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Ecommerce on Tap is a world where Supply Chain meets storytelling. Join Aaron Alpeter each week as they offer insights into the backend of successful businesses. Brought to you by Sourcify and Izba Consulting!
Javier Zarazua (00:00)
there is no way nice way to put this, but in the US the compliance whether it's trade or taxes is based on trust. You know, the government is trusting that you will do the right thing. In Mexico it's the opposite. the the compliance for trade and taxes is Mexico distrust and so there is a lot of red tape and a lot of compliance around it.
Aaron Alpeter (00:27)
Hey everybody, welcome back to e-commerce on tap. I'm your host, Aaron Alpeter. Maybe you're driving, maybe you're somewhere in the middle of a workout, or maybe you've got headphones in pretending to do work. Wherever you are, thank you for spending part of your day with us. if you're new here, each season we pick a subject and we go deep. we talk about the history, the supply chain, the vocabulary, the companies that are really shaping what's going on in in that industry. this season we're gonna do things a little bit different. if you are a longtime listener, you know that we've dove into things like footwear.
fragrance, jewelry, supplements, etc. And those are all product categories and they were really important. But what what we wanted to do this season was
to focus on a country. And this season we're gonna focus on Mexico. And we're doing it for one specific reason. If if you're somebody who is sitting with a real live decision thinking about hey how do I near shore, you know, what's it look like to produce a Mexico, this season is really written with with you in mind. And so as we're thinking
about
Kicking off a deep dive into Mexico. I've had to bring on somebody who I have looked up to and have been arguing with about Nearshoring for a long time. And so
I want to introduce Javier Zarazua who is the managing director of JL Nearshoring Mexico. He was the country manager for Mexico at CSCMP, the main professional body of supply chain. He's also the president of the Association of Manufacturing Excellence for the Mexico region.
And the thing that's really interesting about this is that for 25 years before doing all that, he was helping to build the Latin American supply chain for Caterpillar. He ran materials for automotive seating, he did lots of other stuff there. And so he's not somebody who picked up Mexico as a hobby. he's Mr. Nearshore. He's somebody who is born and raised and has done everything you could possibly do from a manufacturing point of view.
And so we talk about procurement and tariffs on a pretty regular basis. And this episode is really just meant to be really one of those conversations just with a microphone in front of it this time. And so Javi, first up, thank you so much for joining e-commerce on tap.
Javier Zarazua (02:29)
Absolutely. Aaron, thank you for having me. Appreciate the invitation and definitely I've enjoyed all those conversations we have had about nearshoring and and particularly Mexico. So twenty-five years in manufacturing and supply chain for manufacturing. that's my expertise if you will. I've worked in automotive heavy machinery and and
remanufacturing industry, which is quite different from regular regular manufacturing. It's a lot more challenging but it's a lot a lot more fun. I started with Caterpillar almost 20 years then I worked for a a couple of companies here in Saltillo area.
And then I I decided to get on my own about nine years ago and I started helping companies moving operations, manufacturing operations to Mexico. Or we helped them develop supply chains for them in Mexico for their products. Aaron, happy to be here and thank you for having me.
Aaron Alpeter (03:29)
Yeah, there there's really nobody I want to you were my first and second choice for the co-host for this episode. So thank you for coming on. I I think you know so
Javier Zarazua (03:34)
So that's
Aaron Alpeter (03:36)
many people are interested in the concept of near shoring. And here's somebody who has been doing it before it became more in vogue with with all the recent tariff incidents. So so thank you for being here and and thank you, listeners, for being part of this. if you haven't already subscribed, we encourage you to do that. You can push all the buttons in your wherever you are. And before we get into it, Javier, we have a
traditional e-commerce on tap that we like to start off with a tidbit. And so is there anything that stuck out to you in the last week or so that that you want to share with the audience?
Javier Zarazua (04:09)
Yeah. You know it was it was surprising. I I I came across this post in X Aaron that says
the US trade trade organization, they did a study what would happen if China lost their permanent normal trade relationship with the United States. the study says that Mexico would be the biggest beneficiary by a long shot.
And so I started digging into it. it turns out that the the the appropriations committee ordered that study last year
Aaron is just not the you know the the usual Trump making a statement. This is a formal study. so you know we gotta take it seriously. That that one surprised me. if that was to happen, you know, in reality China is losing a lot of commerce. So I it it wouldn't but it would not be unthinkable, you know, that that that that happened.
Aaron Alpeter (05:05)
That is
such a perfect kind of layup into the season, what we're looking about in digging into. And I think for me that the tidbit that I had was also trade related. And it is the Canadian trade war, which is something that I would not have expected to say even a year ago. but 50% retaliatory tariffs went into effect on September 8th. And what's really interesting about these tariffs is that they are very targeted. And so if you look at
the commodities and and the elements that they are pushing back against, they are all coming from swing states and and swing states that have competitive Senate or House races. And so it it is very interesting that Canada chose this time with a couple of months before the midterm elections and and chose to inflict this amount of of supposed pain at at this you know where where we're right now so
I think it just one speaks to kind of how thoughtful the Carney administration
Javier Zarazua (06:04)
Maybe.
Aaron Alpeter (06:04)
has been where they said if we're gonna take a stand, this is the time to do it. but what's been really interesting to me has been the reaction of of Canadians, both people who've you know been publishing stuff online as well as some of my friends who have reached out to. And for the most part, this is something that's bringing the country together. And they understand this is gonna be painful, they understand that this is this is gonna be impacting a lot of people, but
they they kind of feel like they're fighting for their sovereignty. And so this is an interesting piece where I think if you were to ask Americans, there's certainly you ask three people, you get three different answers of is this something we should be doing or worthwhile and you know it is it is galvanizing for the Canadian populace, which is pretty interesting.
Javier Zarazua (06:46)
Hmm. Well if that was to happen in Mexico, trust me, Mexicans will not come together with the government. I can almost assure you that, Aaron.
Aaron Alpeter (06:54)
Really?
Javier Zarazua (06:55)
Yeah, very, very dependent. and it will create a a nightmare for the government, I I I think.
Aaron Alpeter (07:05)
Yeah, it it's
really interesting because Canada also has a large dependency on the US economy. And it's interesting to see how both countries are taking a a different tact. Canada is is certainly saying that we we'd like the ability to still work together, but also to chart our own path. it feels like Mexico is is more in lines of like, hey, whatever we need to do, let's just make sure we're on on the side of the US. Would you agree with that?
