Why More Companies are Thinking About Nearshoring to Mexico

April 16, 2020

Mexico has been an attractive base for manufacturing for decades, but data indicates that more U.S.-based companies are focusing on “nearshoring” operations in Mexico than ever before. Global management consultancy Kearney reports in its seventh Reshoring Index a significant trend in sourcing manufactured goods from Mexico. While imports from Mexico have risen steadily since 2009, Kearney noted a $13 billion increase in imports from Mexico to the U.S. in 2019 alone. 

It’s a shift that’s being seen across numerous manufacturing sectors, driven by upheavals to the global supply chain. While some companies are weathering today’s trade disruptions, others are beginning to recognize that a more regionalized approach to manufacturing may provide long-term resilience as well as low-cost production. 

So, what is nearshoring? 

Word Cloud - Nearshoring Mexico

Nearshoring is one of three strategies adopted by companies looking to capture the cost benefits of moving their manufacturing operations to a new global location: 

  • Offshoring: Offshoring is about relocating factories or offices that produce goods or services from more costly countries to lower-cost economies. The goal is to lower the cost of production in order to provide consumers with a lower cost. This is occasionally confused with outsourcing, in which operations are moved to a third-party. With offshoring, the parent company remains in charge of all operational decisions.
  • Reshoring: Reshoring, sometimes call onshoring, is the process of relocating factories that had been previously offshored to a foreign country back to the parent company’s domestic territory. Many companies make this decision to lower freight and transport costs and meet the growing demand for locally made products. 
  • Nearshoring: The act of moving manufacturing operations geographically closer to the country were the goods or services ultimately will be sold. There are numerous benefits to this strategy, as we’ll outline below. 

The benefits of nearshoring to Mexico

map of nearshoring in mexico

Nearshoring provides many of the cost benefits of offshoring — with labor costs being chief among those benefits — but without the logistic and geological challenges. The most apparent benefit comes through reduced shipping costs and lead times. Consider that it typically costs about $4,300 to ship a 40-foot container to the U.S. from China and take five weeks to arrive. To send the same shipment from Mexico would cost $1,800 and take days. Those shipping costs drop further for manufacturers who are able to take advantage of de minimis shipments from Mexico under Section 321 of the U.S. Code of Federal Regulations. Section 321 sets an $800 minimum value on shipments allowed into the United States duty-free. 

It’s also much more cost-effective for travel to visit operations in Mexico versus other countries. This can give executives more quality oversight into complex processes. However, compared to many Southeast Asia countries, Mexico has a significantly more advanced manufacturing supply chain to support sophisticated industries, from automotive to aerospace to electronics manufacturing. As a leading location for manufacturers, it has long attracted component suppliers to its various regional manufacturing hubs.

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Manufacturing Worker in Mexico

As Kearney points out, nearshoring is not a new trend, but it has grown dramatically this year. A massive 17% decline in imports from China to the U.S. has driven a contraction in trade with many traditional Asia trade partners, a dramatic reversal of a five-year growth trend. While Kearney notes that China has seen its share of imports to the U.S. decrease consistently in recent years, as part of an ongoing shift to other low-cost manufacturing countries, the 2019 tariffs on Chinese goods caused many companies to reconsider their reliance on China as a low-cost manufacturing center. 

While Kearney’s research shows that as early as 2016 more than half of U.S. companies with manufacturing operations in Mexico had moved production there from other parts of the world specifically to serve the U.S. market, “the U.S.-China trade war and the recently ratified U.S.-Mexico-Canada-Agreement have accelerated production flow to Mexico.”

Nearshoring is a key part of the mass trend toward regionalization. As EMSNow publisher Eric Miscoll writes, “The electronics manufacturing industry has spread and migrated around the globe for the past three decades in search of lower-cost labor and in the hopes of penetrating new markets … At some point, around ten years ago, outsourcing managers began to rethink the strategy. The definitive trend in the industry now is regionalization.”

The McKinsey Global Institute reported in 2019 that “companies are increasingly establishing production in proximity to demand.” Based on research of 23 global value chains accounting for 96 percent of global trade, the firm notes that the “intraregional share of global goods trade has increased by 2.7 percentage points since 2013 … Regionalization is most apparent in global innovations value chains, given their need to closely integrate many suppliers for just-in-time sequencing.”

This trend was already apparent before the COVID-19 pandemic further shook global trade. While it is far too early to understand the full impact, this latest disruption will have on global economies at large, and manufacturing, in particular, Kearney is forecasting that it will compel more companies to rethink their sourcing strategies and entire supply chains. “Specifically, we expect companies will be increasingly inclined to spread their risks, as opposed to putting all their eggs in one low-cost option,” the report states. That may mean taking a more regionalized approach to manufacturing, with operations serving each regional market. 

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Maximize the benefits of nearshoring 

 

Appropriate site selection is a critical first step to launching a low-cost manufacturing operation, and there are many factors to consider (and traps to avoid). While the more affordable logistics of shipping from Mexico are a powerful enticement for many manufacturers, they do come with some potential regulatory hurdles. By working with a shelter service provider experienced in navigating bureaucratic red tape, manufacturers can identify a site that will enable them to get products quickly to market while supporting long-term futureproofing. To start planning your expansion, contact Tetakawi today and get a free estimate of your payroll costs in Mexico. 

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