Trend and Growing Impact of Nearshoring in Mexico:
The phenomenon of nearshoring has emerged as a powerful economic trend in Mexico, leaving a significant mark on the country’s industrial development. Mexico has become an attractive magnet for international companies seeking to optimize their supply chains and enhance their resilience in an increasingly complex global environment, leveraging logistical and legislative advantages.
Furthermore, its strategic location near one of the world’s prominent markets positions Mexico as an ideal destination for nearshoring. This appeal has resulted in exponential growth over the past two years and has attracted multinational giants, including the prominent company Tesla.
In this context, the demand for industrial spaces has experienced a drastic increase, especially in key sectors such as automotive, manufacturing, and retail. For instance, the industrial real estate market reached historic records in net absorption in 2022, and this trend is projected to continue through the end of 2023.
However, despite the benefits, the rapid growth of nearshoring also poses challenges that must be addressed. Among them are overcoming logistical and coordination obstacles in global supply chains.
In this regard, it is essential to understand that nearshoring plays a crucial role in the detailed analysis of how it can contribute to Mexico’s sustainable growth in the global economy. It is necessary to address the complexities and challenges that arise as more international companies choose to establish themselves in the country to ensure that the benefits extend throughout the nation.
What is Nearshoring?
Nearshoring, in the industrial and international trade context, represents a business strategy that involves relocating part of production or services to geographically nearby foreign countries, preferably with similar time zones. Its primary objective is to improve supply chains and reduce logistical issues that may arise when production occurs in distant locations. By bringing outsourced production centers closer, companies can optimize delivery times and reduce costs associated with international transportation and logistics.
The essence of nearshoring lies in seeking geographically proximate locations to the home country of the contracting company. This allows for being closer to consumer markets while facilitating coordination and communication with external suppliers. Unlike Offshoring, which involves outsourcing production to more distant destinations, often in Asia, nearshoring aims to establish relationships with neighboring countries, which brings a series of strategic benefits.
One of the critical features of nearshoring is the precise definition of roles and responsibilities between the contracting company and external providers. This ensures greater transparency in the supply chain and a better understanding of the expectations and requirements of both parties.
Moreover, nearshoring entails careful contingency planning and risk management, enabling companies to be prepared for possible setbacks such as supply chain disruptions or changes in economic or political conditions. Geographical proximity also facilitates a swift response to unforeseen situations.
Compliance with legal and fiscal restrictions is another fundamental aspect of nearshoring. By establishing business relationships with neighboring countries, companies must ensure compliance with all local regulations, contributing to greater confidence and stability in commercial operations.
What is the difference between Offshoring, Reshoring, and Nearshoring?
In today’s globalized world, businesses face crucial decisions regarding the location of their production and services. Three standard options that are debated are Nearshoring, Offshoring, and Reshoring. Each strategy has its characteristics and advantages, but there is no one-size-fits-all answer for all companies. The choice will depend on each company or buyer’s specific needs and possibilities.
Offshoring:
Offshoring is a strategy in which a company decides to establish its operations or produce goods and services in a foreign country, usually to reduce labor costs and access international markets. This practice has been widespread for decades in industries such as manufacturing and services, where labor is more cost-effective in certain countries compared to the company’s country of origin.
The advantages of Offshoring include:
- Potential labor cost reduction.
- Access to new markets.
- The possibility of leveraging local resources and skills.
However, it also presents challenges, such as physical distance, supply chain management, cultural barriers, and potential quality or intellectual property issues.
Reshoring:
Reshoring, on the other hand, is when a company returns part or all of its production operations to its country of origin after relocating them abroad through Offshoring. This strategy has gained popularity recently due to changing economic conditions and growing concerns about dependence on foreign markets.
The main reasons for considering reshoring include the following:
- Closer proximity to customers.
- More effective communication and coordination.
- Higher product quality.
- More excellent intellectual property protection.
- A better perception of the brand as a company supporting the local economy.
However, reshoring may also involve higher initial costs and the need to find a skilled workforce in the home country.
