Navigating the Surge: Mexico's Manufacturing Renaissance and the Startup Revolution

The North American Free Trade Agreement (NAFTA) has been a catalyst for transformative growth in North America, particularly in Mexico, where the manufacturing landscape has flourished. With tariffs dismantled and a robust intellectual property agreement in place, Mexico stands as a beacon of opportunity, especially for agile startups poised at the frontier of innovation and scalability. This comprehensive exploration dives into the heart of Mexico's manufacturing boom and the pivotal role of startups in this burgeoning ecosystem.

The Strategic Advantage of NAFTA

NAFTA has been instrumental in bolstering Mexico's manufacturing sector, offering robust intellectual property (IP) rights to foster innovation and support jobs across North America. By prohibiting customs duties on digital products and ensuring the free cross-border transfer of data, NAFTA has created an environment ripe for digital innovation and growth. This has been particularly beneficial for industries such as pharmaceuticals, agriculture, aerospace, electronics, automotive, furniture, and medical devices, all of which have seen substantial growth due to reduced trade barriers and strengthened IP protections.

Opportunities in Mexico's Manufacturing Ecosystem

Projected to expand by 3.30% from 2024 to 2028, Mexico's manufacturing sector encompasses a spectrum of industries from aerospace and electronics to automotive, furniture, and medical devices. Each segment offers a unique canvas for innovation:

• Aerospace: With over 330 manufacturers, Mexico's aerospace sector shines, driven by the demand for precision and sophistication in components and assemblies.
• Electronics: Tijuana's acclaim as a global TV manufacturing hub underscores the potential for startups in high-tech production, with the electronics sector boasting an export value of $87.12 Billion.
• Automotive: The arrival of over 1100 Tier 1 automotive manufacturing companies highlights Mexico's dominance in auto parts supply for the U.S. market.
• Furniture and Medical Devices: Benefitting from NAFTA's focus on IP and patents, these industries offer fertile ground for innovative ventures.

The Industry 4.0 Revolution

The embrace of Industry 4.0 technologies such as IoT, AI, robotics, and 3D printing is remolding Mexico's manufacturing framework. Pioneers like Schneider Electric and Bosch exemplify this shift, leveraging IoT and smart factory concepts to boost efficiency and sustainability. This technological metamorphosis opens avenues for startups to deliver solutions that mesh with this newly interconnected milieu.

Why Mexico? 

• Geographical Advantage & Lower Shipping Costs: Given the evident geographical proximity between the two countries US-Mexico, moving manufacturing to Mexico for the US would not seem like a bad idea—specifically when such installations would lower shipping costs for imports and exports. According to NovaLink’s Cost Analysis, reshoring US manufacturing from Vietnam and China to Mexico instead would save the US approximately 30% on fuel and logistics costs. The close proximity would also drive Mexico’s startup scene through technological and knowledge sharing. 

• Geopolitical Trade Wars: With US-China restraining trade relationship, policies are expected to not improve in the next decade. Such a hawkish environment is exacerbated by China’s National Security’s policy that forces any company on Chinese land to provide data and assistance upon request of the Chinese Government. This has resulted in fears of data security threats from the US Government in DC. For instance, with many Electric Vehicles (EVs), their components such as light, built-in sensors, and cameras are manufactured in China and are used by US automakers like Tesla and General Motors for their EVs. Under China’s National Security’s policy, data collected by these components like recordings of US highways via EVs’ sensors are at risk of being exposed and handed over to the Chinese Government. Thus, such a restraining US-China trade relationship will drive the US-Mexico relationship.  

• Human Capital & Low Manufacturing Costs: US’s reshoring to Mexico has not simply just started. In fact, a lot of manufacturing for areas such as automobiles and furniture have been relocated from Asia to Mexico. The country is equipped with a strong human capital: many technicians in Mexico understand good manufacturing practices. Tesla for instance is tapping into Mexico’s important automotive engineering workforce, which has been growing in recent years after automakers have built 19 car factories in the country. However, while near-shoring to Mexico has been facilitated by the country’s manufacturing’s talent base, more sophisticated production—requiring more steps—such as that of Apple’s Iphones will not be happening in Mexico anytime in the next 5-7 years. With existing high efficiency, productivity, and deep expertise in China for Iphones for example, moving the whole supply chain, especially higher value chain production like battery, to Mexico would be unfavorable.  

• Increasing Power of Peso: According to Reuters, the Mexican peso is among the top-performing currencies in 2023 with a 12% surge against the U.S. dollar. Indeed, while such a spike in the "super peso" could discourage exports and lead to trade deficit, these costs however remain relatively inexpensive for the US’ reshoring to Mexico—coupled with US-China Geopolitical Trade Wars, propelling the US to locate manufacturing to Mexico. 

However, these driving factors still remain uncertain as they are dependent on the results of the US and Mexico presidential elections this year—which would be instrumental in future US-Mexico trade policies. 

Early and Growth Stage Startups to Watch: 

• Autometrics (Seed | Raised): Part of Techstars’ Jan’24 Class Batch, Autometrics is a plug-and-play pre-trained AI software that allows manufacturers to monitor manufacturing processes in Real-Time based on existing sensors before defects occur at the final stage of production. 
• Polymath Robotics (Seed | Undisclosed Funding): Polymath Robotics is building basic generalizable autonomy, enabling clients to quickly and cost-efficiently automate industrial vehicles and build apps on top via a plug-and-play software. 
• Yumari (Pre-Seed | Raised $2M): Yumari focuses on building a cross-border B2B trading platform that allows end-to-end transactions powered by a relevant search algorithm, real-time tax and logistics calculation, as well as secure payment processing for international transactions.
• Autana.ai (Series B | Total Funding Raised: $123M): Autana is a manufacturing partner based in Latin America that provides a range of manufacturing services, including forging, castings, CNC machining, injection molding, and extrusions. 
• Addi (Series C | Total Funding Raised $462M): a leading Buy Now Pay Later platform. Statista estimates that BNPL transactions in Mexico would be about 48 percent higher in 2024 than in 2023. This is according to a market model released in the first quarter of 2024, which placed Mexico among the earliest adopters for buy now, pay later in five countries covered for Latin America. 

As more startups emerge from this space, we are excited to continue following early-stage software and manufacturing technologies. While the software startups are playing in a more saturated market, we believe that the ones that have strong robust architecture as their backbone and deep expertise will gain the right to win in this evolving market, fueled by regulatory tailwinds.