Javier Zarazua (07:29)
Yep, yep, that is exactly the at least the the public display of how the government is conducting the the negotiations.
Aaron Alpeter (07:39)
That's so much. Why do you think there is that dichotomy between, you know, two partners in Kuzma.
Javier Zarazua (07:45)
we're getting ready to do a a C S C P panel during the conference and we're gonna have somebody from Canada, professor from Canada and somebody from Mexico and I'm gonna be moderating and we were talking about this very topic, Aaron and one of the questions actually the theme of the panel is integration. North America integration and I so I told the professor this morning says, Gene
we may not have integration after after today, man. a radical approach. I I wanna go into the cultural side, Aaron. this it's this could be something dumb, but I read an article that said Canadians were expecting to be treated as a sequel and and they're they're not and and now they're upset about it. And Mexicans we we understand that our dependence
on the trade is so big that you know the pride is is is really we we don't we don't care about that in in and canada is is betting in what you're saying, you know, the betting on the pride, which is actually happening. in Mexico we care more about economics because it would put a lot of pain in the Mexican economy.
if if something like that was to be replicated.
Aaron Alpeter (08:59)
That's so interesting. And I I can't wait to to dig into this a little bit more. And I think that there as I was doing research, there was one figure
that came to mind that was very
interesting. I just want to lay it out here. so everybody thinks they know the story behind Mexican manufacturing. It's you know, we used to produce everything in China, tariffs happened, and so they said, let's go to Mexico because Mexico is cheap or it's cheaper.
And
Javier Zarazua (09:22)
Yeah.
Aaron Alpeter (09:22)
here's what what I found that was really interesting was that Mexican factory labor actually costs when you when you load in all the wages and benefits and things like that about five fifty-six an hour, which is which is very low, especially compared to US standards. but a Chinese manufacturing worker fully loaded is about six sixty-nine an hour. And so that's one dollar and thirteen cents. Call it 17%. And so this idea that Mexican factory labor
is about a dollar an hour cheaper than Chinese factory labor. That's it. That's the whole gap. And so I I just want to kind of like sit with that for a second because I don't think that that's what most people have in their heads. I think they think that there's this larger gap between manufacturing costs in in China and and in Mexico. And so when somebody says, hey, we're we're moving to Mexico for cost, I think that they're picturing a much bigger number than just a dollar.
And so I think this entire episode and a big part of the of the season is trying to answer this question of if the labor gap is really a dollar an hour, why is every brand in America suddenly looking to move to Mexico? And so, I mean, you you kind of do this for a living, right? Like, am I talking myself into a wrong answer here? Why is it that people are suddenly so interested in something that's only a dollar difference?
Javier Zarazua (10:34)
Absolutely, definitely, Aaron. the five fifty number you use, it's actually kind of an average. we just did a study for a customer. Monterrey, the the labor rate is seven dollars and Torreon, which is only a few hours south of Monterrey, it can be down to four fifty, four eighty. Okay, so so you know you're talking an average. if you go to Monterrey, the
There
there might be no no benefit there. but obviously people do not come to Mexico for that. That is their least of their concerns. let me give you one example. We just moved a company from Korea to Mexico. and if they didn't move, they were going to lose their American market because all their competitors are already here. people do not want to lose.
access to the biggest market in the planet which is the United States around the you know this the the reasons are more strategic, And obviously when they move to Mexico they they're closer to the market
big companies, they can redesign their entire distribution model in the US when they come to Mexico.
they can only dream to do that out of Asia, Aaron. So you know speed to market, other capabilities that they develop come with moving to Mexico. But based on on my experience, access to the market is the biggest factor.
Aaron Alpeter (12:04)
I guess the challenge would the then be like why not just come to the US if if that's the key thing. Like why is it that Mexico is the one that that people are are drawn to? Is it because we're only talking about a dollar difference here. Is that really enough to reorient all the supply chains?
Javier Zarazua (12:20)
Well, l let me answer that with a very live example. We just did an analysis for a customer. they wanted to put a factory to do furniture fully automated. And we did their case. and guess what? If you do the the fully automated facility in United States, the tariffs for the raw materials will kill the project.
Compared to Mexico.
So, you know, that is a tariffs, you know, still play a big, big, big factor in the in the decisions that all these executives are making. and the US has a big disadvantage, Aaron. As much as the Trump administration wants to bring all manufacturing back to the US in practicality, that that that will not happen in in in a decade. Because kids graduating from
College, they want to go to manufacturing. You know, I have a girl who is going through industrial college degree. She just started with John Deere an internship. That's what kids want. They want to go to manufacturing in US, young
Kids out of college, the last thing they want to do is go to manufacturing. So so going back to the culture, US lost that ability to attract young kids to manufacturing. And and obviously you have the cost factor, an average worker in the US is six times higher than than Mexico. So in that case, labor cost does play a big factor when you compare it to the US.
Aaron Alpeter (13:52)
Yeah. one of the things that you mentioned as you were talking about the differences in wage rates between Lyon and and Monterrey is Mexico is not a monolithic economy, right? It it's actually seven or eight different markets that are that are spread out throughout
the the country.
And so when people say, we're gonna manufacture Mexico, they treat it as if it's it's just one decision. It's just it's all the one place. but before we even get to where, I wanna kinda talk about
How big the relationship actually is between the US and Mexico. And so here's some figures I the most up to date that I found was that the total goods traded between the two countries in 2025 was around $871 billion US. And $337 billion was US selling into Mexico, and $534 billion was Mexico selling into the US. there's a lot of focus on cars, and that gets a lot of headlines. but Mexico
Also exports a lot of machinery, particularly electrical machinery, medical devices that are worth over $48 billion a year. We've got food, drink, vegetables, beer, distilled spirits, all sorts of things. I mean, I still we still have the commercials, avocados from Mexico, right? Like those are real meaningful imports that come through here. I think agriculture itself is is $30 billion as well.
You know, I I think people think of this as as one way cheap stuff coming coming north. I is that a fair representation of what's there or are you starting to see more expensive things going south or vice versa?
Javier Zarazua (15:20)
Absolutely not. No.
