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Achieving Global Supply Chain Resilience: The Imperative of Diversifying Beyond China

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Achieving Global Supply Chain Resilience: The Imperative of Diversifying Beyond China

In today’s risk-laden global supply chain landscape, the strategic approach of “China Plus One” has emerged as a critical imperative for businesses operating on a worldwide scale. This strategy aims to diversify manufacturing operations beyond China, mitigating supply chain risks and enabling companies to adapt to dynamic market conditions. The concept gained traction around 2014-2015 as rising labor costs in China prompted companies to explore sourcing from other regions, further accelerating during the COVID-19 pandemic when supply chain challenges reached unprecedented levels.

Read also: Enhancing Supply Chain Resilience Through Proactive Fleet Safety Management

The China Plus One concept represents a strategic evolution – one that empowers businesses to maintain competitiveness and agility in an increasingly volatile global market. By diversifying their manufacturing footprint, companies can effectively hedge against potential disruptions, geopolitical tensions, and economic uncertainties that could otherwise cripple their operations.

China’s dominance in global manufacturing has been unparalleled for well over a decade. According to the United Nations Statistics Division, in 2019, China accounted for a staggering 28.7 percent of global manufacturing output, surpassing the United States by more than 10 percentage points. This shift occurred in 2010 when China overtook the U.S. to become the world’s largest manufacturing economy. Moreover, in 2019, the total value added by China’s manufacturing sector was nearly $4 trillion, contributing to almost 30 percent of the country’s total economic output.

However, overreliance on China for manufacturing and sourcing carries inherent risks, including potential delays, quality control issues, escalating costs, economic tensions, and geopolitical instabilities. The U.S.-China trade war has underscored the perils of such over-dependence, prompting many businesses to reevaluate their supply chain strategies and diversify their manufacturing locations. The COVID-19 pandemic further highlighted the vulnerabilities, with China’s stringent zero-COVID policy resulting in factory shutdowns and disruptions in production, exacerbating supply chain challenges worldwide.

As companies seek to mitigate risks and bolster supply chain resilience, the Association of Southeast Asian Nations (ASEAN) region and Mexico have emerged as promising destinations for implementing the China Plus One strategy. These regions offer a strategic geographical location, economic and political stability, favorable investment climates, market openness, trade liberalization, well-developed infrastructure, and competitive labor capabilities.

The ASEAN nations – which include Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Brunei, Laos, Burma, and Cambodia – have actively promoted new investments through tax incentives, business-friendly policies, fiscal incentives, and infrastructure development. Notable investments in the region include chip-testing factories in Malaysia, electric vehicle supply chains in Indonesia, and electronics facilities in Vietnam.

Meanwhile, Mexico’s proximity to the North American market, competitive labor costs, and streamlined logistics make it an attractive alternative for companies seeking to diversify their manufacturing operations beyond China. Mexican manufacturers have significantly enhanced their electronics and PCBA manufacturing capabilities, offering ample capacity for high-volume production and a more accessible environment for U.S. companies.

As businesses navigate the complexities of global supply chains, leveraging data-driven approaches and advanced technologies is increasingly crucial. By associating components to suppliers’ manufacturing locations – including FABs, factories, and assembly, packaging, and testing sites – modern supply chain visibility tools can help identify high- and low-risk parts, pinpoint single-sourced components from China, and guide diversification strategies.

Embracing this approach empowers businesses to gain comprehensive insights into their sourcing landscape, identifying whether their parts are sourced from single or multiple origins, and determining which manufacturers have diversified their global footprint. This invaluable insight enables informed decision-making and ensures the continuity of supply chains, ultimately enhancing resilience and competitiveness in the ever-evolving global marketplace.

In addition, the integration of artificial intelligence (AI) and machine learning (ML) technologies is revolutionizing supply chain management. These cutting-edge technologies can analyze vast amounts of data to identify optimal sourcing locations, predict potential disruptions, and streamline operations. By harnessing the power of AI and ML, companies can make informed decisions, mitigate risks, and ensure the smooth operation of their supply chains in an increasingly complex global market.

