Mexico has been an attractive base for manufacturing businesses 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.
Nearshoring is 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, other businesses 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?
Nearshoring is the trend of locating manufacturing capacity in Mexico, closer to the U.S. market, rather than in Asia. 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 called 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 where the goods or services ultimately will be sold. There are numerous benefits to nearshoring as we’ll outline below.
The benefits of nearshoring to 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.
Nearshoring is also much more cost-effective for travel to visit operations in Mexico versus other countries. This can give business 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.
Why is now the best time to expand into 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 and business. 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 Mexico's manufacturing, with operations serving each regional market.
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 future proofing. To start planning your expansion, contact Tetakawi today and get a free estimate of your payroll costs in Mexico.
Which Country Is Best for Nearshore Ventures?
When searching for the best country to nearshore in, it’s important to select a location filled with an educated, cultured workforce. Based on regional analysis and technology skills insights, several Latin American countries are deemed to have a robust technology ecosystem, and Mexico opportunities may be the right investment for your business.
These ecosystems are supported by reputable educational institutions and universities, providing your business with an endless source of information technology (IT) professionals each year. In a recent Coursera global skills report, Mexico outranked the United States, China, and South Korea in terms of global rankings for proficient workers in technology and data science.
Paired with Mexico’s competitive trade agreements with Canada and the US under the United States-Mexico-Canada Agreement (USMCA), this can create a tax advantage for businesses, potentially allowing them to import and export through neighboring states tariff-free and other benefits for raw materials in the supply chain. This agreement states several trade specifications, and Tetakawi can help keep your business in compliance.
What is an example of nearshoring?
A common example of nearshoring is when a company based in the United States outsources to a third-party in Mexico. Businesses will often outsource their manufacturing to a nearby country for financial benefits. Nearby countries can offer lower production costs, easy access to the supply chain, and other manufacturing benefits.
What is the business reputation in Mexico?
Mexico is one of the top business-friendly environments in Latin America. The country has a positive reputation for manufacturing. Mexico's affordable labor costs, close access to the U.S. border, and a stable economic conditions make it a great location for businesses.
Nearshoring In Mexico: Multiple Approaches
Nearshoring can be the investment opportunity your business needs, but every situation comes with its own unique set of challenges. From managing supply chains and operational services to human resources and legal details, if your business has been primarily domestic, navigating foreign markets and import duties can be daunting.
Luckily, there are multiple approaches to setting up with a nearshoring business developer, like Tetakawi. We offer multiple approaches for companies looking to benefit from nearshoring in Mexico.
Each business comes with their own unique set of skills, services, and needs. At Tetakawi, we work with your team to determine which nearshoring strategy works best for the goals and demands of your enterprise.
There are five models for nearshoring strategies:
- The standalone model
- The shelter model
- The contract manufacturing model
- The merger or acquisition model
- The joint venture model
Each type of nearshoring operates with varying ranges of involvement from the foreign company and a Mexican legal entity of record or Mexican manufacturer. In some instances, such as a standalone nearshoring model, the foreign company requires limited assistance from either an established Mexican manufacturer or shelter company, but is ultimately working towards total independence in Mexico.
In some situations, such as a contract manufacturing model or shelter model, the foreign company may require more involvement from an established manufacturer or legal entity. No matter your business needs, Tetakawi has the expertise and systems in place to support your needs across all markets.
An Investment Opportunity for Your Business
Mexico’s nearshoring industry provides valuable benefits for a wide range of businesses. The geographic proximity for nearshore manufacturing is designed for efficiency, with more frequent site visits. This cuts travel and transportation time when products are moved and assembled, which allows for further opportunity for a streamlined supply transportation system.
Mexico’s manufacturing supply chain is advanced, allowing it to support a range of industries, from electronics technology to automobile manufacturing. Businesses can benefit from employing a highly skilled labor force for a fraction of the cost of domestic manufacturing. Many businesses find that they enjoy certain tax and tariff benefits when nearshoring in Mexico, thanks to the USMCA and Mexico customs.
Thinking about manufacturing in Mexico? Download this ebook and start moving your due diligence forward.