And that question comes up a lot, Aaron, 'cause that's exactly the belief that people have. You know, in fact many people think that you know we're just rerouting stuff from China, relabeling take for instance is automotive. The automotive parts, if you dig into the the data, the parts on a finished car they cross
the border between Mexico and the US between six and seven times in average. which means there is jobs being
created in the United States side to be able to feed the automotive industry. that is the biggest example. a lot of the the stuff that we manufacture starts in the US, and and again automotive machinery. Machinery it's another example. we get a lot of highly especially on the machining side, highly, sophisticated machining parts from the United States shipped to Mexico and
And they're assembled into into machines. but that also applies to plastic chemicals, metals, amongst other other industry. that is the essence of what we call the maculadora industry in Mexico, and now we call it IMMEX which is the certification that allows companies to import
raw materials and machines and tools do value add and and export all their their products out of Mexico. Which most of that goes to the United States. So in that sense Mexico has become an industrial integrator that's what we are industrial integrator we're you know we're focusing on machine industrial machines, automotive appliances, and believe it or not that I'm gonna
shock you with these numbers. automotive industry has been in the building for many decades or several decades I should say. AI servers, I'm pretty sure you will take over automotive by the end of this year.
Aaron Alpeter (17:13)
Really? AI servers will be bigger than automotive in Mexico.
Javier Zarazua (17:16)
Yes, sir. Yes, sir.
Aaron Alpeter (17:17)
Yeah, that that's super fascinating. I think when you talk about how a part crosses six or seven times between the border, I think a lot of people think like, you know, that that just is silly. Why is it going up? But I think you make a good point about there are six or seven jobs on the US side of the border that are also being impacted. And so that's an important piece to take a look at. one of the things that's really important too is is understanding the where.
as as
Javier Zarazua (17:41)
Yeah.
Aaron Alpeter (17:41)
much as the what. So would you mind just giving us a a geographic lesson of Mexico in terms of, what sorts of things are made in what parts of the country?
Javier Zarazua (17:48)
Absolutely. we can start with the Bajío, which is central part of Mexico. they're automotive, and I'll include Saltillo even though we're not part of the Bajío. Saltillo is actually called the Detroit of Mexico because we have three big assembly facilities here in town.
So automotive is done mostly in in Bahio, you know, all major US brands, automotive brands are here and they've been here for a long time and we'll talk a little bit more about that. Guadalajara, that's where the majority of the AI servers are coming from. Guadalajara or Jalisco the state is hub for electronics. And they're also big on food, the soil is very fertile around Guadalajara.
Querétaro is aerospace. these are clusters. we also have a lot of aerospace in Juarez, but Querétaro, that's what they do the in Tijuana. We have medical serv devices and electronics. And Monterrey which is by the way, is the capital of nearshoring during the the boom of nearshoring Monterrey captured about fifty percent of the nearshoring
coming into Mexico and they have become the industrial capital of Mexico and they're very versatile. they have general fabrication they have heavy industry they also have AI servers
They have companies of every industry in in Monterrey. And then Leon, which is traditional, footwear and leather, I wouldn't be surprised if it's the capital of the leather in the world, and Torreon, there's a lot of denim. all your Levi's are done in a factory whose owner is a very good friend of mine and he ships to I think a hundred and something countries worldwide.
out of torreon and Juarez which was the first border city that got developed they're right across the border and they're also very versatile in a lot of industries
each of these industrial s clusters, and they're very, well organized
Aaron Alpeter (19:39)
Yeah, I I think this concept of an industrial cluster is one that we'll come back to. And you know, I I imagine
Javier Zarazua (19:43)
Mm-hmm.
Aaron Alpeter (19:44)
that there are people who come to you looking to near shore and they decide that, yeah, we're just gonna pick this location, but not understanding the supplier base underneath it. So can you walk us through how important
is it when you're thinking about
near shoring in Mexico or setting up a supplier base there, understanding not only where it could be from a geographic perspective, but where it has to be from a cluster perspective.
Javier Zarazua (20:08)
Yeah, definitely. especially with Asian companies,
good, bad or different, they have this mindset, you know, no, no, no, I I don't need I don't need suppliers in Mexico. I will bring everything from my home country. Asian companies, that's normally what what they do. but they miss a big opportunity at the beginning, they they just make that assumption and this one customer I told him, let's let's do a full analysis on the supply chain maturity for your industry, which is was a
very specialized industry. But they don't. They they have their mindset on we will do it our way, we will bring components from our home country and then they run into issues. They run into logistics issues. They run into, by the way, you know now there's new tariffs announced by the Mexico government. by the way, the port I was going to use is very congested and you know things happen.
you gotta take into account all of that. the cluster is just one critical variable to look after when they make decisions to install their their factories in Mexico. because Saltillo, 30 years ago, there was nothing.
There was it was a big farm.
Aaron Alpeter (21:18)
Really?
Javier Zarazua (21:19)
now Saltillo is a automotive cluster. I'm I'm telling you, it's it's called the Detroit of Mexico,
And it doesn't get built overnight, and now, Saltillo is a powerhouse when it comes to automotive and rivals Queretar who has been developing for a lot longer, just just to give you the two two examples.
Aaron Alpeter (21:35)
Yeah, I think your story of Asian
suppliers kind of thinking they'll bring everything over and then learning very quickly that actually you need to be cognizant of where these suppliers are, that's a very expensive lesson to learn. And I think that
As I was doing some research too, just on real estate data,
I saw that in the first quarter of this year that the industrial vacancy in Aguascalientes was about 1.1%, and it was almost 10% in Jaurez And you know, you think about like 1.1%, that's basically no vacancy. That that's like the lease is expiring on Monday and somebody's already got it on Friday, and so for a couple days there you can say it's available. But that spread of nine points from a vacancy point perspective.
is pretty high. and so you think about all those different elements there. I remember that when we were looking for a manufacturer when I was at Mirror we had a good manufacturer in Nogales, just across the border from Arizona. And we were looking at different places to go as well. And so we, went to Guadalajara, went to Juarez, went to Monterrey we went to all these different places just to kind of see what was available there. there were
Lots of different reasons to choose each one. I mean Guadalajara had lots of other high-tech manufacturing that was there. the size of these factories was enormous. we ended up choosing Juarez just mainly for proximity to to the market and kind of the inventory pieces that we saw there.
we very quickly got a crash course in what it actually looks like to produce in different places in Mexico. And I think one of the things that a lot of people have that isn't always true is is they think that this is a relatively new thing. That this all started because of a recent trade agreement, whether that was USMCA or the tariffs or or NAFTA before that.
walk us through the mechanics of how did we get to this place where we have Michiladoras and and this symbiotic relationship between Mexico and the US.