The successful implementation of a China Plus One strategy, however, requires a holistic and strategic approach that extends beyond mere geographical diversification. Businesses must carefully evaluate the potential risks and opportunities associated with each region, considering factors such as political stability, regulatory environments, infrastructure quality, and the availability of skilled labor. Fostering strong partnerships with local suppliers and manufacturers is paramount to ensuring seamless integration and collaboration within the diversified supply chain network.

As businesses navigate the complexities of global supply chains, they should embrace a mindset of continuous improvement and adaptation. The global landscape is constantly evolving, with new challenges and opportunities emerging regularly. Companies must remain agile and proactive in their approach, continuously monitoring and analyzing supply chain data, identifying potential bottlenecks or vulnerabilities, and promptly implementing corrective measures to mitigate risks and optimize operations.

The China Plus One strategy represents a critical imperative for businesses seeking to fortify their global supply chain resilience in an increasingly uncertain and dynamic market environment. By diversifying their manufacturing footprint beyond China and leveraging advanced technologies and data-driven approaches, companies can effectively mitigate risks, enhance adaptability, and maintain a competitive edge in the ever-evolving global marketplace.

 

global trade supply chain

Resiliency, Wherever You Can Get It: Uncertainty In Global Supply Chains Is Going To Stay

Citi has launched its latest Global Perspectives & Solutions (Citi GPS) report titled “Supply Chain Finance: Uncertainty in Global Supply Chains Is Going to Stay.” Its findings indicate that in an environment of stabilizing trade flows and cooling goods demand, disruption remains top of mind for businesses reliant on global supply chains.

Read also: Geopolitics, not Economics, is Front and Center for Global Supply Chains

The report, which follows 2021’s report titled “The Complicated Road Back to ‘Normal,’” draws insight from Citi Research’s propriety Global Supply Chain Pressure Index, trade flows and survey responses from multinational corporations and their suppliers globally.

As Citi’s premier thought-leadership product, Citi GPS is designed to help readers navigate the most demanding challenges and greatest opportunities of the 21st century. Citi accesses the best elements of a global conversation with senior Citi senior professionals, academics and corporate leaders to anticipate themes and trends in today’s fast-changing and interconnected world.

The Citi Global Supply Chain Pressure Index, outlined in the report, continued to ease on the back of a slowdown in global consumer’s demand for goods. Core goods inflation is expected to alleviate as heightened supply chain pressure has been a key driver of price pressure. The report cautions that while the decrease in demand is an important driver of loosening supply chain pressures, these developments are also a sign of mounting recessionary risks across countries and globally.

Citi Treasury and Trade Solutions (TTS) enables clients’ success by providing an integrated suite of innovative and tailored cash management and trade finance services to multinational corporations, financial institutions and public sector organizations across the globe. Based on the foundation of the industry’s largest proprietary network with banking licenses in over 90 countries and globally integrated technology platforms, TTS continues to lead the way in offering one of the industry’s most comprehensive range of digitally enabled treasury, trade and liquidity management solutions.

By analyzing the $4 trillion of average daily payment flow that TTS processes, the report finds that flows have largely stabilized after multiple disruptions in 2021 and early 2022. It is against this backdrop of stabilization, that Natural Resources and Clean Energy Transition (NRCET) trade flows grew 65% through the first three quarters of 2023 as energy prices soared globally.

“The pandemic and then the war in Ukraine demonstrated the fragility of supply chains. Many companies and customers experienced the pain of those disruptions and are now looking for resiliency wherever they can get it. While reshoring and nearshoring may seem like the next steps, buyers and suppliers alike indicate that the higher priority is resiliency or redundancy deeper into the supply chain,” notes Jane Fraser, CEO of Citi in her forward to the report. 

Citi and its research partner surveyed 2,327 global corporates for its Supplier & Large Corporate Survey as part of this report. This survey garnered powerful insights into the challenges facing companies large and small around the world, from which five themes emerged:

  • Rising prices and rising interest rates have had impact as corporates take steps to boost financial supply chain resilience
  • Corporates and their suppliers want to strengthen relationships and broaden their supplier base to mitigate further disruption
  • Pandemic disruption has given way to geopolitical tension as the primary threat to supply chain funding stability
  • Despite economic headwinds, respondents remain optimistic about the prospect for export growth
  • ESG remains an area of focus, but lack of clarity has impeded meaningful progress.

