Manufacturing from China to Mexico.”

Chief among those dangers is the very real possibility of losing access to your company’s assets and intellectual property (IP) if you announce plans to leave China before moving all molds, tooling, and personnel out of the country, Harris cautioned.

“I’m here to dispel the notion that leaving China involves basically pushing a button — it’s a lot more than that. There are risks involved in leaving China. To quote one of my clients: ‘Hell hath no fury like a Chinese factory spurned.’”

Having watched many companies leave China, Harris continued, he noted the distinct differences between leaving the right way and the wrong way. “Those who leave the wrong way oftentimes experience major problems. News of your departure will set off a scramble for your assets — your money, your IP, whatever is still in China. Your friends in China, your factories, the government — they don’t need to be nice to you any longer, and they probably won’t be. I’m not saying that all of them won’t be, I’m not saying that problems always happen — but I am saying that they happen a lot.”

Harris, therefore, advises clients to:

  • Not let anyone know you are leaving China until you are out. Advise former partners once your company has relocated.

  • Resolve any contractual loose ends, potential owed fees, taxes, etc., prior to relocating operations, and make sure you have contracts and registrations in place.

  • Register all relevant patents and trademarks to prevent Chinese manufacturers from registering them and creating products using your IP.

“One of the things we do for clients leaving is [to] audit their IP situation. We get the registrations in place so no one else can.” To protect things like molds and tooling, “we draft (good) contracts (and) we get the manufacturer to sign.”

Hostage situations are another nightmare scenario, Harris warned.

“We used to write about Chinese hostage situations all the time, because even our small law firm . . . would deal with probably one hostage situation in China every month. Whenever we would write about it, people would get angry . . . because they did not want their home offices to know that China was not as safe as they were making it out to be.”

What to expect in Mexico

Unsurprisingly, the business climate in Mexico is not a carbon copy of China’s, asserted Hupert, China/Mexico supply chain expert for Harris Bricken.

“Mexico isn’t set up for every type of international company operating in China right now,” he noted. “In Mexico, you will be expected to own your factory” or facility.

Not only is the 2,000-mile land border between the United States and Mexico a clear advantage, he added, but manufacturing managers and employees in Mexico tend to view themselves as more closely aligned partners with US-based companies or international companies with US operations. They “feel that they are on the same team.”

The culture of contract manufacturing isn’t quite as established in Mexico, Harris added, “but I think over time we’ll see more of it.”

While China enjoys a tremendously integrated horizontal network, Mexico isn’t integrated in that fashion yet, said Hupert. Chinese businesses tend to know “a little bit about everyone else’s business . . . in Mexico that is not so; people don’t share their network the same way.”

Ultimately, setting up manufacturing in Mexico will require careful negotiation of each relationship “quite intently. This is more of a partnership than a set of transactions like they are in China, and you are the point person. Even if you use someone else, you are going to have to eventually negotiate face to face with that manufacturing manager in Mexico — and he’s going to be making judgments about you as a person, not just about your project,” said Hupert.

Mahdi concurred about the distinct cultural differences. “When moving operations to Mexico, your new potential supplier may need information/molds you’re unable to provide. In terms of setting up a manufacturing facility, it depends on the industry and location. It would probably have something to do with staffing and adjusting to the business culture, which is much different in Mexico than in China,” said Mahdi.

About the Author(s)

Geoff Giordano

Geoff Giordano is a tech journalist with more than 30 years’ experience in all facets of publishing. He has reported extensively on the gamut of plastics manufacturing technologies and issues, including 3D printing materials and methods; injection, blow, micro and rotomolding; additives, colorants and nanomodifiers; blown and cast films; packaging; thermoforming; tooling; ancillary equipment; and the circular economy. Contact him at [email protected].

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