Javier Zarazua (23:21)
Absolutely. Well, every time I get invited to talk about near shoring the first slide I put on is the history in the making. because
started getting visibility in two thousand eighteen and I was already into this business when Trump imposed a lot of the first set of tariffs on China. two things that really sparkled the
industry in Mexico. first in nineteen sixty two. believe it or not, people people laughs when I tell this,
The president of Mexico in nineteen sixty two did to the automotive industry what Donald Trump is trying to do to the automotive industry today, which is if you want to access to the market of my country, you need to move your manufacturing to my country. so
Aaron Alpeter (24:04)
Interesting.
Javier Zarazua (24:06)
in nineteen sixty two there was a program implemented by the government and that sparkled a lot of the automotive industries to get serious about moving to Mexico. And that is when
the modern automotive industry was really born yeah at that time. Because you know we have had automotive for for for a lot longer than that. And the other one is in nineteen sixty five the the US ended the BRACERO programs which was to allow
agricultural workers to come to work temporarily in the US. so the US government finished it. And a year later the the Mexico government initiated the border industrialization program which allowed companies to move in assets, inventory and tools add value, mainly assembly and be able to ship the stuff out without paying paying any tariffs.
that was the beginning of what we call now near shoring and it's still it's still valid today. eventually it got spread it to the entire country. But in
Aaron Alpeter (25:11)
Yeah, that that's fascinating
because I think everybody thinks that near shoring started with a trade war in 2018, but it actually started 60 years ago in 1965, but you're talking about with all of these things that happened. And so walk me through from how we got to this this border program in the 60s to what IMMEX actually does for a company today.
Javier Zarazua (25:32)
Absolutely. IMMEX is the modern version of the border industrialization program. basically if a company that is not owned by a Mexico company, meaning there is a foreign owner of the company, they can temporarily bring in machines.
tools to begin with, to do the setup. And then they can bring in all the raw materials and or components. Do value add in Mexico, which normally is tied to full transformation, like assembly. Assembly is full transformation because you start with a bunch of components and end up with a finished product. And there's some benefits on getting these IMMEX program
once you do the finished good you can export and relieve your inventory and you get fiscal benefits. if you need to do sales in Mexico, you're allowed to do to some degree. So it's so it's got a lot of benefits. So in essence it is a program to allow
companies to do export.
Aaron Alpeter (26:28)
we had firsthand experience with this, and it's a wonderful program if you are selling in the United States. I mean again, when we were at Mirror, we had a manufacturer at Mexico. All of our subassemblies, the the L C Ds, the microchips, all that sort of stuff came from Asia. They came into Mexico duty-free because it came in through maquiladora they were turned into something else, and then with the customs rulings that we had, they were imported to the US at zero percent. And so it was this amazing.
Not even a
loophole, it's just this amazing
tech shelter that we had.
because of of how we chose to assemble things. And you know, if we had again, if we brought those those materials directly into the United States and tried to assemble the United States, we'd pay tariff on all of those electronic components coming in. If we had had them produced in Taiwan or in China, we've been paying tariffs on the thing coming in. So it was like this beautiful thing. And then you start stacking on top of it all of the great working capital considerations we have of not needing to hold as much inventory. It was it was fantastic.
it seems like everybody should be using the maquiladora When would that type of shelter not actually make sense for a company?
Javier Zarazua (27:34)
Well, first of all, the IMMEX program is great, but but there's a big but between IMMEX and VAT. it can take you up to two years to get it.
my company is set up in the US and I can do imports, because it's a trading company. it took me two weeks to set up the company and be able to do import into US, and in Mexico it can take you up to two years to do the very same. So if companies do not want
to export without having to go through a lot of red tape in mexico they use the shelter okay the Asian companies they don't like shelters.
it's a preference. US companies normally they just go through shelter
I have the record according to one of the biggest shelters in Mexico, I have the record of the fastest move of a small manufacturing company from the US to Mexico. We moved it in I think twelve or thirteen weeks. that was the very first project I did. And you would not be able to do that without a shelter because the shelter allows you to start moving machines the very next day you sign a contract. So whatever whatever it takes
for a company to sign a contract, any contract, then next day you can start moving machines to Mexico. That is the advantage of the of the shelter where they
hired people for you, they do the payroll, they do all the compliance, they do all the logistics. you don't have to worry about about anything. They they install the machines for you. All you have to worry about is quality and engineering. You know you provide the specs, you supervise the people to those specs and provide the their raw materials, machines and
tools.
Aaron Alpeter (29:11)
And so really the difference here is you know, using maquiladoras is is using a co-packer who already has that certification versus trying to build your own factory and and going through all that VAT stuff yourself.
Javier Zarazua (29:20)
Yes. Which is
which it takes a long time, unfortunately. That is something
Aaron Alpeter (29:26)
That's great.
Javier Zarazua (29:27)
I I wish I wish the Mexico government did a fast IMMEX hey let's have it in a month, why dragging two years to have both IMMEX and VAT? That's just makes no sense. But hey,
Aaron Alpeter (29:38)
Yeah. Well
Javier Zarazua (29:39)
not a president.
Aaron Alpeter (29:40)
Yeah,
l so let's let's assume that a US company wants to move forward and and they want to set things up. what is actually different about operating in Mexico compared to the United States or other countries?
Javier Zarazua (29:50)
the compliance is is much, much, much different.
setting up a business to be able to do import with IMMEX it can take you up to two years in the US it took me two weeks to do the very same I didn't have to go to the US which is even more surprising Aaron because I did everything remotely and you know Mexico you have to start by a are you a maquiladora or you are a business unit are you an SA de CV
or a U S de RL de CV which is the difference between a small company big company kind of an LLC in the US so in Mexico the government has a copy of all my business invoices, every single one of them.
But it's
Aaron Alpeter (30:33)
Well.
Javier Zarazua (30:33)
very difficult to set up. if I import something into Mexico, I have to do pedimentos. the government has a copy of every every pedimento, meaning every import that I made and every export that I have made. it's just a totally different environment.
there is no way nice way to put this, but in the US the compliance whether it's trade or taxes is based on trust. You know, the government is trusting that you will do the right thing. In Mexico it's the opposite. the the compliance for trade and taxes is Mexico distrust and so there is a lot of red tape and a lot of compliance around it.
