In recent years, the landscape of global manufacturing has witnessed a significant shift, with an increasing number of companies considering "manufacturing reshoring" and evaluating the potential benefits and drawbacks of relocating their production operations closer to home. We at MTG/CMC have seen many companies make this change. Additionally, you can see the attitude of many investors in new articles from Fortune and the South China Morning Post.
One prominent destination in this reshoring trend is Mexico, a country that has emerged as a prime location for nearshoring. As companies weigh their options, it's essential to comprehensively assess the advantages and disadvantages of reshoring to Mexico. The reality is more complicated than expected.
Benefits of Nearshoring to Mexico
- Proximity and Logistics Advantages: One of the most significant benefits of nearshoring to Mexico is its proximity to the United States. This geographical advantage reduces shipping times and costs, making it easier to manage the supply chain efficiently. This proximity allows for faster deliveries, reducing lead times and improving overall responsiveness. Proximity to your target market can be vital for companies that are highly elastic to consumer demands, such as sporting goods or higher-end consumer products.
- Cost Savings: Mexico offers competitive labor costs compared to the United States, making it an attractive option for companies looking to reduce manufacturing expenses. Additionally, Mexico's trade agreements, such as the United States-Mexico-Canada Agreement (USMCA), can further enhance cost efficiency by reducing tariffs and promoting free trade. Currently, Mexican and Chinese manufacturing wages are similar.
- Skilled Workforce: Mexico boasts a skilled labor force with expertise in manufacturing, engineering, and other technical fields. Companies can tap into this talent pool, benefiting from a readily available, adaptable workforce. Mexican universities excel in producing top-notch engineers, bolstering a well-established manufacturing sector, particularly in the automotive and electronic sectors.
- Improved Quality Control: Nearshoring to Mexico facilitates better quality control and faster issue resolution since company personnel can visit production facilities more frequently. This minimizes the risk of defective products and improves product quality.
- Inventory Management: Closer proximity to the home market can reduce the need for extensive inventory stockpiles. This can lower inventory carrying costs and the risk of obsolete goods. Fast fashion is an excellent example of an industry with significant inventory costs and a high risk of obsolete goods. Onshoring could reduce the risk of obsolete goods at the expense of higher production costs.
Drawbacks of Nearshoring to Mexico
- Security Concerns: While Mexico offers many advantages, some areas have security issues and crime rates. Companies must carefully select their locations and take necessary precautions to ensure the safety of their operations and employees. Our experience shows that many companies hesitate to travel to Mexico due to safety concerns. That creates higher costs for manufacturers.
- Regulatory Challenges: Navigating Mexico's complex regulatory environment can be challenging for businesses. Understanding and complying with local regulations, labor and tax laws can require significant effort and resources. However, there are many resources to manage the regulatory environment, and the Mexican government is making progress to streamline the process.
- Cultural Differences: Cultural differences, language barriers, and varying business practices can lead to misunderstandings and miscommunication. To succeed, companies may need to invest in cross-cultural training and bridge-building efforts. For American and Canadian companies, this difference is likely to be much less extreme than working in China and Vietnam. It is also much easier to find Americans who speak Spanish to assist with the transition.
- Infrastructure Challenges: While Mexico has made substantial progress in infrastructure development, some areas may still lack the necessary infrastructure to support advanced manufacturing operations. Companies must carefully evaluate the infrastructure in their chosen locations to avoid disruptions. The best areas are also the most expensive, such as Monterrey, Tijuana, and Juarez. Leasing costs are increasing rapidly as companies pour in. Mexico has many low-cost areas, but those are usually poorly developed.
- Political and Economic Volatility: Mexico, like any country, is subject to political and economic fluctuations. This can pose risks for businesses that have made substantial investments in the country. Staying informed and adapting to changing conditions is crucial. Mexican democracy has increased over the past 30 years; however, there are worrying signs of backsliding, such as the recent bill to curb the power of the non-partisan National Electoral Institute.
Weighing the Pros and Cons: Is Nearshoring to Mexico the Right Move?
Nearshoring to Mexico offers numerous benefits, such as proximity, cost savings, a skilled workforce, and better quality control. These advantages make it a compelling option for companies seeking to relocate their manufacturing operations closer to the United States. However, it's essential to be aware of the drawbacks, including security concerns, regulatory challenges, cultural differences, infrastructure limitations, and political and economic volatility.
When considering to nearshore to Mexico, you must undergo careful planning and due diligence. Companies should conduct thorough site assessments, consider the cultural and regulatory nuances, and build strong relationships with local partners. When done thoughtfully, nearshoring to Mexico can lead to increased competitiveness, streamlined supply chains, and enhanced quality control, ultimately contributing to the long-term success of businesses in the evolving landscape of global manufacturing.
Bottom line: know your business and don’t rush to relocate.
Do you have any questions about nearshoring to Mexico? Contact us to learn more about how we can help you.
