Nearshoring Investments are Bringing Supply Chains to Mexico
Nearshoring shortens supply chains with help from 3PLs
In response to e-commerce orders, manufacturers and retailers have pushed their just-in-time production and fulfillment operations to the max. Once COVID-19 hit however, production paused everywhere. At the same time, bottlenecks and skyrocketing prices occurred, symptoms of the fragility of global supply chains. The impacts of the pandemic have accelerated the need for supply chain managers and executives to explore nearshoring to Mexico as an option to:
- Shorten time to market
- Minimize risks
- Strengthen supply chains
U.S. companies have a history of operating manufacturing facilities and other services offshore to take advantage of lower production costs, competitive real estate prices, and cheap labor. Since the 1960s, offshoring has been a more popular business model than nearshoring due to the benefits that industries received from moving business operations to places such as China. This includes higher profit margins and economic growth opportunities.
However, the COVID-19 pandemic showed that global supply chains can be a logistical liability. The rising costs to do business with China, geopolitical tension from the Ukraine war, and costly global shipping services have been exacerbated by port congestion and transportation challenges.
As a result of these disruptions, China’s dominance in global trade growth is expected to diminish over the next five years, dropping from 26% to 13%. In fact, 70% of U.S. manufacturers plan to relocate production closer to American shores.
Let’s look at what nearshoring is, what the benefits are, and why now is the best time for businesses to make the transition to nearshoring.
Nearshoring in Effect
Appliance manufacturer Whirlpool has nearshored its operations to Mexico since 1987. Since then, 80% of the company’s appliances have been exported to the U.S. and Canada.
Boeing outsources operations to a French company that operates in Mexico. The French third-party company produces 95% of Boeing’s wiring used in their airplanes.
The term nearshoring refers to a business process for which a manufacturer or service provider moves all or part of its business operations from a distant location to a nearby country. Nearshoring can also be defined as the practice of a company partnering with suppliers, manufacturers, and other service provider within a supply chain in close proximity to the company. An example of nearshoring is when a American-based company moves manufacturing operations from China to Mexico to be closer to its capital market. Nearshoring is often associated with manufacturing, however services such as software and product design are also prominent nearshoring industries.
As a concept, nearshoring is proving to be one of the most effective supply chain management strategies for future supply chains. Businesses can utilize nearshoring to ensure faster speed to market for products as well as quicker transit from manufacturers to consumers. Having operations close to concentrations of regional customers that make up a company’s capital market enables faster and more efficient production and shipping. This also reduces the likelihood of disruptions that can come from long and complex supply chains.
Why Mexico and Why Now?
Mexico has a decades-long history of foreign production. The country opened the first “nearshoring” manufacturing facility in 1989, so the rejuvenation of nearshoring to Mexico should come as no surprise. For a long period of time, Mexico was dominated by the agricultural industry, however over the last decade the country’s economic investments have shifted towards education and technology. This has expanded Mexico’s involvement in industries such as aerospace, electronics, electric automotives, and even medical devices. It has also driven investment into Mexico from companies around the world.
In 2021, several companies including Sutherland LLC and Continental AG announced the construction of export facilities in Mexico. The Inter-American Development Bank recently announced plans to invest $2.25 billion into nearshoring operations in Mexico as well. Toy maker Mattel also plans to spend $50 million to move operations out of Asia and expand the company’s largest plant in Monterrey, Mexico. Additionally, several U.S. companies plan to invest $40 billion by the end of 2024 to improve the country’s supply chain and logistics infrastructure.
The rail industry is also getting into the mix. If the Kansas City Southern – Canadian Pacific Railway merger is finalized, it will form a 20,000-mile cross-continental railway network stretching from Mexico to Canada. Approved in 2021, the potential railway could improve North American business logistics by enabling more integrated supply chains to better manage product flow between the countries. This will give companies the opportunity to improve efficiency and better meet supply and demand expectations.
- A shorter supply chain
- Duty-free imports
- Cheaper workforce labor
This same force is also driving demand for increased automation, as artificial intelligence and machine learning are helping to address concerns such as labor shortages and an aging workforce. Being able to communicate in real-time as well as to store and share data quickly are important advantages for nearshoring companies. Advanced digital technologies like the Internet of Things (IoT) and cloud computing can help companies gain visibility into their supply chains, enhancing their ability to make fast decisions to improve their value chain.
Operating in similar time zones is also a key benefit for companies that are nearshoring to Mexico. Fewer time zone differences enable business partners to have greater work hour compatibility. The close proximity also reduces the stress of cultural and language barriers. Shared perspectives and cultural understanding can make collaboration between companies simple and effective, which can improve the efficiency and quality of work. Fewer time zone differences can also enhance the digital supply chain.
The recently enacted United States – Mexico – Canada Agreement (USMCA) updates the North American Free Trade Agreement. The USMCA incentivizes U.S.- based businesses to take advantage of nearshoring in Mexico. Some of the most notable changes that the USMCA brings are:
- The strongest IP protections of any international agreement in the world.
- Duty-free access to Mexican and Canadian markets.
- Streamlined import-export processes that help facilitate the movement of products and services across borders.
Along with the advantages that the USMCA brings, U.S. businesses operating in Mexico can gain access to the large number of markets with which Mexico has entered Free Trade Agreements (FTAs)
According to SICE Organization of American States, Mexico has 14 FTAs with over 50 countries, representing nearly 60% of the world’s gross domestic product. One such agreement is the Maquiladora, Manufacturing and Export Services Industry (IMMEX) program. This program enables foreign businesses to import raw material and unfinished products into Mexico, providing that they are exported out of Mexico within a set period of time. Due to wide market access across five continents, these agreements position Mexico as a prime nearshoring location.