Nearshoring:
Nearshoring is a strategy that falls somewhere between Offshoring and reshoring. Instead of relocating operations to distant countries, companies locate in geographically close countries or those with cultural and linguistic affinity, usually in the same region or continent.
China and Nearshoring:
Historically, China has been a preferred destination for Offshoring due to its cost-effective labor, attracting numerous companies to establish their operations in the Asian country. However, this high concentration created trade tensions with countries like the United States and prompted a strategic reevaluation by companies that relied heavily on the Chinese supply chain.
The COVID-19 pandemic heightened the perception of vulnerability in global supply chains, and this situation catalyzed reconsidering Offshoring strategies. Many companies realized the inherent risks of relying heavily on a single country and began seeking closer and more secure alternatives to maintain the continuity of their operations.
The Evolution of Nearshoring: Background
Nearshoring in the Automotive Industry:
The beginning of nearshoring in the automotive industry dates back to 1925 when Henry Ford established a plant in Mexico to manufacture vehicles. Since then, this practice has grown significantly, attracting companies like Nissan, General Motors, and Volkswagen, which have moved part of their production to Mexico, leveraging its competitive advantages in labor costs, strategic location, and trade agreements.
A recent milestone in this industry was Tesla’s arrival in Nuevo León, Mexico, which consolidated the company’s presence in Latin America and promised to generate more than 35 thousand jobs in the region.
Nearshoring in the Appliances Sector:
The appliances sector has also experienced increased use of nearshoring to optimize its operations and maintain competitiveness in the global market. A prominent example is the case of Whirlpool, which in 1987 relocated part of its production to Mexico and managed to export 80% of its appliances to the United States and Canada. This strategy has allowed Whirlpool to take advantage of proximity to its main markets and reduce logistical costs while maintaining high standards of quality and efficiency in manufacturing.
Nearshoring in the Aerospace Industry:
The aerospace industry has also embraced nearshoring to optimize supply chains and improve operational efficiency. A notable case is Boeing, which outsourced part of its wiring production to Safran in Mexico. Thanks to this strategy, Mexico now produces 95% of the wiring used in the Boeing 787 Dreamliner at the plant located in Chihuahua. This approach has proven beneficial for Boeing, enabling them to reduce costs and improve production times without compromising product quality.
Why Mexico Leads Nearshoring in Latin America? Advantages and Key Factors.
Mexico stands out as the primary destination for Nearshoring in Latin America due to several strategic factors that make it attractive to foreign companies. Among them, the following are highlighted:
- The United States-Mexico-Canada Agreement (USMCA): The USMCA between Mexico, the United States, and Canada has been a significant driver of Nearshoring in the region. This trade agreement has reduced tariffs and barriers to exchanging goods and services among these countries, strengthening Mexico’s competitiveness as a manufacturing and distribution center for the North American market.
- Geographical Proximity: Mexico’s strategic geographical location, adjacent to the United States, is a crucial factor for Nearshoring. The closeness to the US market allows for more efficient logistics and reduced product transit times, favoring operational agility and a quicker response to market demand.
- Effective Coordination and Communication: The overlapping time zones between Mexico and the United States are an additional element that facilitates real-time coordination and communication between American companies and their operations in Mexico. This synchronization streamlines decision-making and swift problem resolution, optimizing business operations.
It is essential to recognize that these factors have made Mexico an undisputed leader in Nearshoring in Latin America, attracting significant investments and fostering sustained growth in various industrial sectors. Mexico’s competitive advantage as an investment destination for Nearshoring remains attractive to companies worldwide.
Current Situation and Forecasts of Nearshoring in Mexico: Attracting Million-Dollar Investments.
Nearshoring in Mexico is experiencing remarkable growth, and a promising future is projected to attract foreign investments. The country is expected to attract an investment of close to $35 billion due to company relocations, showcasing investor confidence in Mexico’s opportunities and advantages as a destination for Nearshoring.
A notable example of this confidence is the investment by renowned automotive companies like BMW, which has established a plant in San Luis Potosí to assemble electric cars, demonstrating the country’s appeal for manufacturing and exporting products in the automotive industry.