Aaron Alpeter (31:12)
Geez, that doesn't sound fun. What what's the most expensive mistake you've seen a US company make in Mexico?
Javier Zarazua (31:18)
assuming that importing stuff into the US is just as easy doing it in Mexico. that's not the case. I have seen US brokers that import a lot of stuff through LA, and they have no clue on how to import through Loredo because they're totally different setup.
To different environments. within the United States. Now imagine Mexico. It's a totally different country. Assuming that it's very simple to import stuff into Mexico, it's a big, big mistake. this company the CEO is a friend of mine. after $1.3 million, he found out that it was not that easy.
Aaron Alpeter (31:54)
One of the things that was most poignant to me when I first started manufacturing Mexico was just the relationship centricity that that I saw in the business there. the business meetings were
were anything about business. It was it was talking about
families, it was talking about interests, it was talking about, ambitions and histories and all these sorts of things. And when we were going through and we were doing the roadshow of of looking at these factories and seeing things there, obviously you had people that were used to catering to Americans, which were a little bit more like, all right, you know, what's gonna cost me stuff like that. But a lot of times you'd start to talk to the the plant managers and the people there and they would talk about how, we have a bus that picks people up and brings them to work.
or we have ways that we can help people earn a degree or to put their kids through college or things like that. And so there was there was a focus here of not only just like a retention story of of workers, but also like, you know, we want to make sure that if we're gonna do business together, that we really get a full measure of of each person and and kind of what it's gonna look like. I I'd love for you to kind of talk a little bit more about what it means to do business.
in Mexico with you know the Mexican way.
Javier Zarazua (33:03)
Well,
first of all, in Mexico everything is relationship based. if you do not have a close relationship with someone, you're gonna have a hard time doing business. In fact in my business Aaron and we have similar line of businesses, I do not work with companies in Mexico.
when I do not have a great relationship with the owner or or the general manager of business.
I just don't. I just don't. And and here's my reasoning. I'm bringing businesses to them and if they're mistreating me, how do you think they're gonna treat my customers? and I have broken that a couple of times and I have realized that breaking the rule was a mistake because that's just the way it is in Mexico. People expect you to be open, people expect you to be sincere and they're expecting
you to have a close relationship. something silly as, after the meeting, let's go out and have dinner. if you say no, that can be insulting to some people.
Aaron Alpeter (33:58)
Absolutely. And the dinners are wonderful too, so I don't know why you would say no to that.
Javier Zarazua (34:02)
Well, you know, tequila and carnasada are great, man.
Aaron Alpeter (34:07)
Yeah,
as we're thinking through all these different things, we've touched on the culture, we've talked on duties and things like that.
when it comes to the actual cost savings that are there, we've talked about a few times that by and large, it is the duties that are the biggest saver with Mexican manufacturing. seventeen percent cheaper from a wage rate between China and Mexico, that may be two percent if you assume that, fifteen percent of your total cost is related to labor. So you're looking at like a two percent savings if you're just to move over that way. you know start looking at getting rid of
10, 15, 30% in duties by leveraging things from maquiladora things like that, like it it starts to make really impactful benefits. I think one element that is sometimes misunderstood is just how being close to your market will impact you as well.
if you look at normal transit from china to the US is call it 30 days, 18 to 35 days, I think what you're saying. East Coast can be farther. with typical supply chain theory, you've got to be holding at least that amount in inventory in excess of safety stocks and things like that. Whereas with Mexico, depending where the factory is, in a warehouse in the US within three to seven days. I mean when we were at Mirror
We were producing in Jaurez and at its peak we were producing thousands of units a month.
And it would be 11 days from when it was came off the line to when it was installed in someone's home. And so you just think about like the difference of not having to hold 20, 30, 40, 50 days of inventory. And you start to get to a point where you're saving hundreds of thousands of dollars in things that you're not financing. And so it's just this really important piece that I think people don't quite understand. And so I guess my question for you is how do you help people calculate what that working capital benefit is gonna be?
Because they may be looking at saying, okay, it's about the same cost in CapEx, it's a little bit cheaper in labor, but how do you really help them quantify the working capital piece, or is it the duties that carry the arithmetic?
Javier Zarazua (35:59)
Yeah, definitely, the biggest differentiator is
the tariffs. Mexico for the majority of the parts does not have any tariffs. China still has the legacy 301 section which goes anywhere from seven point five to twenty five percent where the majority falls on the twenty five percent that creates an important difference but not only that when you
You
have the tariffs that gives you an advantage, but it's not enough. But then the the next thing you have is the inventory. and I started doing near shoring projects in caterpillar.
many moons ago. And Catapillar had a rule which I really liked it. if you wanted more capital for your business, you would pay a seventy percent for that capital. So every time I reduced inventory on near shoring projects, my project got seventeen cents per dollar as a benefit. the logic was I can put that seventeen percent on another business and get that
Much return. Most companies do not do that, but it is an important factor, especially for big companies they do the buy of China. the cost of capital it can be it can be big. when you're coming in from China, not only you have
have this big delta but your time to market can be also influenced. when you're developing a a product out of China you know it takes a few trips and
A lot of shipping forth and back, even if you ship by air, you're still quite away. obviously the proximity to the United States, faster response to orders, the ability to mitigate quality or deliver issues. You know, if an issue comes up out of China, you may find out when the container hits LA or even after that, in Mexico you you find
find out pretty fast you have the ability to respond. when you put all these things together these are capabilities and capabilities compound they're not just somebody renegotiating any any of these capabilities that you develop as a company when when you are manufacturing out of Mexico.
Aaron Alpeter (37:56)
You're right. the tariff posture could change with tweet, right? but I think so much of these capabilities in terms of geography, the clusters, you like you said, they're they're just gonna be there. And I you I remember during COVID when I was running the supply chain for Mirror, again, we were producing in Mexico, had a had a really strong supply chain, really quick turnaround.
And our biggest competitor at the time was Peloton, and they were producing in Asia. at the same time that we're rolling off thousands of units and getting them installed within a couple of weeks, they had dozens or hundreds of containers that couldn't get a berth into the port of LA. And so you think about all of that working capital that's tied up, they would have paid anything, they paid anything, not only to secure the space on the boats, but also to get into the port.
