What Is Reshoring in Mexico: Can It Be a Competitive Advantage in 2024 and Beyond?

Last Updated on February 26, 2024

In the ever-evolving landscape of global business, reshoring has emerged as a pivotal strategy for companies seeking a competitive edge. As we navigate through 2024, the question arises: What is reshoring in Mexico, and can it be a potent competitive advantage? This article delves into the intricacies of reshoring, exploring its potential impact and the unique advantages it offers in the Mexican business environment.

What is Reshoring?

Reshoring refers to bringing manufacturing operations back from geographically distant countries to a nearby country to serve domestic markets. Reshoring is an alternative to offshoring, which, to reduce costs, looks for suppliers much farther away.

The aim of reshoring is to bring outsourced production centers closer together and resolve the problems and inconveniences associated with long distances and time differences between continents, which harm supply chains. As well as improving control over production and distribution of strategic goods, reshoring enables companies to improve their efficiency.

Why Consider Reshoring to Mexico?

Recently, international businesses have become increasingly interested in reshoring to Mexico. After the trade war between the United States and China erupted in July 2018, the concept gained popularity. According to a recent economic study by the Center for Strategic & International Studies, Mexico has increased its share of US imports from 13.5% to 13.9% since the dispute began. By contrast, imports from China decreased from 20.6% to 17.2%.

As a result of the trade war with China, manufacturers are moving operations closer to home, mainly to Mexico, which is neighboring the United States. Similarly, if other Latin American countries had similar advantages for investment and trade with the United States, reshoring opportunities would continue to multiply. However, Mexico leads the race in attracting manufacturing investment that has returned to the Americas because it has a strategic location that is ideal from a logistical perspective, a cost structure that is globally competitive, and a workforce that has extensive manufacturing experience. 

How big is the reshoring opportunity in Mexico? Manufacturers in the United States are expected to retain some suppliers in China, but not all. In order to avoid the problems they have encountered due to Covid-19, they will diversify their supplier base. Mexico will now be able to play a much more prominent role in logistics development and generating services for North Americans.

A supply chain disruption of this magnitude has impacted every industry across every geography. Though it's too soon to assess the full aftermath considering the pandemic is still impacting companies worldwide to some effect, the financial effects of COVID-19 and the resulting shortages have already been substantial. Supply chain leaders from seven impacted industries indicated in the Jabil and IndustryWeek survey that the pandemic was a turning point in their strategies. According to the survey, 66% of decision-makers said they diversified their supply base during the pandemic or have plans to do so.

The Impact of the COVID-19 Supply Chain Disruption

Several Factors Are Driving the Trend of Reshoring to Mexico

• Reduced logistics costs: Mexico's geographic proximity to the US market minimizes transportation costs and lead times, improving supply chain efficiency and responsiveness.
• Lower tariffs and trade agreements: NAFTA and the USMCA trade agreements create favorable tariff conditions for goods produced in Mexico and entering the US market, making Mexican production more competitive.
• Skilled workforce: Mexico has a growing pool of skilled manufacturing workers, with investments in technical education and vocational training further strengthening its workforce.
• Improved infrastructure: Mexico's infrastructure, particularly for transportation and logistics, has been steadily improving, providing better support for manufacturing operations.
• Government incentives: The Mexican government offers various incentives and tax breaks to attract foreign investment in manufacturing, further lowering costs and risks.

Can Reshoring to Mexico Be a Competitive Advantage in 2024?

Looking ahead to the future, reshoring in Mexico is poised to remain a viable and strategic choice for businesses aiming for a competitive edge. To maximize the benefits, companies should focus on comprehensive risk assessment, strategic supplier partnerships, and leveraging digital technologies for operational excellence.

The Competitive Advantage of Reshoring to Mexico in 2024

The potential for reshoring to Mexico as a competitive advantage in 2024 and beyond depends on several factors:

Advantages:

• Increased flexibility and responsiveness: Shorter supply chains and faster production cycles allow companies to adapt to changing market demands and customer needs more quickly.
• Improved quality control: Closer proximity to production facilities enables better quality control and oversight, potentially leading to higher-quality products.
• Enhanced security and intellectual property protection: Reshoring can reduce the risk of intellectual property theft and security breaches that occur more frequently in distant locations, such as China. Mexico has rigid intellectual property laws.
• Boosted brand image: Producing closer to home can improve a company's brand image by highlighting domestic production, social responsibility, and environmental sustainability.

Challenges:

• Competition from other emerging markets: Countries like Vietnam and India also offer competitive manufacturing conditions, requiring companies to carefully evaluate their options.
• Infrastructure limitations: While improving, Mexico's infrastructure still needs further development to fully compete with established manufacturing hubs.
• Political and economic stability: Mexico's political and economic landscape can be volatile, requiring companies to manage potential risks and uncertainties.

Conclusion: Mexico Offers Competitive Reshoring Advantages

Mexico offers competitive advantages over other locations like China including lower shipping costs, similar time zones, free trade agreements, and cultural and language commonalities with the US. As Mexico works to address some of their issues, the potential for further reshoring growth remains strong leading into 2024.

Frequently Asked Questions on Reshoring

1. What exactly is reshoring, and how does it apply to Mexico?

Reshoring refers to the strategic decision of bringing back manufacturing and production operations to the home country or a nearby region. In the context of Mexico, it involves relocating manufacturing activities from offshore destinations back to the country. This shift is driven by factors like cost considerations, supply chain resilience, and geopolitical dynamics.

2. Why is Mexico considered an advantageous destination for reshoring?

Mexico offers several advantages for reshoring, including proximity to major markets like the United States, a skilled and cost-effective workforce, and participation in key trade agreements such as the US-Mexico-Canada Agreement (USMCA). These factors collectively make Mexico an attractive choice for companies aiming to enhance operational efficiency.

3. How does reshoring benefit the automotive industry in Mexico?

The automotive industry in Mexico has experienced significant success through reshoring initiatives. The streamlined supply chain, reduced transportation costs, and proximity to major markets contribute to a more competitive market position for automotive players leveraging reshoring in Mexico.

4. What success stories exist in reshoring initiatives in Mexico's electronics manufacturing sector?

Companies in the electronics manufacturing sector leveraging reshoring in Mexico have witnessed enhanced flexibility and responsiveness to market demands. The skilled workforce and favorable trade agreements further amplify the advantages, making Mexico a strategic choice for electronics manufacturers.

5. What future strategies should businesses adopt for successful reshoring in Mexico?

To maximize the benefits of reshoring in Mexico, businesses should focus on comprehensive risk assessment, strategic supplier partnerships, and the utilization of digital technologies for operational excellence. These strategies will enable companies to navigate the complexities of global business and position themselves competitively in the evolving market landscape.