Moreover, Tesla’s decision on the location of its Gigafactory in Mexico is also a significant signal that could further boost the growth of the Nearshoring sector in the country. The preference of leading technology and manufacturing companies for Mexico as the base for their operations highlights the nation’s strength and competitiveness in this field.
The United States remains Mexico’s primary trading partner, with a 31% growth in their trade exchange since the beginning of 2019. This close trade relationship reinforces Mexico’s geographical advantage as a Nearshoring destination, facilitating connectivity and logistical efficiency with the US market.
In addition to Mexico’s appeal to the United States, the increase in Nearshoring in the region has also been evident in other Latin American countries. This trend reflects the region’s organizational resilience and ability to attract foreign investments, establishing it as a competitive option for international companies seeking to develop operations close to their markets.
A relevant aspect is the significant involvement of investments from China, representing 65% of the total Nearshoring demand in Mexico at the end of the first quarter of 2023. This highlights the importance of trade relations with various world regions and solidifies Mexico as a strategic bridge between the Americas and Asia.
Impact of Nearshoring in Specific States and Industrial Sectors:
Impact of Nearshoring in Nuevo León:
Nuevo León stands out as a leading state in Nearshoring in Mexico, concentrating 76% of this type of investment into the country. This high concentration reflects the attraction this state exercises over foreign companies seeking a strategic and competitive location for their regional operations.
The privileged geographical location of Nuevo León, its developed infrastructure, and the presence of qualified talent in various industries make it a preferred destination for international companies looking to establish themselves in Mexico and have closer access to the US market.
Impact of Nearshoring in Querétaro and Jalisco:
Querétaro and Jalisco have also shown a strong performance in Nearshoring, positioning themselves in the top six places of the 2023 State Competitiveness Index (ICE) and being the only states in the central zone with high competitiveness.
These states have adopted public policies focused on improving Mexicans’ living and working conditions, which has been a determining factor in attracting foreign investment and establishing a presence in the country.
Furthermore, investment in infrastructure and collaboration between the public and private sectors have strengthened their appeal to international companies seeking to establish Nearshoring operations in Mexico.
Industries Growing through Nearshoring in Mexico
Nearshoring in Mexico has driven the growth of several industrial sectors, among which the following stand out:
- Electronics and Appliances: The electronics and appliances sector has experienced significant growth in Nearshoring in Mexico. In 2022, auto parts manufacturing led the demand for Nearshoring space. Still, by 2023, the electronics and appliances sector has become the main demand driver, representing 55% nationwide. This highlights the country’s diversification and potential in different industries.
- Automotive: The automotive industry has been another sector benefiting from Nearshoring in Mexico. Renowned automotive companies like BMW have established assembly plants in the country, demonstrating the country’s appeal for vehicle manufacturing and export.
- Metal-Mechanic: The metal-mechanic industry has also experienced significant growth thanks to Nearshoring in Mexico. The geographical proximity to the United States has enabled a more efficient and agile supply chain, driving the development of this industry.
- E-commerce: The surge in e-commerce has boosted the demand for Nearshoring operations in Mexico, especially in logistics and distribution, allowing for faster and more efficient access to the US market.
- Construction and Textile Industry: Other sectors that have found benefits in Nearshoring in Mexico are the construction and textile industries. The availability of skilled labor and competitive costs has attracted investments in these areas.
Benefits of Nearshoring:
- Cost Reduction and Job Creation: By moving part of the supply chain or production to nearby countries, operational costs are reduced, and skilled local labor is utilized, generating employment and strengthening the receiving industry.
- Lower Supply Chain Disruption Risk: Avoiding long transportation distances minimizes the risks of delays and damage to goods, ensuring more excellent stability in the supply chain.
- Enhanced Contact and Effective Communication: Geographical proximity and similar time zones streamline communication and decision-making.
- Reduced Transportation Time and Costs: Locating operations in nearby countries lowers transportation costs and time, improving logistical efficiency.
- Market Knowledge and Adaptability: Nearshoring provides a close view of the local market, enabling quick adaptation of products and services to consumer needs.