And so it allowed us to be much more nimble and to take advantage of the situation because we could tell someone, hey, yeah, you'll get this in two weeks. Whereas you know, other folks who are producing elsewhere would say, you know, we'll we'll check back with you in a couple months. I do know that like it's not perfect in Mexico. there's a reason that people have not all moved to Mexico. There's things that obviously the country needs to work through. What sorts of things actually
break inside Mexico. what are the questions I should be asking to to figure out if I'm I'm gonna be a good fit there?
Javier Zarazua (39:09)
Well one of the things that I advise customers is labor. If you go to Monterrey, you will be paying around seven dollars per hour, and you will be competing with a bunch of people.
if you move just a few hours south torreon torreon is an industrial city you may be paying for eighty dollars and there is a big park in Monterrey that they only have Chinese companies
Their turnover is thirteen percent. Thirteen percent per month.
Aaron Alpeter (39:40)
Wow.
Javier Zarazua (39:41)
a few months ago, I visited a a big factory in Torreon. Their turnover was point five percent
that's a that's a huge difference in cost. That's a huge difference in being able to fulfill your production plan. turnover just invites quality issues to come to your door so that is what I always advise customers be careful with people
the second is compliance. You know, we've been talking a lot about compliance. IMMEX requires a lot of paperwork. importing stuff into Mexico requires a lot of paperwork. that's just a fact. Whether you like it or not, other issues we have is power. there is a lot of places in Monterrey that do not have power.
a lot of industrial park.
And security, it's a concern not only for Mexicans living in Mexico but for foreign companies moving into Mexico. it is a concern. it's not Trump or the media creating the story. It it is a concern. So I I would say those those are the main issues that I would be
advising companies to be careful with.
Aaron Alpeter (40:42)
Yeah, I I wanna I wanna
dig into the the power one briefly here because this is something that I've paid attention to as well and it's been kinda surprising. I saw some statistics where in twenty twenty two and in twenty twenty three the electricity demand grew between three and four percent each year.
And yet the transmission network only grew between 0.9% one year and 0.1% in those same two years. And so you you've got demand growing about thirty-five times faster than the grid that can carry it.
why is it so hard to get power in in some of these places? It seems like this is something that, should be a solvable problem. And it looks like Mexico needs tens of billions of dollars in energy infrastructure in order to not squander the opportunity they have of everyone who wants to come and and produce there.
Javier Zarazua (41:26)
Well, we had a new government in twenty twenty four, Aaron. And in Mexico, the president runs for six years. So the previous president, he pulled a plug on investments, on any meaningful in infrastructure.
Power was one of them. the other one was logistics, you know, ports, bridges, highways. he just didn't put any money. And that was a big mistake. They he shouldn't done that. he built other infrastructure that has not brought any benefits to Mexico. But you I don't wanna get on the political stuff. as far as power, he did not invest anything and he did not allow private investment to
take place in Mexico. That would have been another way of doing it. But you know, he was just a nationalist and he didn't believe in all of that. This new government has already opened up the private investment into power and logistics projects which is good. there's investment going on by the government that is going to help us. But obviously it's gonna take time because it's a lot of money to be to be said but
The the the good news, I have not seen a single project from customers who said I cannot move to Mexico because there is not enough power.
You know, you
Aaron Alpeter (42:32)
Hmm.
Javier Zarazua (42:33)
may not have power in Monterrey in Apolaca, but you may have power in Cienega de Flores. in a different, city within Monterrey. Or, Monterrey is struggling overall, Torreon, they have a lot of power. i it is a concern, but it's not a showstopper. Unless you're a Tesla and you you know you're gonna install a facility in Monterrey, and chances are you know they you're gonna
have to do a lot of investment with the government to do that type of installation.
Aaron Alpeter (43:01)
Yeah, so if if you're not worried about
power, what what is it that you worry about? Is it is it more labor?
Javier Zarazua (43:06)
I worry about labor. the there was a customer we helped start up their facility a few years ago and they were in in a location where very disadvantaged. Very disadvantaged. But they got pretty pretty good deal on a building. And I told do not do that. You're gonna have a hard time getting people.
And said, No, but you know, I cannot miss this deal. it's the deal of the century. Like, all right. obviously six months later they couldn't fill their jobs because they were geographically in the worst place and they were in a very, very competitive city. those two combined,
it can kill your business. can you imagine Aaron having a thirteen, fifteen percent turnover every month? I mean, how do you sustain that?
Aaron Alpeter (43:50)
that's hard
you you don't do it for very long, I imagine is the answer.
Javier Zarazua (43:54)
Exactly, exactly.
Aaron Alpeter (43:55)
Yeah. Well well coming back to the security piece, there's the narcos TV shows on Netflix and and people think about cartels and stuff like that. and I I just want to kind of put some numbers to that 'cause I think it is a it is a real consideration. I certainly had some exposure to
what I would say cartel adjacent activity as I was going through and and sourcing factories in in Mexico. and what I saw was that cargo theft losses in Mexico are about three hundred and seventy million dollars a year.
82% of those incidents are involving violence. But when you look at this and you start comparing it to the US, there's even more cargo theft that's happening. I think it's like $780 million worth of cargo theft that's happening in the US. And so it's not as if there's only crime in Mexico and there's no crime in the US. I think it's just, 82% of the cargo theft in Mexico.
is happening in in 10 states and and most of that is involving some violence that's why i think it it pops up in some places but talk to me about somebody who is from mexico who's been operating there for a while i mean how real of a presence are the cartels in in a manufacturing environment
Javier Zarazua (44:57)
there is no sugar coating. cartels are real. They exist in most of the territories in Mexico. That that is a fact, trying to argue against it is just silly. we have a governor indicted by the United States over cartel activity. That that should tell you, right? fortunately, I live in in Coahuila, which is one of the
safest states in in Mexico. I am from Tamaulipas, which is a border state, which I cannot say the same thing. here if if I'm traveling and my girls go to disco at night my wife can go and pick them up at 130 in the in the morning and I'll be sound asleep in my hotel in my hometown nobody goes after dark unless we absolutely
You know, that is the contrast. we have three
Aaron Alpeter (45:37)
There are places like that in the United States too though.
I mean, you know, I might do that in Beverly Hills, but not downtown LA.
