What is Nearshoring?
Nearshoring is the outsourcing of manufacturing to a nearby or neighboring country, but it can also refer to the transfer of manufacturing processes to a closer geographic region. Many companies find that nearshoring provides various benefits such as:
– similar time zone
– geographic proximity
– cultural alignment
– less expensive labor costs
Nearshoring can also mean offloading responsibilities and jobs to nearby countries, allowing operations to be closer to the customer base. It’s the perfect option for companies that are looking for cost-effective options and the benefit of the same cultural and logistical knowledge.
Why Companies Are Shifting to Nearshoring
For the last decade, U.S. businesses have steadily been shifting their production from Asia to Mexico. This rise in nearshoring was triggered by several different events:
Tariffs on China
When tariffs on China were implemented in 2018, they forced businesses to look for alternative markets to reduce costs. Though agreements have been made and some have fallen through, tariffs against China are still in place after 8 years, causing businesses who haven’t already shifted production to think seriously about it.
The United States-Mexico-Canada Agreement (USMCA)
The USMCA is a trade agreement governing the trade and economic relationships between the United States, Mexico, and Canada, originally negotiated to replace the NAFTA (North American Free Trade Agreement). USMCA was first signed into law on January 29, 2020, and implemented on July 1, 2020.
The agreement has given producers an incentive to relocate their supply chains to North America. For many businesses, they’ve chosen Mexico.
Disruptions to Logistics
There are several disruptions that impact why businesses move production to Mexico. The increased cost of transport is a major one. When having production overseas, businesses must budget for the transport expenses of getting shipments back to the U.S. When your production is in Mexico, that cost significantly decreases.
Another disruption is global conflicts. If production relies on a supplier that’s currently engaged in war, the production of goods may come to a halt. Nearshoring allows easy access to goods and production during times of global uncertainty. During the pandemic, faults in the supply chain revealed how fragile it is. Ever since then, businesses have opted to find ways to have more control over their supply chain.
Nearshoring to Mexico isn’t anything new; it’s simply rising higher than before. During the 1990s and early 2000s, the practice gained significant traction. Back in 1994, the North American Free Trade Agreement (NAFTA) went into effect, which eventually evolved into USMCA, which encouraged business between the U.S., Canada, and Mexico. The agreement effectively reduced tariffs, trade barriers, and other blocks to cross-border commerce. With this agreement, Mexico became a preferred destination for nearshoring. The Maquiladora program was another reason businesses were attracted to Mexico. The program allowed foreign companies to create manufacturing operations, as well as benefit from beneficial tax and tariff conditions.
Some of the biggest American businesses are operating in Mexico today. Whirlpool, an electric appliance company, has shifted its operations to nearshore in Mexico. 80% of their machines are manufactured in Mexico, then exported to the U.S. and Canada. Honeywell, an aerospace components manufacturer, operates out of Mexicali and consistently produces high-quality goods. Finally, General Motors has been nearshoring in Mexico for decades and is its biggest carmaker, with over 800,000 cars produced as of 2018.
What are the Benefits of Nearshoring in Mexico?
Proximity to Market
Shifting production to Mexico has one major benefit: proximity to the U.S. market. Rather than goods being produced in Asia, where it will take weeks to make its way over, goods can be brought over in just days. In just 48 hours, freight can be shipped to the U.S. from Mexico via ocean and with a truck in 24 hours or less. In contrast, pan-Pacific Ocean container carrier routes take two to six weeks.
When demand shifts, production can run smoothly, instead of worrying about long transit times. It’s also easy to make the journey to the production site for in-person meetings and check-ins. Being able to physically check on production more easily helps to keep everyone on track or adjust when needed.
Cost Savings
Nearshoring in Mexico helps businesses keep costs down. It’s cheaper than if production occurred in the United States and will result in significant cost savings once wages and regulatory compliance are considered. Shipping costs will be decreased since the goods are already close to their final destination. Labor costs are lower in Mexico, and the wages are more consistent than in China, which helps keep a business’s expenses down.
Favorable Trade Agreements
As previously mentioned, the USMCA helps with fairer trade and economic growth in North America. The new agreement offers incentives to businesses to shift production to North America, such as strong labor and environmental protections, revised investment provisions, and innovative rules of origin. The agreement is mutually beneficial for all three countries.
