In recent decades, the phenomenon of offshoring, a strategy of shifting production to suppliers in distant lower-cost countries, mainly in Asia, has lost its appeal due to global challenges.
As a result, more and more manufacturers are considering the option of relocating those links in their global supply chain to countries closer to their base of operations. As a result, relocating operations to Mexico has become the option of choice for US manufacturers.
In the industrial sector, this practice is known as nearshoring, and Mexico, sharing a border with the United States, is the country that is best positioned to take advantage of its benefits.
Manufacturers must be familiarized with the main characteristics and advantages of this trend.
Nearshoring: tidal change
According to analysts, two main reasons companies stopped choosing China as the primary investment destination for manufacturing: the increase in costs, especially in labor, and the tariff war with the United States. In 2018, the Trump administration imposed tariffs of US $60 billion on products imported from China. This was done to counter the Asian country’s alleged illegal trade practices. For the most part, these tariffs still apply to Chinese products under the current Biden Administration.
Regarding the first point, according to data from the World Wage Report of the International Labor Organization, average real wages in China almost doubled between 2008 and 2017, far exceeding the pace of global growth in the same period.
Also, an analysis that was conducted by the brokerage agency Savills points out that, as the Asian giant developed its productive potential, its cost competitiveness began to erode. To cite one piece of information, the unit labor cost of manufacturing (that is, the quotient between wages per unit produced) has increased by 285% in the last 20 years.
As for the commercial conflict between the economic superpowers, which began in 2018 and represented some five hundred billion dollars annually in reciprocal taxes, this dispute “accelerated” the decision of the companies that had already detected cost increases to diversify, or outright divest, their position in China. As a result, many companies moved their manufacturing operations from China to Mexico.
Added to this are conditions such as intellectual property piracy (with an annual loss of between 225 and 600 billion dollars in software and counterfeit merchandise). Often, intellectual property thieves in China steal the technologies of foreign firms to advance their military and broader economic goals. Added to this were cases of labor exploitation (think the Uighurs in Northwest China), delays, or damage to supply due to environmental disasters (tsunamis, tropical storms) or health emergencies, as has recently happened with the coronavirus COVID-19.
Why nearshoring in Mexico?
But what is nearshoring, and why is it essential in the current context of international trade? Broadly speaking, nearshoring is the business strategy that allows companies to bring production centers closer to their consumer markets, intending to generate benefits in logistics, transport, and managerial support.
Thus, companies can increase their ability to respond to the needs of their customers with shorter delivery times and greater flexibility in the face of potential crises that interrupt the supply chain. A shorter supply chain also creates opportunities for manufacturers to implement a “just in time” production model.
Additionally, with the entry into force of the new Free Trade Agreement between Mexico, the United States, and Canada (USMCA, formerly NAFTA), Mexico became a key player for global companies seeking to maintain a competitive position in the North American market. Nearshoring to Mexico has gained considerable popularity in recent years.
The clearest example of this phenomenon is in the automotive sector. For instance, the inauguration of the new BMW plant in San Luis Potosí attracted the German automaker’s suppliers, including Chinese companies, to establish themselves in Mexico in anticipation of a rise of 62.5 to 75% regional content per vehicle manufactured, according to the new commercial agreement.
Likewise, Mexican manufacturing has grown in specialization, capacity, and experience so that large companies in the automotive, aerospace, electronics, and medical device industries now have a presence in the country’s territory. Among them are the following companies:
- General Motors
- FCA (Fiat-Chrysler)
- Becton Dickinson
Industrial market opportunities in Mexico
The advantages of the Mexican industrial market cover various areas, from demographic factors to investment promotion policies. Some of the most important are:
Lower labor costs
In 2019, the average wage in Mexico was $3.95 per hour, compared to $4.50/per hour in China. Even with salary protection measures (such as the increase to 40-45% of automotive labor value content produced by employees earning 16 USD/ per hour, to which Mexico committed with the USMCA), labor costs are competitive, both at the operational, specialized, and managerial levels.
Fast and secure supply chains
Instead of waiting three to four weeks for a transpacific shipment, overland delivery from Mexico to the US typically takes 3-4 days. This reduces the risk level of the entire chain and the transportation and storage costs of handling smaller inventories.
Accessibility and direct contacts
A maximum time difference of up to 3 hours facilitates communication and supervision visits. Additionally, production or design processes can be quickly modified to keep pace with changing market preferences.
Increased productivity and quality control
The Mexican workforce is surpassing the Chinese not only in productivity rates but also in quality. In addition, each year, more than 110 thousand engineering students graduate. The entry of these individuals into the workforce guarantees the flow of specialized human talent.
Intellectual property protection
The risks of trade secret theft are lower due to intellectual property laws in Mexico that are modeled on those in the US. They are strictly enforced by the Mexican authorities.
Lower tariffs and a robust network of free trade agreements
Due to the status of “most favored nation” due to the recent signing of the new North American free trade agreement T-MEC and the free trade agreements signed with more than forty nations around the world, Mexico is favored by the reduction of tariffs and taxes for import and export inputs and products.
Should you be seeking the benefits of nearshoring to Mexico, Novalink has the experience and know-how to be your partner. The company is a best-in-class nearshore outsourcing solution for both domestic and international companies that are seeking to relocate manufacturing to North America to be closer to North American consumer markets. Contact Novalink now.