Chris Cox, global head of Trade and Working Capital Solutions at Citi said: “Given the impact from global events businesses have re-evaluated supply chain strategies. Notably, resiliency and continuity are taking center stage on sourcing through the production cycle. Another developing trend is the shift from ‘Just in time’ to ‘Just in case.’ Buyers are now building-in more resilience by purchasing earlier and holding more inventory. As a result, financing the end-to-end supply chain remains top priority.”

He continued: “How this trend plays out long term remains to be seen. Buyers, however, are focused on ensuring their suppliers have access to better and stable working capital solutions. Businesses are also accelerating the digitalization of supply chains. Digitalization enables ease of monitoring and management throughout the chain, enabling the robustness for any future disruptions.”

The digital copy of the report is available at tinyurl.com/ms64jvbt

Citi is a preeminent banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in its home market of the United States. Citi does business in more than 160 countries and jurisdictions, providing corporations, governments, investors, institutions and individuals with a broad range of financial products and services. 

Additional information may be found at citigroup.com X: @Citi; YouTube: youtube.com/citi; Blog: blog.citgroup.com; Facebook: facebook.com/citi; and LinkedIn: linkedin.com/company/citi.  

 

tradebeyond global trade supply chain

Building Resilient Supply Chains through Collaboration and Digital Connections

Collaboration and communication are increasingly important for effective continuity planning and business development in a complex and uncertain global supply chain operating environment.

Read also: Building a Resilient Supply Chain with Advanced Predictive Analytics

Forwarders and their business partners must maintain clear lines of communication and always-on access to information about disruptive events to quickly manage exceptions, whether weather-related, geopolitical, or other events.

When supply chain and logistics service companies have an effective, secure way to communicate and integrate with business partners and industry trading contacts, they enable greater supply chain resiliency, flexibility, and safety.

Timely digital communication and collaboration enable partners to a shipment to be proactive in researching disruptive events, determining their impact, and exploring alternative solutions. Supply chain and logistics options, such as alternate routes, backup storage facilities, port gateways, or transportation modes must be evaluated quickly to maintain production schedules and meet customer expectations.

Plus, when expanding into new markets, a secure, globally connected network offers access to new business partners, such as agents, that have local and regional knowledge and experience and the boots on the ground to facilitate reliable freight movements.

By being part of a collaborative industry network that securely connects to global shipping industry participants 24/7, an organization’s supply chain and logistics network can quickly address disruptions and seize business opportunities to successfully address unique market and infrastructure conditions.

Uniting businesses in commerce

Through a cloud-based global network, a worldwide community of users can quickly access logistics and market updates and build trusted business relationships with trading partners across the globe to improve visibility, predictability, and control. 

For example, Magaya, a logistics and supply chain automation software provider, connects forwarders and logistics service providers and their agents across the globe with the Magaya Network.

The Magaya Network facilitates timely, direct peer-to-peer dialogue when supply chain disruptions are occurring and facilitates reliable origin-to-destination data flows. Information can be exchanged faster, more securely, and more accurately when sent electronically in the cloud.

Shipping documentation can be electronically exchanged, enabling transactional information to be completed and flow smoothly and accurately from end-to-end. Participants can immediately transfer all necessary shipment and customs documents electronically allowing for faster freight clearance, eliminating the errors that occur with manual data entry, and, ultimately, lowering costs.

Secure connections

With the constant risk of scams, spam, and cyber-attacks, electronic transmission of shipment documentation via a secure network is an essential capability for today’s global shipping participants. Networked communication has encrypted data and uses authentication to verify a user’s credibility. It is much more secure than email, which is known for its risk of data breaches and can easily fall into the wrong hands.

Additionally, as part of a global network, trading partners can rely on an outside firm like Magaya for its established cybersecurity protocols and ongoing security updates. This alleviates the burden on businesses to manage this critically important aspect of their business.