Javier Zarazua (45:43)
No, that that's a good point. That is a good point. cartels are real and and they operate in three modes. is the hijacking, where they they go into the the highways and they may or may not have violence. Most of the times they do, you know, they have bring their their big guns and stop the trailer and and do their thing. the second is extortion,
Unfortunately in in several cities, they just go and in and charge for fee to to keep you safe, you know, like the old ways of the Italian mafia, right? and the third thing is and this happens a lot in in in border towns. I've heard a lot of stories in in Nuevo Laredo where
they may put stuff in your truck without you even knowing about it
Aaron Alpeter (46:22)
it
it's it it certainly is something I think that I I've seen over the years the Mexican government is trying to figure out the right way to to deal with it. obviously if if it's a big crackdown then you you can see what happens when a a drug dealer is taken out or drug lore, there's violence for a couple of days or things like that. And so I think it's it's gonna be several decades until it gets to be normalized. again, there's organized crime in every country. I would say it is probably a bigger
problem in Mexico than it's say in in the United States or elsewhere, but to say it's only there and not here is I think incorrect. I've heard about the roadblocks
and about how there are basically tolls set up for some factories that come across. And I remember there was a day in Juarez where there was a shootout
And it was it was kind of restricted to the cartel
elements that were fighting each other. but it basically put the the whole city of of Juarez on lockdown.
And our factory said, Hey, we're not gonna bring people in today, we're gonna be down. And so we lost maybe two or three days worth of production while they were waiting for it to be safe. And so I think that those are are real things that you just kind of have to be aware of.
it's unfortunate, but I think it's it's a real thing that you have to go through
and I don't know, like what what's kind of your perspective on all this? Is it something where if you are operating in certain states, you kind of just assume that you're gonna have certain number of quote unquote snow days where people can't come in because of something that's happened externally, or is it something where it's it's really more the exception than the rule?
Javier Zarazua (47:57)
as a foreigner coming in, number one you have to be aware. I never hide those things from customers. It's like, hey, you need to know what you're getting yourself into. and and be honest about it. I think people appreciate that when a local tells them, what the real situation is.
The good news though is for the most part the cartels do not mess with big manufacturers or or the export industry. For the most part. there is some companies that that are hit. and I always tell people, if you and I are walking together in a red zone,
cartel zone. Aaron, you're probably safer than I am because I'm local and no FBI or no CIA is gonna come to rescue me. But they may come and rescue you. So th those guys know very, very well. Do not mess with Americans or Canadians so from that perspective they're fairly safe. Obviously you need to be concerned.
I have brought in customers where, we just hire custodies, arm guards, just for their own sake. Normally I do not recommend it, but some customers they wanna feel that confidence and we've done it. that's kind of the exception, where where the customers are fearful or a little bit more anxious. once you leave here, once you understand humans we have a high capability of adapting to
situations. I would say that one be aware and second be careful do your planning properly and chances are that there is
a low risk generally speaking of getting Mexican businesses hit get hit a lot harder than than big companies or export companies.
Aaron Alpeter (49:24)
Yeah, and I think the key thing here is I don't think people should be afraid of Mexico. I mean, it is is some place that you have to be aware of, just like you would in any other place around the world. certainly if you go to certain parts of Asia or you go to certain parts of of Europe, you know, you've got to make sure that you are aware of your surroundings. You're not intentionally putting yourself into harm's way. I think that there are some other things that happen from a logistics point of view that can help deal with some of these issues. And so I want to talk a little bit about CTPAT.
which is the Customs Trade Partnership Against Terrorism. It is a State Department or a CBP program that was put together that basically kind of tries to lock down the entire supply chain from the manufacturer all the way to delivery. And so I've been in some of these CTPAT certified warehouses and I tell you like the the gates and the inspections and they're built like fortresses you can't get over.
I mean it is it is impressive. can you just talk a little bit about what CTPAT has meant for Mexican manufacturing and and do you recommend that everybody look for CTPAT providers or is it okay to use non-CTPAT providers?
Javier Zarazua (50:29)
absolutely. Definitely. you know, there is a lot of companies that they do not do business with you. I mean American companies will wanna buy, stuff in Mexico if you're not CTPAT. They just don't. and it helps, it gives you that that that extra level of security where you know you're gonna have controls from the time you produce your products to the time they they make it to the US border, meaning that nobody
accidentally or intentionally is going to plant any any drugs or any explosive for that matter most of the companies that I deal with eventually put plans to be certified because not only you have the security aspects but also you have preference in when you're crossing the border definitely recommended is worth
it it's the that extra level of security that you will know that if something happened in your CTPAT at least you are gonna be able to know what happened and where which you know gives you some some assurance and a way to defend yourself from the US coming in against you for something they find on your on your products.
Aaron Alpeter (51:29)
It's true.
It it's a huge way to shirk some of that liability because these are not easy regulations. And these are things that, if you can say we're only gonna use a CTPAT certified origin and and trucker, just great all the way around.
we actually had a really interesting case study a little over a year ago, when the De Minimus three two one loophole for e-commerce went away. And so if you're not familiar with that, this was a basic loophole that said that any personal
package that was delivered to a person, if it was under $800 per day, then you didn't have to pay duties or taxes on it. And so what a lot of smart, sophisticated e-commerce companies figured out was that, hey, I can import my products from Asia, put them in a warehouse in Mexico, and then when you order your product, I'll just mail it to you. Instead of of paying taxes on all of the duties that came in, it'll come in as a personal product and I won't have to pay duties, you won't have to pay duties and things are fine. Well that changed in like
two weeks, right? Like I think between they said, hey, we're gonna get rid of it to when it was actually gone. it was it was certainly within a month. And so I'm I'm curious to know from your perspective, what was that like for Mexican warehouses or the US countries you work with to see this loophole kind of disappear immediately.
Javier Zarazua (52:41)
these customer came in and
They wanted us to house their inventory here, imported through Manzanillo from China. And the challenge they gave us said that I need to make sure that every day by ten o'clock in the morning we ship to the border, it crosses the border and we deliver to the US mail by five o'clock in the afternoon. So after we did a little bit of research.
we found a bridge between McAllen and Loredo, Texas. It's a very small bridge that I happen to know the administrator, and they assured us that we can cross the border within an hour, which is you know nothing compared to your Loredo. You're lucky if you cross in you know seven, seven,
Aaron Alpeter (53:21)
Yeah. That's an all day event. Great six.
Javier Zarazua (53:24)
12 hours, you know, whatever that is. we were putting together the business case for the customer and sure.
enough you know that was going to be a win we we thought and mr trump had a different idea and killed a project that is the extent of that that i can share with you as far as the the de minimis but
countries were abusing that big time and and it it needed to be stopped.
