If you’re looking for rapid growth for your company without the cost and hassles of expanding domestically, nearshoring to Mexico can be the answer.
Mexico is a Latin American country that provides companies favorable conditions for business growth. And many firms, especially ones in the manufacturing sector, consider nearshoring to Mexico as a viable alternative to outsourcing in their own country.
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Let’s get started.
Nearshoring to Mexico is the process of a company shifting all or part of its operations from the USA to Mexico.
It is very similar to traditional offshoring, where you shift business operations to another country with a low cost of living.
And while both nearshoring and offshoring helps you leverage the benefits of lower costs — they have their differences.
Here’s a quick look at how nearshoring is different from offshoring for a manufacturing company:
You also have reshoring (also known as onshoring), where factories are relocated from the foreign or neighboring country back to the home country. For example, if a US company shifts manufacturing operations to China or Mexico and then moves operations back to the USA, it is called reshoring.
Which one is better: offshoring or nearshoring?
Well, that depends on your company.
It ultimately comes down to the location of the company. If the company has good options available nearby, then nearshoring is the best choice.
And of the many benefits of nearshoring to Mexico, the country’s low-cost economy and proximity to the United States stand out for nearshoring purposes.
For decades, nearshoring has been an effective way to enjoy the benefits of the low-cost economy of Mexico. But now seems to be the perfect time to start this process.
Earlier, most US manufacturing companies preferred offshoring to countries like China in Asia. This was because of the lower labor costs and favorable regulations on offer.
To attract foreign investment, countries in Latin America like Mexico, Colombia, Costa Rica, among others, offer greater benefits to these companies.
Moreover, with the ongoing COVID-19 pandemic, nearshoring is emerging as a more viable option than offshoring.
Nearshoring to Mexico offers several benefits to manufacturing and other businesses.
Here’s a list of some of the key ones:
For a country like the USA that promotes innovation, the protection of intellectual property (IP) is crucial. American companies that are heavily dependent on their intellectual property contribute to roughly 1/3rd of the employment in the country.
US companies receive strong IP protection in Mexico. The United States-Mexico-Canada Agreement (USMCA), signed in November 2018, boosted these efforts even further.
It was a step to modernize the 25-year-old North American Free Trade Agreement (NAFTA).
The USMCA particularly highlights intellectual property protection as a key chapter and is sure to boost innovation in all three countries.
In comparison to the USA, the cost of labor in Mexico is substantially lower. This is because of the lower average cost of living in Mexico.
For example, you can avail the services of a skilled worker in Mexico at the cost of an entry-level worker in the USA.
Additionally, the labor cost of China is on the rise. The International Labour Organization’s World Wage Report estimates that the wages in China more than doubled between 2008 and 2019.
That’s why Mexico’s low monthly labor costs are an attractive alternative for US companies as it lowers manufacturing costs.
Mexico offers a talent pool of highly skilled and cost-effective employees.
The quality of Mexican labor and higher management employees has been improving consistently over recent years. This is, in part, due to the nation’s improved education standards.
Moreover, these individuals are familiar with the culture of both countries and are bilingual. And this helps them respond better to the needs of US companies.
The Coronavirus pandemic has hit the manufacturing industry, and strict travel restrictions and have affected the global supply chain.
Companies now have to innovate flexible supply chain solutions.
When nearshoring to Mexico, American companies don’t have to worry about the travel restrictions. The borders between the two nations have largely remained open for trade since March 2020.
Moreover, trading with Mexico leads to lower transportation costs and a shorter duration for products to reach the market. This makes nearshoring to Mexico far better than offshoring to faraway nations.
Mexico is the largest trading partner of the USA. The two countries share strong and favorable trade relations, supported by several agreements.
The USMCA encourages US companies to set up manufacturing facilities in Mexico. It is an agreement that allows free trade between the three major economies in North America.
Now the trade benefits on offer are not limited to Mexican markets.
Companies from the United States can access multiple markets in other countries if they set up manufacturing in Mexico. This is because of the Free Trade Agreement (FTA) that Mexico has with other countries.
This contrasts sharply with the USA’s tense relationship with China. The recent trade war, political disagreements, and the pandemic have greatly affected US-China trade relations.
Throughout the pandemic, the US-Mexico borders have remained open for trade. Companies with manufacturing units in Mexico were still able to conduct business relatively smoothly.
On the other hand, the COVID 19 pandemic has made it difficult for US companies to conduct operations in Asian countries where they have traditionally set up manufacturing plants.
The coronavirus pandemic may boost nearshoring to Mexico, with more US companies preferring to set up operations in Latin America due to the proximity.
When setting up manufacturing units in other countries, it is crucial to find a location with adequate amenities such as electricity, water, transport, etc.
In an effort to develop Mexico as a global manufacturing hub, the Mexican government has heavily invested in developing its infrastructure. In 2019 alone, the Mexican government announced a plan to spend over $40 million on infrastructure.
As a result, Mexico’s developed industrial areas offer basic utilities to attract foreign direct investment from businesses.
These steps have drastically improved the manufacturing sector of the country.
There are many benefits of nearshoring to Mexico. But there are also certain challenges involved in this process.
Let’s take a look at some challenges and how you can overcome them:
Companies need to ensure local compliance in their operations. The USMCA has brought in measures to make trade easier by standardizing the laws.
However, US companies need to pay attention to the manufacturing compliance regulations that are unique to Mexico.
Some of these include:
Companies need to remain vigilant about these regulations during the process of nearshoring to Mexico. It is recommended to work with a local sourcing agent, to avoid costly pitfalls.
Issues in procurement lead to delays in the supply chain and affect operations. And a supply chain disruption can lead to strategic losses that negate the cost savings of nearshoring.
So it is important to address supply chain challenges early on.
Companies often create designated procurement teams that communicate directly with the local contract manufacturers. This helps them fully realize the benefits of nearshoring and avoid sourcing issues.
By keeping this team involved at every stage of the process, companies can lower the overall production costs.
When moving operations to a different country, cultural and language barriers are very common. If companies are unable to manage these barriers effectively, it can prove fatal to their nearshoring efforts.
Although citizens of the USA and Mexico are better positioned to understand each other, it is best to take help from cultural mediators to avoid conflict.
Companies need to have reliable and qualified partners who can understand the company culture and the local culture. This helps bridge the cultural and language gap between the local employees and the company.
Companies need to understand how much it will cost them to set up operations in a new country.
Some of the major costs involved in nearshoring are:
The goal behind nearshoring is saving costs and increasing profit margins. If the company is unable to achieve this main goal, then the whole activity would be futile.
Detailed financial planning and cost accounting before setting up shop often helps companies understand their costs. It helps them to make more informed decisions.
Consulting a Mexican manufacturing company to get a better estimate of costs is also helpful.
Nearshoring to Mexico involves administrative costs related to different time zones, managing various office spaces, and tracking employee productivity.
Companies from the United States have to collaborate remotely with their teams in Mexico. If not done efficiently, this can lead to communication and trust issues.
Over time, this can weigh down any company.
One of the best ways to manage administrative challenges is to utilize tech solutions for everyday tasks such as communication, task management, and productivity tracking.
Nearshoring to Mexico can be a great alternative to other options because of its competitive advantage. The benefits of low labor costs and proximity make Mexico an ideal nearshore partner for American companies.
However, companies need to strategically plan to overcome challenges such as Mexican regulations, the cost of investment, and adapting the company’s culture.
Use the information covered above to understand where you need to start and help you make a more informed decision.
If your company is considering nearshoring to Mexico, then there is no better time than now. Good luck with setting up operations in Mexico!