Collaboration and communication are indispensable enablers for today’s global supply chains. Navigating today’s uncertainty, disruptive events, and evolving market dynamics underscores the importance of seamless connectivity. Through fostering robust partnerships and embracing digital networks, companies can fortify their supply chains and logistics networks against disruptions while seizing new opportunities. Digitized communication platforms like the Magaya Network provide secure communication and reliable data exchanges to support resilient, efficient supply chains.

supply chain global trade Source-to-contract

Building Resilient Supply Chains: The Role of Source-to-Contract Management in Mitigating Risk  

In today’s global economy, along with ever-present geo-political unrest, building a resilient supply chain is not just a strategic advantage, it is a necessity. Besides external risk factors, procurement fraud in the UK cost the private and public sectors £157.8 billion and £50.2 billion respectively. 

Among the myriads of strategies that organizations must employ to mitigate risk, source-to-contract can help teams seamlessly integrate sourcing and contract processes to ensure that operations run safely and smoothly, standing out as a crucial method for mitigating risks and enhancing efficiency.

Jack Macfarlane, Founder and CEO of DeepStream, discusses the stages of source-to-contract management, the advantages it can offer procurement teams, and how common risks can be mitigated.  

Read also: Building a Resilient Supply Chain with Advanced Predictive Analytics

Understanding source-to-contract management

Source-to-contract management is a strategic procurement process that spans the procurement lifecycle, from sourcing suppliers to finalizing contracts. This process is designed to streamline operations, ensure supplier reliability, achieve fair and competitive pricing and fortify the overall security of the supply chain.

Historically reliant on manual methods, modern source-to-contract management has embraced digitalisation, incorporating technologies like artificial intelligence to automate and secure procurement processes. This evolution allows for real-time data analytics, enhanced decision-making, efficient supplier performance monitoring and better adaptability to market disruption and demand.

The primary aim of source-to-contract management is to identify and secure contracts with the best quality suppliers of the products or services a business requires but at the most attractive price on the market.

A structured set of steps are undertaken in the source-to-contract process, beginning with sourcing and vetting suppliers to identify the wheat from the chaff. This involves extensive research, both market-related and internal, to identify a specific sourcing criterion and create a shortlist.

Next, bidding takes place and involves disseminating RFIs, RFPs and RFQs, which can also include a general bid invitation, placing the onus on the supplier to offer a competitive rate for their product or service within a competitive pool of other prospective suppliers.

Finally, a supplier will be chosen based on their ability to fulfil the drafted criteria to the highest standard. A contract must be negotiated, accepted and implemented.

Advantages of source-to-contract management

The source-to-contract approach significantly enhances procurement efficiency by aligning goals and activities at each phase, from the selection to the acquisition of goods and services. This strategic alignment not only streamlines processes but also boosts the return on investment (ROI) potential for businesses by improving financial and operational outcomes.

Tracking the ROI from source to contract involves several key strategies. Firstly, aligning metrics is crucial; understanding and monitoring supplier performance metrics regularly can profoundly influence procurement strategies, ensuring that decisions are data-driven and geared towards efficiency.

Secondly, the ability to track savings explicitly each month allows businesses to quantify the effectiveness of their procurement strategies in real time, providing clear insights into financial benefits.

Beyond the measurable financial returns, the source-to-contract approach also fosters intangible benefits. Creating value in areas like speed and customer satisfaction—though not always quantifiable in monetary terms—can significantly enhance competitive advantage and customer loyalty.

Moreover, effective communication and the development of trust between departments can further refine procurement processes, leading to continuous improvements and better alignment with business goals.

The additional benefits of a well-implemented source-to-contract strategy are manifold. Cost reduction is one of the most immediate benefits, as effective sourcing strategies make it easier to find competitive supplier rates, thus directly improving the bottom line. This approach not only cuts costs but also aids in managing financial gains more sustainably over the long term.

Strengthening business relationships is another critical advantage. The source-to-contract process facilitates greater information sharing and communication between buyers and suppliers, which enhances supply chain cohesion and helps in managing expectations.

This improved relationship fosters trust and transparency, enabling better management of supply chain risks such as shortages or the bullwhip effect, where small fluctuations in demand at the retail level cause progressively larger fluctuations up the supply chain.