The USMCA enables better mobility of services between all three countries, making it even easier for businesses to switch operations to a closer country.
Skilled Labor Force
Mexico’s workforce caters to a wide variety of manufacturing needs, especially in automotive and aerospace. In the U.S. today, millions of industrial jobs are going unfulfilled or require exceedingly high wages for stateside production. The lack of willing and able workers in the U.S. to do industrial work represents a generational shift and a longer-term issue for manufacturers. Luckily, Mexico has presented a viable solution to this issue with steady markets and labor costs. Mexico has invested in its education and training programs, with a heavy focus on the technology and manufacturing industries.
When businesses nearshore to Mexico, they’ll have access to an always-evolving and talented workforce. In the IT industry, Mexico ranks as the 3rd largest exporter globally. Mexico is the top supplier of medical devices to the United States. On the world stage, Mexico has proven to be one of the strongest choices in where businesses should move their production.
Efficient Inventory Management
Due to the geographical proximity between the U.S. and Mexico, inventory management can be more efficient. Businesses won’t need to have an extensive inventory since goods can be shipped faster than if production were based elsewhere. Inventory expenses are lowered, and the risk of obsolete goods becomes zero. Businesses can focus on improving their cash flow, rather than stockpiling products. The efficiency is invaluable for industries where frequent product updates and volatile demand are most prevalent.
Time Zone Alignment
Gone will be the days of early morning and late-night calls to discuss production issues a world away. When nearshoring in Mexico, everyone will be on the same time, give or take a few hours. Collaboration and communication between teams will occur faster, meaning problems can be solved within an hour if needed.
Some of the most significant business benefits of nearshoring to Mexico include scalability, diverse industry, and Infrastructure. Serious investments in telecommunications, transportation, and business parks have significantly increased operational efficiency. Meanwhile, vast sectors of highly skilled and educated professionals fluent in English await the opportunity to work with businesses across various industries, including electronics, aerospace, automotive, and more. Suppliers and professionals are available for a vast array of business needs. All these factors make scalability possible, whether your business needs to scale up or down quickly! This kind of flexibility is essential for successful business operations.
Mutual Benefits
A long-term nearshoring partnership between the U.S. and Mexico presents excellent benefits for both countries. Agreements such as the USMCA keep the trade partnership competitive, relevant, and favorable for all parties involved. While the U.S. benefits from cultural similarities, steady markets, labor forces, and similar business practices, Mexico also stands to gain from U.S. foreign direct investment, which can potentially add another 0.5% to Mexico’s GDP while manufacturing output could add 2.4 percentage points, with an additional 1.1 million potential jobs being created.
Mexico still has some areas of improvement, including solving electricity and water supply issues, improving the business environment, increasing infrastructure investment, and introducing general investment incentives. Improving these areas and continuing to create beneficial nearshoring experiences has the potential to transform Mexico into an international logistics hub.
Conclusion
As the trade world shifts, it’s important for businesses to know how to adapt to the changes. Nearshoring is the perfect answer for U.S.-based companies, offering cost reductions, faster transit times, and access to a highly skilled workforce. With tariffs being implemented and various wars causing trade to come to a halt, switching your production location closer to your operations may be the right choice.
Nearshoring in Mexico FAQs
Q: What legal and regulatory requirements does Mexico have in place?
A: The legal and regulatory environments for businesses are stable in Mexico. However, it is essential to research and understand the local labor laws, tax regulations, and other legal requirements before establishing operations.
Q: How does IP protection work in Mexico?
A: Mexico has IP laws, regulations, and agreements to protect IP. But It’s still important to take the extra steps to ensure protection. Ensure you take responsibility for your IP through contracts, trademarks, patents, and other legal mechanisms.
Q: Are there any potential challenges in reshoring operations to Mexico?
A: Some potential challenges include managing a remote workforce, dealing with security concerns in particular regions, and ensuring consistent quality. Currency exchange rates also have the potential to impact costs.
Q: How can a company find a reliable nearshoring partner or service provider in Mexico?
A: Finding a reliable partner requires conducting in-depth research on potential matches—exercise due diligence by reviewing track records and client references and assessing capabilities and infrastructure.
Q: Are there incentives for nearshoring in Mexico?
A: Mexico offers a variety of incentives to attract foreign businesses. These incentives include tax benefits, grants, and research and development project support.