Aaron Alpeter (53:49)
Yeah, it it is it is interesting
how quickly, you know, if you're if your business is built on a loophole, you can't be surprised on a loophole is closed and you to change very quickly. So it's it's an impact. So Javier, I know we're coming up on time here. We've gotta talk about USMCA, CUSMA.
whatever the the acronym in Spanish is, and kind of what's happening right now. I know that the US declined to automatically renew the agreement. it's still completely in force today. It's just it's kicking off a documented way where we'll kind of talk about it for the next, I think, 16 years.
but we'll kinda work through it. And so I want you to walk me through what you think the different versions of the future could look like as it pertains to USMCA or if we're kicking Canada out, what the future of of Mexico US trade relations could look like.
Javier Zarazua (54:32)
I just did a full study for a presentation I'm gonna have next week. and a great majority of the imports from Mexico, based on the negotiations taking place right now and the demands from from each of the countries, Aaron, the majority of the imports are not gonna be affected.
then we have the automotive industry, which is obviously the most regulated from a from a USMCA perspective, which by the way in Mexico we call it TMEC T E C. there's gonna be probably higher regional content out of North America.
And there's gonna be verification, because today the rule exists but it cannot be reinforced, which is kind of dumb, you know. which is gonna create a lot of burden on on automotive companies to to really trace
all these components and and be able to demonstrate their their content. we have some strategic industries like semiconductors and and things like that that may be hit but but they're not big on the percentage of exports to the US. Mexico is trying to get a relief on the metal two thirty two
tariffs and also on the automotive because we do have the 232 on automotives too are they gonna be successful I doubt it honestly but you know I I can see a few different scenarios one is nothing changes and things continue the way it is
every year a big pony show and everything else continues the same. Which you know today there's a lot of noise, Aaron, but the first seven months of this year imports into the US from Mexico are up by thirteen percent. So I I don't care what the noise is, you know, commerce is still happening very strongly. the second is
the regional value content goes up. so far we have automotive, you where the US has demanded. and some strategic industries that are low, low volume, let's say, going into into the US. if that happens, that's gonna hurt businesses that are still importing a lot of stuff, from outside of the North American region.
the third is and I hope it doesn't happen, but the US puts a floor on let's say fifty percent has to come from the US. That will hurt because
if he's coming from Canada, technically is USMCA compliant or if comes from Mexico is USMCA compliant. is that gonna happen? I hope not, because then it's going to transform those industries that are hit again again.
Aaron Alpeter (57:02)
Gotcha.
Javier Zarazua (57:02)
and four, I'm a positive thinker, I think a
Combination of high original content, which automotive is already at 75. Up in that to 80-82% really is not gonna be that much of a stretch. But I'm hoping, I'm hoping that the US in return gives us some release on section 232 on metals and and autos.
Aaron Alpeter (57:27)
Yeah.
So it it sounds like
you are basically assuming things to be roughly what they are now, maybe some tweaks, some enhancements, things like that. but the one thing that would dramatically alter the relationship would be if there's a US content floor versus a USMCA specific floor.
Javier Zarazua (57:44)
Yep, yeah, I I I I think so.
Aaron Alpeter (57:47)
And you know, I I think what's interesting here is that a lot of times we think about, okay, well, if we raise even just the USMCA related content, that that will spur more manufacturing in the United States or in
Canada or Mexico.
and I think that like the answer is yes, there will be more manufacturing there, but it may not be USMCA companies doing that. And I know you've done a lot, you've talked about a couple times here where you're helping Asian manufacturers set up
shop in Mexico. I saw that 80 automotive projects were announced in Mexico in the last three years compared to 18 in just the three previous years prior to that. And I think you'd said that like Chinese companies were representing about 17% of all new tenants entering Mexico.
And so I I just want to understand a little bit more because is a Chinese owned plant in Mexico a Mexican advantage or a Chinese one?
Javier Zarazua (58:39)
Well it's both. It's both. Aaron, obviously Chinese company coming in, hiring people, creating jobs, contributes to the Mexican economy. that's what the business is all about. on the other side,
and not many people know this, but there is a twelve million square feet industrial park in Monterrey that only houses Chinese companies.
Aaron Alpeter (59:01)
Really? Wow.
Javier Zarazua (59:02)
Only, only, only Chinese companies.
I told you a couple of times that in Saltillo there is a big Stellantes facility. they have an engine facility here they create
tens of thousands of jobs. the machining and the assembly line they're almost fully automated. I mean it's amazing to see overhead all the all the blocks and the you know all the components going through and some of the welding is done automatically and stuff. that's a lot of money. That's a lot of investment, billions of dollars of investment.
to me the Mexica government should put not a fifty but a hundred or even higher percent on tariffs on Chinese cars coming in because they're the ones who are getting the advantage, not us.
Aaron Alpeter (59:41)
Mm.
Javier Zarazua (59:41)
So in that sense, Aaron, the businesses are welcome, but the capital is not staying here. the capital is going out and
it is what it is, right?
Aaron Alpeter (59:51)
Yeah. Javier,
thank you so much for being on this episode of E-Commerce on Tap. I think we probably have three more hours worth of content that we could go through and record at some point in time. I I'd love for you to kind of just share one idea around if you could change people's conception about Mexico. What's the one thing they get wrong about manufacturing in Mexico that they need to to change?
Javier Zarazua (1:00:14)
Well, when foreigners come to Mexico, they come with fear and distrust,
but come and visit. Come and visit. I I don't care what what ideas and what fears you have, once you come and visit
Your perspective is gonna change. I don't worry when people say I'm afraid or I don't believe that's fine. you are entitled to an opinion. But just come and ninety-nine point nine percent of the times, Aaron, their perspective changes.
Aaron Alpeter (1:00:41)
Awesome. I am a huge proponent of Mexican manufacturing. And whenever I talk to a brand and I'm I they're trying to figure out where to go, I'm always saying you you gotta consider Mexico. You gotta take a look at this. I mean, you look at the labor, you look at the ease of getting there, the ease of communication. It's much more convenient and easier to find a Spanish speaker in the US than it is to find a a Chinese speaker, for example. And so there's just
so many things that Mexico has in its corner that I think really set itself up well for the next 10 to 20 years. So thank you again for for being on. This has been such a great episode. And and thank guys for tuning in to this episode of e commerce on tap and we'll have you on next time.