Moreover, these strong supplier relationships enhance decision-making capabilities. With a deeper understanding of the supply chain dynamics and greater trust among stakeholders, businesses can anticipate future challenges more effectively and implement strategies to mitigate potential impacts. This proactive approach not only limits the adverse effects of supply chain disruptions but also positions the company better within the market.

In conclusion, source-to-contract management not only offers substantial ROI through direct cost savings and enhanced efficiency but also strengthens supplier relationships and improves overall business resilience. This holistic improvement in procurement and supply chain management makes it an indispensable strategy for businesses aiming to thrive in competitive markets.

Mitigating common risks during the process

The structured framework of proper source-to-contract management, with its stringent controls, transparency, and enhanced accountability, effectively improves vendor management strategies and ensures robust contractual management. These elements are critical in mitigating risks and safeguarding businesses.

However, the efficacy of source-to-contract in risk mitigation is contingent upon its correct implementation. A comprehensive source-to-contract process encompasses effective communication, meticulous document management, vigorous bid platforms, and proficient data collection and reporting capabilities. Nonetheless, common pitfalls such as inaccurate needs analysis, poor vendor selection, and disorganised vendor management can increase the risk of fraud and legal challenges.

To address these challenges, automation and digitalisation play pivotal roles. They enable real-time data analytics, facilitate more informed decision-making, enhance efficiency in monitoring supplier performance, and provide the agility to respond to market disruptions and shifts in demand. Additionally, the deployment of centralised digital platforms supports real-time, thorough auditing processes, making it simpler to identify discrepancies and reduce the risk of fraud.

However, there is a downside to advanced technology. Sophisticated software designed to automate procurement processes can be susceptible to misuse. For instance, such software can be manipulated to alter data, conceal suspicious activities, produce fraudulent invoices, or unfairly influence vendor selection during the bidding process. This underscores the necessity for vigilant oversight and robust security measures in the implementation of technological solutions within source-to-contract management.

predictive global trade

Building a Resilient Supply Chain with Advanced Predictive Analytics

Global supply chains have made front-page news for all the wrong reasons in recent years. The pandemic shook the foundation of supply chain management, blockages in the Suez Canal cost businesses billions, and the global conflict undermined the stability of otherwise reliable trade routes. 

Responding to these changes is key if you want your firm to last in the long term. You cannot afford to be out of action for weeks on end when upstream suppliers falter and should be quick to respond to potential issues caused by geopolitical tensions. 

Rather than reacting to supply chain issues, adopt a proactive approach by harnessing the power of predictive analytics. Today’s predictive analytics tools can help you spot weaknesses, make strategic changes, and avoid costly errors. Predictive maintenance can keep your fleet on the road for longer and improve your overall operational efficiency, too. 

Understanding Predictive Maintenance

Predictive maintenance is a branch of predictive analytics that attempts to forecast faults and mechanical failures. This can be revolutionary if you’re used to responding to problems like dead motor batteries, electrical wiring issues, or worn-down fabrication units. Predictive analytics programs use data to identify these issues and bring them to your attention before a supplier or employee does. 

Read also: Technology’s Impact on the Supply Chain

These predictive maintenance programs rely on machine learning (ML) algorithms to crunch the numbers and learn from patterns. Investing in these ML programs is crucial, as ML programs can optimize your global logistics and improve your supply chain efficiency. Common uses of ML in supply chain management include:

Demand Prediction

These tools identify consumer trends and use historical data to identify patterns. This is crucial if you want to respond to seasonal surges in order volume.

Route optimization

Route optimization apps minimize energy waste and expedite delivery times. They give drivers the fastest route possible and reduce the risk of an accident while on the road. 

Fleet management software

These tools protect drivers and identify failing parts before your machine or vehicles break down. This is particularly important if you utilize Just-In-Time production models and need to minimize the amount of time products spend in the warehouse.  

These predictive analytics tools can be used in conjunction with predictive maintenance tools to improve the efficiency of your global business. 

For example, if you sell winter apparel in Australia, predictive analytics tools can prepare you for a surge of sales if temperatures are set to suddenly dip. You can then look towards predictive maintenance programs to ensure that your delivery vehicles are primed for increased use and will not break down while you’re trying to meet high demand. 

