"Nearshoring" is a trend that has gained significant popularity in Mexico; it is a business strategy in which a company outsources part of its production to suppliers located in countries that offer geographical advantages for their operations.
While subcontracting parts of operations is not an entirely new concept, nearshoring to Mexico has become increasingly popular among U.S. companies over the years due to numerous benefits such as lower costs, reduced delivery times, and increased efficiency.
The pandemic that began in 2020 significantly impacted supply chains due to global difficulties in logistics and transportation. This highlighted the disadvantages of the "offshoring" model, leading to the need to find solutions to these challenges. The result of this search was the adoption of the "nearshoring" approach.
Why is Mexico #1 in nearshoring?
The relationship between Mexico and the United States is characterized by notable dynamism, reflecting the growing integration of production chains in the North American region. This integration has been driven by the North American Free Trade Agreement (NAFTA), shaping and organizing it. The fundamental elements include geographical proximity, integration of resources and infrastructure, and demographic and production factor complementarity, creating profitable trade opportunities for both countries and Canada.
Mexico replaced China as the United States' top trading partner in 2023; this reflects a shift in the dynamics of the global economy, moving away from prioritizing low prices and greater efficiency towards a more nuanced approach. China's decline follows years of worsening relations between the two countries, accelerated by a renewed push for nearshoring or bringing work closer to the United States.
Comparing trade between the U.S. and China, the trade with its neighbor is more balanced between imports and exports. The automotive industry represents nearly a quarter of the total manufacturing trade activity.
On the other hand, Mexico offers several strategic advantages in the current context of reevaluating global supply chains:
Geographic proximity: Mexico's geographical location next to the United States is a fundamental advantage. The proximity facilitates the transportation of goods and minimizes the risks of production chain interruptions due to international events, such as trade conflicts or health crises.
Reduction of operational uncertainty: In an environment where certainty in supply chains is critical, Mexico provides a more predictable environment less susceptible to sudden interruptions than other offshore production destinations, such as Asia. Certainty is essential to ensure production continuity and meet the demand for final goods in the United States. Simultaneously, it is necessary for Mexico to focus on strengthening the rule of law and public security to increase its reliability.
Foreign investments: Mexico has attracted significant investments from companies worldwide, including China. This demonstrates confidence in the country as a strategic location for the production and export of goods. Large companies, such as BMW, have announced multimillion-dollar investments in Mexico, driving economic growth and job creation.
Developing infrastructure: To make the most of this opportunity, Mexico is investing in infrastructure, including service expansion, ensuring a conducive environment for production. Additionally, clean energy projects, like the photovoltaic park in Puerto Peñasco, promote sustainability and transborder cooperation with the United States.
Human capital and rule of law: To maintain and attract investments, Mexico is working on strengthening its human capital through educational investment, albeit gradually reinforced.
What benefits does nearshoring bring to the companies?
Nearshoring generates an increase in trade between the United States and Mexico. As more companies move their business processes to Mexico, this trend strengthens. Between January and November 2023, trade between the two countries reached $599.8 billion.
During the first three quarters of 2023, Foreign Direct Investment (FDI) in Mexico increased by 2.4%, reaching $32.926 billion, according to the announcement from the Ministry of Economy. 41% of the FDI came from the United States, followed by Spain (3.7%), Germany (2.8%), Argentina (2.5%), Japan (2.4%), and Canada (2.2%).
The nearshoring trend has shortened supply chains, reducing the distance and time needed to move products from production facilities to consumers. This has led to faster delivery times, lower inventory costs, and increased responsiveness to customer demand.
Cost savings: Companies can reduce costs by moving production closer to the end user and by cutting transportation expenses when shipping goods back to North America, especially to the United States.
Market Dynamism: When carriers are closer to their customers and suppliers, less time is needed for products and materials to reach where they need to go, making them more attractive in today's fast-paced global economy.
Quality control: When suppliers are closer to their customers, they can more easily ensure that the production process is running smoothly and that products meet quality standards. It also means that companies can respond more quickly to problems that may arise along the way.
Reduction of carbon emissions: By shortening the distances between production and consumption centers, the need for long transportation journeys is minimized, leading to a decrease in greenhouse gas emissions. Additionally, opting for nearby locations allows for the implementation of more sustainable and efficient manufacturing practices, harnessing renewable energy sources and reducing dependence on environmentally unfriendly production methods. This nearshoring approach promotes environmental responsibility and contributes to the preservation of natural resources while fostering a more equitable and sustainable regional economy.
Cross-border logistics is booming among U.S. companies looking to reduce costs and improve efficiency by leveraging Mexico's proximity to the United States. For instance, Walmart announced plans to open a new cross-border fulfillment center in Mexicali that will serve online customers in the southern states of the United States. This move will allow Walmart to deliver packages faster and significantly reduce shipping costs.
The trade relationship between Mexico and the United States is highly dynamic and beneficial for both countries. This dynamic is based on geographical proximity, resource and infrastructure integration, and demographic and production factor complementarity. The recent replacement of China by Mexico as the United States' top trading partner reflects a shift in the global economy towards a more nuanced approach. This strengthens Mexico's position as a strategic partner for supply chains and the production of final goods in the United States.
Considering the numerous competitive advantages Mexico has in terms of nearshoring, it is recommended to contact a logistics advisor with extensive experience in the region, such as SPARX. Their team with knowledge at national, regional, and global levels, coupled with strategic infrastructure, will enable the successful development of proximity logistics.