Nearshoring is becoming more attractive as United States medical device companies aim to shorten manufacturing processes to avoid supply chain and other issues linked to manufacturing in far-away locations, like China.
US companies have practiced nearshoring to Mexico for decades, however, there has been an uptick in interest in recent years, according to Douglas L. Donahue, co-managing partner, Entrada Group, which works with international suppliers establishing manufacturing footprints in Mexico.
While Mexico has long been strong in medical device manufacturing, according to Donahue, he’s seen two trends emerge over the last few years.
One is that companies are looking for a way out of China, with the objective of nearshoring. The other is a lot of the startup companies who used to go to China for subcontracting are instead establishing an operation directly or indirectly through a subcontractor in Mexico, according to Donahue.
And the reasons tend to be economic.
“It’s pretty simple. Under the Trump Administration and carried by the Biden Administration, there have been tariffs put on a number of different medical device products,” he said. “That’s number one. Number two is… the longer the supply chain is, the easier it is to fall apart. We saw [it] during the pandemic when we couldn’t get product out of China, while Mexico continued to produce with almost no reduction whatsoever.”
Nordson Medical, which is headquartered in Westlake, OH, designs, develops and manufactures complex medical devices and component technologies. The company announced the opening of its Tecate, Mexico, manufacturing facility in September 2022.
Nordson vice president David Zgonc told MD+DI that operating a medical device manufacturing facility in Tecate allows the company to achieve an improved cost position compared to other locations, “while at the same time providing access to skilled labor familiar with medical device assembly and the quality standards required by Nordson and the industry.”
“Nordson has a long history of operating and manufacturing in Mexico, so when we assessed expanding our operations to match our growth, we considered several options in both Mexico and other regions of the world,” Zgonc said. “Our decision to build our facility in Tecate was driven by several factors including labor availability to ensure that we could staff our facility as we continue to grow, skill level and experience of available labor and staff, and general logistical assessment.”
Tecate offers experienced engineering, management, and direct labor talent that has been part of the Tijuana and Tecate medical device manufacturing environment for many years, according to Zgonc.
“Additionally, the relative location to the US and our other operating facilities made sense from simplicity and cost of logistics standpoint,” he said. “The availability of lower cost labor in Tecate allows Nordson to manufacture at a lower cost position that we are then able to share with our customers to help get medical devices to the market at the best prices.”
Manufacturing in Mexico offers US companies the opportunity to shorten the supply chain at a reasonable cost, according to Donahue. “While [Mexico is] slightly more expensive than China, it’s not greatly more expensive than China,” he said.
However, companies must consider potential challenges when setting up manufacturing plants in Mexico. One is that unlike China, Mexico does not have free trade zones.
“Mexico has what is referred to as the IMMEX program. The IMMEX program allows you to establish anywhere in Mexico in manufacture for export and get all the benefits of a free trade zone—no value-added tax, no tariffs on your input,” Donahue said.
The problem is that freedom to set up anywhere in Mexico means that companies have to document every single thing that comes in and leaves.
“It is a huge amount of work,” Donahue said. “[Mexico is] an extraordinarily bureaucratic country,” he said.
Additionally, security throughout Mexico is an ongoing problem.
“… the Economist Intelligence Unit classifies Mexico as an undemocratic ‘hybrid-regime’ rather than a full democracy. Mexico currently sits among the worst countries in the world in terms of corruption and institutional frailty. Violent crime in Mexico is at an all-time-high,” according to an article from Forbes.
According to Donahue, many people don’t know that the crime in Mexico is largely “bad guys on bad guys,” with narco-traffickers competing for territories and it does not tend to spill out into communities of law-abiding residents.
Another concern for businesses in Mexico is the current Federal administration under President Andres Manuel Lopez Obrador, who tends to be tough on business and more worker friendly.
“Under this administration we have seen increased unionization activity and increases in the minimum wage year in and year out which have been much more substantial than in other administrations. It has affected the pay scale all the way through. And this administration’s taxation policy is more focused on getting means to the lower income classes of Mexico than in supporting economic growth through supporting businesses,” Donahue said.
Donahue advised US manufacturers to consider nearshoring in select Mexican locations, suggesting looking at Mexico in the same way as the US — in regions.
Monterrey and Saltillo, in Mexico, are like the Midwest, US, and have a long history of industrialization, he noted. Those areas have a strong and experienced manufacturing workforce but are expensive and well developed.
Central Mexico (El Bajío) is more like the Southeast, US, according to Donahue. Central Mexico got a later start in manufacturing for international businesses and is becoming more expensive but remains more cost-effective than Monterrey and Saltillo.
“Then you have Northwest Mexico, which you might has well call California — a lot of the industries that come from California are there. It has a lot of aerospace and medical device [companies],” Donahue said. “South of Mexico City is really cheap but there has never been any industrialization there. It’ll be interesting to see what happens.”
Donahue recommends smaller companies avoid the Monterrey area, where they will likely compete with the likes of Tesla for labor. Entrada, which specializes in privately held mid-market companies, goes to secondary markets where the labor is more available.
Of all the considerations when deciding to nearshore, he noted, the number one business problem manufacturers face, particularly in the medical device industry, is maximizing potential gains from doing so.
“You’ve got to source the input for that [product] as much as possible,” Donahue told MD+DI. “You’ll never get 100% but [should aim for] as much as possible in the North American region to leverage those gains. That’s the number one thing: get your supply chain right because if you don’t… all of the savings you thought you [would be] getting by producing in Mexico you will lose.”