Why top companies are choosing Mexico for Nearshoring, and you should consider it too
- When it comes to fast-growing your business without the expense of domestic expansion, nearshoring to Mexico is one of the main solutions.
- Proximity, cost savings, time zone alignment, beneficial trade conditions, and low labor costs are some of the key benefits of nearshoring to Mexico.
- There are big American brands that have successfully nearshored their manufacturing operations, like Whirlpool, Honeywell, and General Motors.
As tensions between China and the United States continue to rise, and due to many geopolitical and economical issues, like warfare, COVID, inflation, and lack of commodities, American companies are having a hard time relying on their goods to be shipped from overseas, especially from China, causing buyers to reevaluate their sourcing.
In the face of these major challenges, Mexico remains one of the top trade U.S. partners. This represents a huge opportunity for American companies, especially since Mexico is starting to replace China as a source of different supplies and has many competitive advantages such as a similar time zone, work culture, and geographical location. This is in turn made easier with the USMCA agreement. These key factors are strengthening the relationship between the U.S. and Mexico, positioning cross-border trade as a true game-changer for many companies.
"Mexico became America’s largest trade partner in 2019, a position they will not give up in our lifetimes." – Peter Zeihan.
Therefore, we can say that nearshoring is a great opportunity to increase business strength, particularly in the post-COVID-19 world.
What is nearshoring?
Nearshoring means outsourcing manufacturing to a nearby country or transferring manufacturing processes to a closer geographic location, in which the company can benefit from geographic, time zone, cultural, linguistic, economic, political, or historical proximity or similarity. However, it can also refer to the process of offloading responsibilities and jobs to countries near the company’s geographic location.
There are other similar words, like reshoring and offshoring, but they essentially mean different things. To know the difference between nearshoring, reshoring, and offshoring, click here.
Why are companies nearshoring to Mexico?
The rise of nearshoring in Mexico has been steadily increasing over the past decade for several reasons. Firstly, ongoing trade conflicts between the U.S. and China have caused uncertainty when it comes to the cost and quality of production, in addition to concerns regarding intellectual property protection.
Secondly, when the world was shut down due to the Covid-19 pandemic, it illustrated just how risky it was to have such a heavy reliance on a weakening supply chain. And thirdly, more North American manufacturers are taking a regionalized approach to their strategies due to the provisions outlined in the USMCA, which was officially effective on July 1st, 2020.
When compared to offshoring, which relocates factories from costly countries to lower-cost regions to produce goods or services, nearshoring allows operations to be in closer proximity to where the goods or services will ultimately be sold.
Even before COVID hit, according to Kearney’s 2019 Reshoring Index, Mexico increased exports to the U.S. by $28 billion in 2018, which equaled a 10 percent growth rate over the year previous and was documented as the fastest growth experienced in the past seven years. This occurred at the same time manufacturing imports from China registered a sharp decline, as a result of the major disruption caused by the U.S./China trade conflict.
Benefits of nearshoring to Mexico
The last few years have seen an upward trend, in which long-term workers are retiring and millennials don't seem to be interested in working in factories, causing labor expenses to go up. U.S. companies still depend substantially on manpower to provide the products that their customers want, and this might cause some issues. One of the most cost-effective solutions nowadays is increasing the amount of work done in Mexico; in other words, Nearshoring to Mexico.
This has become a popular topic for many companies because of the benefits they can get: the shorter travel distance to Mexican plants is one of the most important advantages of manufacturing in Mexico, particularly for businesses with headquarters in the United States or Canada, as well as reducing the number of corporate travels, and so on. Let’s take a look at some other key benefits that Mexico can provide for U.S. companies::
- Proximity; A shipper can move freight from Mexico to the U.S. by ocean in 48 hours; by truck, it can take 24 hours or less. This compares to two to six weeks from Asia via pan-Pacific ocean container carrier routes.
- Time zone alignment; one of the biggest advantages of nearshoring to Mexico is that it allows companies to be in sync with their teams’ time zones because communications can be faster and more agile, and you don't need to stay after hours to schedule a meeting with teams.
- Costs savings; shipping costs are also cheaper because goods are closer to their final destination.
- Beneficial trade conditions; The USMCA is a high-standard trade agreement supporting mutually beneficial trade resulting in freer markets, fairer trade, and more robust economic growth in North America. The Agreement modernizes and rebalances U.S. trade relations with Mexico and Canada and reduces incentives to outsource by providing strong labor and environmental protections, innovative rules of origin, and revised investment provisions. The Agreement includes important commitments on customs inspections, automation, and the treatment of low-value goods. Additionally, the USMCA establishes the strongest and most advanced provisions on intellectual property and digital trade ever included in a trade agreement, while also bringing labor and environment obligations into the core text of the agreement and making them fully enforceable.
- Low labor costs; In comparison to the U.S. the cost of labor in Mexico is substantially lower. Manufacturing hourly salaries costs in Mexico are cheaper than those in China when comparing production between the two countries. Additionally, Mexico has far more consistent wages, which helps businesses plan their production expenses. The fully burdened direct laborer salary rate in Mexico as of 2019 is roughly $3.95 per hour, compared to $4.50 in China.
- Growing market; The number of cross-border shipments is increasing. In 2021, more than 5 million trucks crossed the Laredo border, making it the number 1 inland port along the US-Mexico border.
Some nearshoring success stories:
U.S. manufacturers, both big and small, are welcome in Mexico. Nevertheless, here are some of the biggest American businesses operating in Mexico today.
- Whirlpool, the American electrical appliance company, is a great example of an international company that nearshored its operations to Mexico. Currently, about 80% of their machines are manufactured and exported from Mexico to the U.S. and Canada.
- Honeywell, the industrial giant that produces aerospace components, has also nearshored part of its operations to Mexico. With the assistance of more than 10,000 workers, notably their aerospace factory in Mexicali (a component of the Baja California aerospace cluster), produces consistently high-quality goods.
- General Motors has been in Mexico since the 60s and currently operates in four different plants: San Luis Potosí, Ramos Arizpe, Coahuila, Silao, Guanajuato, and an engine factory in Toluca, State of Mexico. By number of units manufactured as of 2018, GM was Mexico's biggest carmaker, producing over 800,000. Because of the volume, suppliers are attracted to these facilities, which helps GM reduce inventory and increase flexibility.
The residual effects of the pandemic have brought the long-ignored issue of supply chains to the forefront, as congestion and price surges caused havoc not only to the companies involved in trade but to the end consumers. Bringing manufacturers closer to users will not solve all problems, but we believe it will bring some relief. Nearshoring is attractive right now for myriad reasons. With investments flowing in and increased attention from all sides, there is also an opportunity for digitally native disruptors in this sector to help spur a new chapter for U.S.-Mexico economic integration. If that happens, it could bring massive benefits to companies and consumers on both sides of the border and beyond.
Are you considering nearshoring in your supply chain strategy?