Anticipating Downtime

Predictive maintenance tools can’t prevent your equipment from breaking down. However, they can help you get ahead of faults and spot issues with your supply chain before an issue can arise. These tools can be used to justify your decision to replace or repair supply chain assets by improving your understanding of asset lifecycles. This is crucial, as all business assets go through four common stages, including: 

  • Acquisition,
  • Operation and maintenance,
  • Repair or replacement,
  • Disposal.

You can identify which stage of the product lifecycle your asset is in by utilizing data analytics to conduct an effective cost-benefit analysis. For example, if you have recently bought a used fleet of trucks, you can use AI-powered enterprise asset management (EAM) software to determine when the vehicles have outlived their usefulness. These EAM programs pull data directly from sensors that are connected to the Internet of Things (IoT) to read the vital signs of your assets. 

These insights can help you make pivotal calls that save you money and bolster the resilience of your supply chain. EAM programs help you evaluate asset performance and improve the veracity of your cost-benefit analysis, too. This data-driven approach to asset management will reduce downtime AI spreads throughout supply chain management, as EAM programs will be able to draw from larger data sets as your IoT expands. 

Additional Features

Predictive maintenance tools do more than tell you when a screw is loose or a clutch is worn out. The best predictive maintenance tools are all-in-one programs that give you on-the-go updates based on data points that are easily overlooked by human supply chain specialists. 

For example, if you work in manufacturing, AI-driven predictive maintenance tools can assess safety compliance at your place of work. By tapping into a range of visual surveillance systems, inventory management tools, and real-time performance metrics like temperature, pressure, and usage, AI can spot safety hazards and help managers remove faulty equipment before it can cause an accident. 

Predictive maintenance tools are particularly beneficial during times of high production when you cannot afford a breakdown. These tools work in tandem with your automated scheduling services and automatically reassign workers to different tasks if a fault has shut down a machine or workstation. This gives you additional time to replace or repair equipment, reduces the pressure that your staff feels during peak times, and improves your supply chain resilience. 

Conclusion 

Predictive maintenance tools should be a part of your wider supply chain management system. Predictive tools can spot faults and minimize downtime when something goes wrong. They can help you make better-informed decisions when a vehicle or machine breaks and innately improve safety standards at work. Just be sure to integrate predictive maintenance programs into your wider tech stack, as they work best when they have access to your wider EAM. 

mexico

Post-COVID Resilient Supply Chains in North America: The Role of Mexico

If we’ve learned anything after surviving 2020, it’s that no industry will return to its affairs as if the pandemic simply did not happen.

Regarding the post-pandemic supply-chain transformation in North America (Mexico, the United States, and Canada), we at Foley & Lardner have received the same message from both the U.S. President[1] and our clients[2]: resilient supply chains are the new name of the game, and they are to be secure, redundant and diverse; also, they will be more transparent regarding purchaser’s needs and the supplier´s ability to fulfill them, will favor provider adaptability over lean inventories, and preapprove alternate purveyors over a race to the bottom.

With the aforementioned in mind, we should begin by laying out the known truths by which Mexico has historically contributed to strengthening the North American supply chains:  (i) the country provides quality manufacturing at the lowest costs in the region, (ii) it benefits from free trade agreement provisions with more than 60% of the world´s Gross Domestic Product (52 countries); (iii) almost all of the favorable factors when considering near-shoring, are present in Mexico, (iv) 25+ years of NAFTA experience created a skilled workforce whose numbers will grow as Mexico´s population ages, (v) intellectual property rights are duly protected, and (vi) trade promotion programs (i.e. IMMEX) are well known and have been running smoothly for years.

Said truths, however, could be hampered by a number of matters that we should keep a close eye upon, namely:

I. COVID-19 Vaccination

Both the Mexican federal government and individual States have concurrent jurisdiction regarding mandatory health measures, including vaccinations.

In December 2020, the federal government´s National Vaccination Policy set the goal to immunize the entire population within 18 months, firstly with frontline health care workers, followed by those 60 and older, those in their 50s, 40s, and lastly, 18 and older. Largely to scarce vaccine supplies and a rocky organizational start, progress to date casts doubt upon whether the 18-months goal is achievable.