Datex Fast Facts
Direct imports from China into the U.S. are subject to a 25% tariff
86% of 3PLs and shippers predict that future supply chains will rely on domestic and regional capabilities
Mexico’s manufacturing sector has grown 5% this year, surpassing pre-pandemic levels
Trade between Texas and Mexico is estimated to reach $1.5 trillion by 2025
Nearshoring has emerged as an answer to offshoring, which has contributed to the lack of diversified resources and risk for disruption the current supply chain model faces. Experts feel that it is too early to understand the full impact of COVID-19 disruptions on global supply chains, however by utilizing a nearshoring strategy, companies can shorten their supply chains and vary their resources, making them more resilient and sustainable.
Think about it. United States’ proximity to Mexico is a major advantage to businesses planning to move to the Latin American country. Lead times for products shipped from Asian nations can take weeks and months. However, by partnering with Mexican suppliers, U.S. retailers can receive goods faster.
For example, shipping costs for products from China have seen consistent growth since the COVID-19 pandemic, with rates increasing nearly 30% for shipments to the west coast of the U.S. Shipping rates to the east coast have doubled.
That’s not all. In 2021, the average cost to move a 40-foot container by ocean carrier from Shanghai to the U.S. was over $10,000. The cost to move a 53-foot trailer by truck from central Mexico to the same location was less than $5,000.
Let’s go further. Transporting products by truck from Mexico to New York can take anywhere from six to twelve days. In comparison, transports from Shanghai to New York by ocean carrier can take up to 35 days. With nearshoring, manufacturing components can be sourced and shipped from the U.S. to Mexico to be assembled and shipped back to the U.S. in less time than it takes an ocean carrier to import finished products from Asia.
Having a relationship with nearshoring companies that have the infrastructure to support a supply chain network in Mexico is vital for companies that want to shift their operations south of the U.S. border.
3PL Transportation and Logistics Companies Lead the Rebalance to Regionalization
By removing ocean shipping logistics to make supply chains shorter, companies can move products faster. This can reduce costly shipping expenses, enabling 3PLs and shippers to offer lower rates, giving them a competitive advantage.
Nearshoring enables companies to work with 3PLs that are experts in specific markets, such as Mexico, versus global companies that are stretched across a wide variety of markets. This can come in handy as 68% of shippers and 3PLs feel the long, complex supply chains that grew out of globalization has caused businesses to suffer. Experts suggest that supply chains should be rebalanced towards regional and domestic supply chain processes. Factors contributing towards the global rebalance to regionalization include:
- Increased need for supply chain resilience
- Increased awareness of supply chain vulnerabilities
- Restrictive trade policies
Transportation and logistics managers are already directing efforts towards this rebalance, with 83% planning to adjust their supply sources and supply chain markets to ensure consistent supply chain flows.
Food and Beverage is the fastest-growing U.S. e-commerce sector and is expected to reach $40.04 billion in sales by the end of 2022.
As labor costs continue to rise in China, the country is becoming unable to compete with the cost-benefit advantages of nearshoring to Mexico.
According to Statista, between 2016 and 2020, China experienced a 30% increase in labor costs compared to a 6.8% increase in Mexico during that same period of time. Labor costs in Mexico are currently 38% lower than comparably skilled workers in the U.S. The average hourly wage for manufacturing labor is $4.13.
Although U.S. companies are currently experiencing The Great Resignation, workers in Mexico are embracing long-term employment. The Mexican government recently invested over $34 billion into higher education and specialized training for advanced, technical industries. In addition, the country graduates over 100,000 engineers per year.
The combination of a well-educated talent pool and low hourly rates bodes well for U.S. industries nearshoring to Mexico, specifically the sectors outlined in President Biden’s supply chain resilience plan:
- Semiconductor manufacturing and advanced packaging
- High-capacity electric vehicle batteries
- Critical minerals and natural resources
- Pharmaceuticals and active pharmaceutical ingredients
Mexico’s highly skilled labor force can greatly benefit U.S. efforts to build a more sustainable supply chain for the semiconductor chip manufacturing industry. Asia’s chip producers currently account for 75% of the global chip supply. The U.S. only manufactures 12% of the chips that it designs. Nearshoring of chip production would help to lower North America’s reliance on Asian nations.
Nearshoring vs offshoring is a hot topic within the supply chain and logistics industry. COVID-19 showed the world the importance of having resilient supply chains after disruptions around the globe stretched them thin. Since the pandemic, companies have started to move away from globalization and are investing into turning modern supply chains regional. Nearshoring is one of the business approaches that is positively impacting supply chains, especially those that service end-consumers in the United States.
Some of the key benefits associated with nearshoring are that it saves money and improves productivity. Nearshoring can also diversify supply chain networks by shortening them, enabling regional growth. By shortening the supply chain, companies can mitigate their exposure to risks as well as enable better transparency in the supply chain. Fewer time zone differences are also a benefit of nearshoring to Mexico. Because nearshore partners have a minimal time difference, it is much easier for them to understand the languages and cultural differences of people not from their home country.
U.S. companies are working through new shipping requirements thanks to the USMCA and are recognizing that the reduction in tariffs and other costs from overseas suppliers is a more cost-effective option than offshoring. This is driving more manufacturers and 3PL service providers to nearshore to Mexico. Doing so can boost supply chain network support and mitigate the impact of shortages improving their supply chain execution along the way. Choosing the right nearshoring logistics provider can also streamline supply chain processes, which can help companies meet customer satisfaction expectations and improve customer experiences.
What Makes Datex Different?
1. Revolutionary low code/no code flexible workflow-driven warehouse management software
2. Most configurable, user-friendly WMS on the market today
3. End-to-end solution provider: software, hardware, EDI, and managed services
4. White Glove Concierge Service
5. Executive-level attention and oversight
Industry Specific WMS