Last Updated on February 27, 2023
In mid-2021, a trend that will significantly impact the country in the present and the future began to stand out. It is reshoring in Mexico. This has come about due to the country’s geographical and logistical advantages compared to the rest of Latin America. But what exactly is reshoring?
The concept of reshoring may still be somewhat unfamiliar to some despite the advantages that it can bring to Mexico. This circumstance is due to problems with supply chains caused by the Covid-19 pandemic and the nation’s proximity to the United States. Nevertheless, according to many economic forecasts, reshoring in Mexico will intensify over the coming years.
What is reshoring?
The meaning of reshoring refers to the practice of bringing a manufacturing operation back from geographically distant countries to a nearby nation to serve domestic markets. Reshoring arises as a response to offshoring, which, to reduce costs, looks for suppliers in other destinations much further afield.
Reshoring aims to bring outsourced production centers closer together and solve the problems and inconveniences of long distances and time differences between continents, which often harm the supply chain. Reshoring is also done to exercise greater control over the production and distribution of goods that are of strategic importance.
Reshoring in Mexico
The greater consideration of reshoring in Mexico by international businesses has been especially prominent in recent years. The concept rose in popularity after the trade war between the United States and China broke out in July 2018. A recent economic investigation by the Center for Strategic & International Studies has found that, since the beginning of the dispute, Mexico has increased its participation in US imports from 13.5% to 13.9%. In comparison, imports from China fell from 20.6% to 17.2%.
According to the same study, the trade war with China is provoking the reshoring of manufacturing operations to locations close to the United States, mainly its neighbor, Mexico. If other Latin American countries had similar advantages for investment and trade with the United States as Mexico does, reshoring opportunities for them could continue to multiply as well. Mexico, however, is the leader in the competition of attracting manufacturing investment that is returning to the Americas because it has a strategic location that is optimal from a logistics perspective, a globally competitive cost structure, and a workforce that has vast experience in manufacturing.
What is the scope of the opportunity for reshoring in Mexico? Predictions suggest that American manufacturers will only maintain some of their suppliers in China. However, they will try to diversify their supplier base to avoid the problems they have had due to the Covid-19 pandemic. This will allow Mexico to take a much more prominent place in logistics development and the generation of services for the North American market.
The reshoring principle and how it is applied in Mexico
As has already been highlighted, the definition of reshoring suggests the practice by which a company transfers its commercial or manufacturing activities to its home country or a country close to final consumer markets.
Before reshoring, offshoring was the usual practice between exporters and importers from different countries when seeking to optimize their economic position. In this context, offshoring is when a company relocates part of its production and internal business processes to other geographical areas, usually those with the most favorable cost structure. These locations tend to be distant from the manufacturer’s home base.
The difference between reshoring and offshoring is quite clear; the names indicate closeness and distance. While offshoring seeks to outsource the manufacture of products in distant countries, such as China, reshoring is moving manufacturing to closer countries, such as Mexico, to gain greater and more secure access to the United States.
What conditions currently favor reshoring in Mexico:
• The current Free Trade Agreement between the United States, Mexico, and Canada(USMCA)
• The proximity between Mexico, the United States, and Canada
• Low labor costs in Mexico
• Fast and secure supply chains
• World-class performance of the industries in Mexico (especially in the automotive and aerospace industries)
• Lack of stability in relations between China and the United States
To better understand the importance of reshoring in Mexico, we must consider the significantbenefits foreign companies can enjoy when accessing Mexico’s manufacturing base. What are the advantages of reshoring in Mexico?
1. Logistics and faster shipping
It is undoubtedly faster to move goods from the United States to Mexico than from the United States to China. Therefore, one of the benefits of reshoring in Mexico is a shorter supply chain. This, in turn, gives companies other advantages, such as reduced costs and fewer problems inimport and export logistics operations.
When companies have their manufacturing suppliers closer, they can avoid delays in the shipment of their merchandise and thus maintain their level of competitiveness with their clients by making prompt deliveries.
2. Fewer complex shipments
The greater the distance involved in shipping goods, the more problems may arise. Additionally, shippers dealing with the global supply chain crisis know that international shipments are becoming more complex today, and commercial cargo conveyances and shipping containers have less availability. This makes shipments risker and transit times longer.
3. Diversity in export transport
If a company is closer to a manufacturing supplier, there is likely more than one way to transport the merchandise, products, or parts. This is another great advantage of reshoring in Mexico; businesses are not limited to only having to use a single means of transport, for example, by land. They also have other options that they can use, such as air, rail, and even ocean transport.
4. Greater proximity to clients and suppliers
In business relationships, communication is essential, and reshoring in Mexico greatly facilitates this consideration thanks to geographical proximity. Communication is different when the person you are making a deal with is 18 hours away. When speaking with partners in Mexico, both parties are frequently in the same or in a similar time zone.
Although Mexico does not generally have a workforce that is as inexpensive as that offered by China, avoiding disruptions resulting from operating in a far-flung location can often more than make up for any difference in the cost of labor of direct labor.
Fortunately, despite the recent uncertainty in the global economy, the search for sustainedeconomic recovery has made international manufacturers seek alternatives to optimize theirproduction chains. The best way to achieve this is through reshoring manufacturing operations close to the United States.
Due to the above, Mexico has become a vital investment center for international companies that want to impact the market with their production. Companies seeking to reshore their operations are encouraged to contact the Mexico professionals at Novalink.