In January 2021, the Mexican Ministry of Health issued high-level guidelines for individual Mexican states and private entities to acquire and administer vaccines, as long as they follow the National Vaccination Policy; operational details are still needed.

Furthermore, compliance with fluid COVID-related health and labor regulations in manufacturing facilities is still a major issue, both in terms of being able to continue production, as well as preventing lawsuits due to real or imaginary risk of exposure.

II. Outsourcing & Insourcing Ban

Due to his Political Party´s (MORENA) control of both Houses of the Mexican Congress, the President´s initiative to ban the current practice of outsourcing and insourcing will likely enter into effect on May 2021 (with an apparent 3-month vacatio legis).

But for “specialized services”, meaning those that are not part of the economic activity of the intended beneficiary, all workers will have to be in the payroll of the employer, which will entitle them to profit sharing provisions.  Simulating receiving specialized services would constitute elements of proof towards the commission of criminal tax fraud.

Since most manufacturing operations in Mexico currently rely on outsourcing operations, incoming law will force reassessing and restructuring a number of labor, corporate and tax present-day structures.

III. VAT-Certified IMMEX Benefits Diluted

Mexican IMMEX (aka Maquila) companies operate under a governmental authorization that includes preferential conditions, both operational and fiscal.

The highest degree of preferential treatment conditions is granted to companies that are VAT (Value Added Tax)-certified, which allows them to avoid paying otherwise applicable VAT upon the importation of goods used in their manufacturing operations.

Such preferential treatment will automatically be diminished as soon as each VAT certification is renewed by individual IMMEX companies, which should occur every one to three years depending on their current authorization.

Upon VAT certification renewal, companies will, most importantly: (i) operate under a reduced time frame to utilize most temporarily imported goods (from 36 months to 18 months), although longer periods apply to products such as containers, machinery and equipment; (ii) no longer will be automatically enrolled in Sectorial import programs which allow for reduced duty imports on steel, textiles, others; (iii) have to file weekly import documents, instead of monthly; (iv) will not be able to temporarily import products without declaring serial numbers; (v) and will no longer have the ability to obtain expedited 16% VAT refunds on their operational balance (capacity to continue temporarily importing without paying VAT remains, however).

IV. Mandatory Technical Standards (NOMs) No Longer to be Exempted

Prior to October 2020, importation of certain materials, i.e. those to be utilized in production processes, were permitted to enter Mexico under “exemption letters” that would allow them to be imported without proof of NOMs compliance (note that not all imports are subject to NOM compliance, in accordance to their relevant Harmonized Tariff Schedule classification).

Even though little is still known in the importing community, importers are no longer allowed to use such exemption letters and, upon bringing goods into the country, are obliged to demonstrate compliance with relevant NOMs, either prior to the importation process or afterward.

In addition to evolving administrative application criteria, a number of procedural rules must be pursued for each of the aforementioned venues.

V. Labor Enforcement of USMCA (United States-Mexico-Canada Agreement) Obligations

As was required in USMCA, Mexico has already amended its labor laws to guarantee the basic rights of freedom of association and collective bargaining (with the non-stated objective of increasing wages in the country).

In accordance with such amendments, (i) effective immediately, existing collective labor contracts shall be free of “interference” from employers (this is, under their dominance or control), and (ii) in the medium term, labor contracts need to be “legitimized” by May 1, 2023 at the latest, in accordance with the July 2019 process issued by the Mexican Labor Secretary.

Due to the foregoing, there will be real, working unions, and current collective contracts signed with employer-friendly unions (commonly known as “protection” contracts or contracts with “white unions”) will soon be eliminated; it is probable that this will bring new leadership and more than one union to a company.

As per USMCA, determination of denial of freedom of association and collective bargaining rights may be made by a Facility-Specific Rapid Response Labor Mechanism; if such a determination is made, the covered facility´s goods or services could face a suspension of preferential tariff treatment or the imposition of penalties.

One thing is certain: labor relations in Mexico are changing rapidly, and now is the time for employers to preventively look into these issues.

VI. Tax Rules Regarding Permanent Establishment

Recent tax reforms have expanded the scope of permanent establishment rules in Mexico. As it is known, if a foreign company is deemed to have a permanent establishment for tax purposes in the country, it shall be subject to levies with respect to the relevant revenue of said establishment.