- Improved Product and Service Quality: Proximity to the local market allows product adjustments to meet specific customer demands.
- Compliance with Labor and Trade Regulations: Establishing in a nearby country facilitates compliance with local regulations, reducing the risks of legal conflicts.
- Boost to IT Talent: Nearshoring has contributed to the growth of Information Technology (IT) talent in countries like Mexico.
- Comparative Rental Cost: A comparative analysis shows a significant difference in rental costs between cities on the northern border of Mexico and the southern United States, attracting international companies to Nearshoring.
Challenges for Mexico in Nearshoring
Nearshoring has emerged as a valuable opportunity for Mexico in the industrial sector and international trade. However, despite its benefits, the country faces a series of challenges that must be addressed to maximize the potential of this trend.
Logistics: Strengthening Infrastructure and Workforce
Efficient logistics are crucial for the success of Nearshoring. Mexico must improve its logistics infrastructure, increase capacity in ports and airports, and streamline customs processes to facilitate the flow of goods.
Impact on the Industrial Real Estate Market
The growth of Nearshoring has significantly affected Mexico’s industrial real estate market, especially in the northern and Bajío regions. The saturation of the border market poses a challenge, making it crucial to find solutions to adapt to the growing demand for industrial spaces.
Demand for Skilled Talent: Adaptation and Upgrading
The high demand for skilled workers presents a challenge in Nearshoring. It is essential to reorient and retrain existing talent to adapt to new roles and required activities. Companies must be willing to invest in improving the capabilities and skills of their workforce, and employees must stay in constant learning and updating to remain competitive in the labor market.
Cybersecurity: A Critical Aspect in Nearshoring
Nearshoring involves increased interconnectedness and information flow, making it vulnerable to cybersecurity risks. Addressing this aspect is vital, and having reliable and experienced technology providers to support companies in the Nearshoring ecosystem is crucial.
Cultural and Regulatory Barriers
Managing culture and communication can be challenging due to language and cultural barriers between teams in Mexico and the United States. Additionally, legal and regulatory regulations may pose difficulties for medium-sized companies, potentially leading to fines and penalties from authorities.
Quality and Productivity Management
Maintaining high standards of quality and productivity is fundamental to the success of Nearshoring. Companies must face balancing efficiency and cost reduction with customer satisfaction.
Selection of Reliable Partners
Finding reliable and experienced partners is a significant challenge for medium-sized companies interested in Nearshoring in Mexico. Proper partner selection is essential to ensure successful operations and a seamless workflow.
The Future of Nearshoring in Mexico: Infrastructure as the Key to Growth
Nearshoring in Mexico presents a unique opportunity for economic growth and attracting foreign direct investment. However, its future largely depends on significantly improving the country’s infrastructure to facilitate the arrival of more relocated companies.
During the first quarter of the year, Mexico received considerable foreign investment, highlighting the importance of seizing this historic opportunity. To reach the full potential of Nearshoring, Mexico must invest in modernizing critical infrastructure such as ports, airports, roads, industrial parks, 5G networks, fiber optics, and stable, clean energy.
Additionally, it is essential to enhance digital connectivity and generate skilled talent to become more attractive to global companies. Mexico must invest in improving the quality of its infrastructure to fully leverage the potential of Nearshoring and ensure sustained and competitive growth in the worldwide landscape.
Moreover, the country must seek the development of its technological capabilities driven by Mexican entrepreneurs and businesses to not depend solely on foreign investment and foster endogenous growth in the industrial and commercial sectors.
Explore Nearshoring with AMN Quality Solutions
After exploring the benefits and challenges of Nearshoring, it is clear that AMN Quality Solutions stands as a strong advocate for fully capitalizing on this trend. As a Mexican provider, we aim to create an efficient supply chain and help our clients manufacture in Mexico with the highest possible quality.
With services ranging from advanced manufacturing, logistics, warehousing, soft landing, and a wide range of comprehensive solutions, AMN is the ideal choice for companies seeking to enhance their competitiveness and efficiency through Nearshoring. Contact us right away!
