“Mexico is the New China” and Manufacturers are Moving There

The above is a direct quote from a client for whom my law firm is now in the process of helping his company move its production from China to Mexico. He said this about China and Mexico, right after setting saying that he “is done with China” because his company is unable to sell a number of its products because when you “add in the increase in China labor costs and the China tariffs and the massive increase in shipping costs, we are simply no longer competitive with those companies that make their products in Mexico.

And then, literally that same day, a client called about moving its manufacturing from China to Mexico because of the “political risks.” This person is convinced there will be a massive “flare-up” between China and Taiwan within the next year and the U.S. will impose massive trade sanctions for this and that will crush his business.

I am sure some of you are reading this and thinking that the above either does not apply to you or is flat our wrong and I get that. But, all I know is that in the last two weeks my law firm has had more companies come to us seeking help to move their manufacturing from China to Mexico than we have had in any six month period. Global Sources (which has for decades made huge money from China sourcing), is also writing about this, and did so last week. See e.g. Made in Mexico: an export manufacturing boom as the US nearshores. See also Made in Mexico and the U.S.-China Trade War.

Not only are we getting foreign companies looking to move their manufacturing from China to Mexico, we are getting many Chinese companies contacting us for the same reasons — it does not hurt that our lead Mexico manufacturing lawyer is perhaps the only lawyer in Mexico fluent in Chinese and with a law degree from both a Mexican and Chinese law school.

So something is happening out there and it is not really any one thing, it is a combination of the below:

1. China is getting more difficult and expensive. COVID is a big factor in this, but just one of many.

2. China’s government is getting more oppressive and this wears on people and it puts the reputations of their companies at risk. See Will Your Business in/with China Hurt Your Business Reputation Outside China? See Negative views of China continue to dominate its international image, survey finds.

3. China is threatening to sanction foreign companies that abide by their own country’s laws regarding China. What U.S. businesses should know about China’s anti-foreign sanctions law. Or, as one of our client’s recently put it, “we are damned if we do and damned if we don’t.”

4. Shipping costs. See Shipping Delays and Higher Rates Get Small Businesses Jammed Up. As one client put it, “I realize these super-high shipping costs will not last forever, but nobody knows how long they will last and I am just sick of the uncertainty. Getting my products into the U.S. from Mexico will always cost way less than from China and will never fluctuate nearly as much.

5. Overall costs of doing business with China.

6. COVID-19, and China’s total lockdowns and blocking foreigners from entering into China.

7. China risks. Two years ago, In The Top 14 China Wild Cards/Future Risks, we listed out what we saw as the top 14 China risks. It is downright scary how many of those are indisputably a reality now and how there are some — like China’s crackdown on tech and on other private businesses — that we did not even write about. Mexico is not without risks, but it has become a far less risky country in which to manufacture than China. Just read the news.

What exactly should a company do to legally prepare itself to move its manufacturing from China?

The first thing you should do is to build up your protections in China before moving your manufacturing out of China.

We have written extensively on why you must prepare well in advance for terminating your China supplier. These means you should make sure you have secured your molds and paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.

It is incredibly common for Chinese manufacturers to retaliate against foreign companies that cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint about ceasing production with their existing China suppliers.Our China lawyers have seen the following:

Foreign company tells its China manufacturer it plans to no longer use it for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. This is incredibly common. The way to prevent this is to get an agreement from your Chinese manufacturer making clear you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving to a new manufacturer. For more on the importance of mold agreements, check out How Not To Lose Your Molds/Tooling In China.

U.S. company tells its China manufacturer it will be moving its manufacturing from China to Mexico and Thailand, then it learns someone in China registered its brand names and logos as trademarks in Mexico and Thailand! U.S. company is now facing not being able to have its product — at least with its own brand name and logo — manufactured in these countries. The easy way to prevent this sort of trademark problem is to register your brand names and logos in the country to which you will be moving your manufacturing before anyone knows this might be happening. You might even want to consider doing these registrations under a company name that will not tip anyone off to your plans to leave China because we had one client get “caught” by its Chinese manufacturer who apparently constantly monitors trademark filings in those countries to which its customers tend to move.

Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its widget production. A few weeks later, this foreign company has its widgets seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using those trademark registrations to seize product as revenge. China has laws that essentially prohibit its manufacturers from registering the trademarks of those for whom it manufactures, but because it is virtually impossible to prove your manufacturer in Shenzhen had a cousin in Xi’an do the trademark registering, this sort of thing happens all the time. You can prevent  this by timely registering your China IP and by making sure your China IP is up to date before anyone knows you will be leaving China.

Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not ship any more product because foreign manufacturer is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can cause the foreign company financial problems that make it difficult for it to leave China. This too is incredibly common and our law firm has handled at least three times as many Sinosure related matters in the last year as compared to any previous year.

Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the foreign company hostage for alleged debt. This is China’s dirty little secret, but this too is incredibly common and in every single instance where this has happened to one of our clients, the local police have either stayed completely out of it or helped the hostage takers. See Commercial Hostages in International Business Disputes.

Having your products manufactured in China has become much riskier, but leaving China has become much riskier as well. Protection comes by planning ahead. Just to be clear though, Mexico is definitely not right for everyone because there are still a whole host of products that pretty much still must be made in China. Just today in fact, I spoke with a potential client that went quite far with trying to get its product made in Mexico but in the end chose China due mostly to its greater expertise and experience with their particular product.

We will in future posts talk more about what it takes to safely move your manufacturing from China to Mexico.