Thus, companies already doing business, or that are considering setting up operations in the country, should evaluate these recent changes to assess potential risks of being considered to have a local taxable presence.

_________________________________________________________________

Alejandro Nemo Gomez Strozzi, a partner at Foley & Larder, focuses his practice on providing advisory and consulting services related to international trade compliance, antidumping, customs, foreign trade and Mexican administrative law. As a top international trade lawyer, he has advised major multinational companies in the automotive, steel and consumer products sectors.

Fernando Camarena Cardona, a partner at Foley & Lardner, is a senior business and legal advisor on international and domestic tax issues in Mexico, providing both tax counseling and assistance with litigation. He represents small companies to Fortune 500, FTSE 100 and other global and brand name corporations in the energy, manufacturing, nutritional supplement, insurance and other industries. 

Marco Najera Martinez, a partner at Foley & Lardner, is a recognized go-to transactional and regulatory lawyer representing global companies doing business in Mexico. With particular experience in the Mexico antitrust laws, he represents Fortune 500 corporations, as well as Mexico companies, in this highly specialized area. 

supply chain

Leveraging Digital Technology to Create a More Resilient Supply Chain

The ongoing COVID-19 pandemic has disrupted the flow of goods across the globe, from raw materials to finished products. The pandemic has raised awareness of the importance of truck drivers, delivery drivers and warehouse workers who have kept products moving in this challenging environment. The economic ramifications have forced companies and industries to reevaluate their supply chains.

Additionally, the pandemic has vividly illustrated that today’s highly interlinked, international supply chains have more potential points of failure and less flexibility for absorbing delays and disruptions than business leaders may have realized.

To build more resilient and flexible supply chains, companies may consider several options, including bringing some critical activities closer to home, setting up backup suppliers to reduce exposure to any single supplier/country, or refining their inventory strategies. Of course, any such alteration will affect logistics and transportation.

Having the right combination of technology, expertise, people, and solutions in place is critical as companies revisit their supply chain strategies. Fortunately, leveraging supply chain technology can improve end-to-end visibility, resiliency, and efficiency within your supplier networks.

Advances in digital technology and automation are driving the continued evolution of supply chains. Some of the most impactful technologies can be grouped into three buckets:

Automation

-Robotic Process Automation (RPA)
-Configurable workflows

 

Digitization

-Artificial intelligence
-Machine learning
-Cloud computing

 

Big data

-Internet of Things

 

Companies in many industries currently employ these technologies. GlobalTranz uses these technology advances to enable and support our people.  We have used RPA to streamline many rote, operational tasks and allow our workforce to tackle more strategic, higher-value activities, particularly those which build relationships with our customers, suppliers, and partners. RPA creates a software robot leveraging a specific set of rules to automate tasks, such as document retrieval, inter-system data entry, approval processes, and gathering track and trace data. Unlike traditional custom-developed solutions, RPA can be continuously modified in a more real-time approach – especially important as the number of data sources and the sheer amount of data continues to increase.

By contextualizing data and reviewing daily processes, businesses can make complex and time-consuming processes more efficient. For example, when using RPA to gather track and trace data, you can be assured that the information is the most recent and accurate.

Before building bots to automate the collection of track-and-trace information, GlobalTranz devoted nearly 139 days’ worth of time annually, per person, to this task. Automation has enabled people to spend more time with customers and partners helping them devise strategies to address challenges brought on by COVID-19 and create a more resilient supply chain.

As companies look ahead to the economic recovery, it is imperative that they obtain greater visibility into their own facilities, their direct suppliers, and logistics partners. The crisis demonstrates the need for resiliency and accurate, real-time information that can help businesses make better-informed decisions and mitigate the costs of supply chain disruptions.

Obtaining accurate, real-time information to mitigate complexity and create resiliency requires a more digitized approach. Disruptive risks require investment in additional supply chain resilience even though the gains and the return on investment may not be immediate.

Successful organizational change, much like social change, can be influenced by the people and capabilities around us – including both stakeholders within your business and your supply chain partners – as well as how internal data and external intelligence are leveraged to make better business decisions.