Nearshore manufacturing in Mexico translates into a competitive advantage
Changing a manufacturing production model requires significant effort and commitment. To be successful in such a complex endeavor, companies have to guarantee robust and healthy supply chains that operate without interruptions (or at least with minimal delays). In light of the experiences and lessons learned during the recent COVID-19 pandemic, companies have concluded that nearshore manufacturing in Mexico translates into a competitive advantage.
After coming to this conclusion, manufacturers will increasingly bet on relying on practices such as nearshoring, that is, producing near the parent company or its main consumption centers. Manufacturers will do this to minimize their exposure to international risks and interruptions in their production and distribution processes.
This represents an excellent opportunity for Mexico to expand its economic role since the regionalization of supply chains can increase its potential to become the leading supplier to North America.
However, although nearshore manufacturing in Mexico represents an enormous growth opportunity, industry experts advise that the government must optimize its internal policies, give certainty to investors, improve infrastructure in highways, ports, and airports and create truly efficient mechanisms to guarantee security for logistics operations.
The history of nearshoring manufacturing in Mexico
For Juan Carlos Meade, an International Trade consultant, in the 1980s, manufacturing companies decided to migrate their production centers away from their primary sales market to seek reductions in their costs. This migration was known as offshoring.
However, notes that in the 1990s and with the implementation of the North American Free Trade Agreement (NAFTA), some companies began to locate their factories as close as possible to their target markets. This came to be referred to as nearshoring. This practice was also strengthened by the constant increase in customer demand for unique products and short-term deliveries.
This is not a new practice, and many companies had already started migrating to nearshore manufacturing in Mexico long before COVID-19. However, in the last decade, its use has intensified due to changes in production processes and the need for greater automation, reduction of logistics costs, and digitization of trade, among other factors.
“Time is money, and companies have found a way to reduce up to 70% in the transfer times of their parts and between 10 and 15% in savings in their supply chains by nearshoring”, notes José Ambe, Vice President of the Foreign Trade and Logistics Committee of the American Chamber of Commerce in Mexico (AMCHAM).
He adds that the important thing is that the supply chains are resilient. He also notes that the trend is for companies to look for different suppliers in various parts of the world. The great challenge will be to achieve homogeneity in the quality of components, “but companies can reap great benefits once this challenge is overcome. The less a manufactured good is touched and moved, the lower the product’s price to the consumer.”
According to an analysis carried out by Mexico’s Analysis Laboratory for Commerce, Economics, and Business (LACEN), the production companies that nearshore manufacturing in Mexico can improve the efficiency of their production processes by 17%, while their domestic suppliers can register a growth of over 25%.
“It is difficult to establish in what percentage nearshoring manufacturing in Mexico helps reduce or not a company’s logistics costs. Cost depends a lot on its level of integration, the positioning of its supplier base, and the cost of its materials, sub-assemblies, and inventories. In this context, reduced transit times and proximity to points of sale has become the greatest need for companies,” according to Carlos Tamayo, regional director of CH Robinson for Mexico.
The challenges to nearshoring manufacturing in Mexico
For Tamayo, the industries that will utilize the practice of nearshoring are automotive, aeronautics, pharmaceuticals, textiles, and electronics, among others. However, from his perspective, one of the significant challenges Mexico must address is to have an infrastructure that helps companies streamline their logistics processes.
“Mexico has a first-class infrastructure in some ports, but the country can make improvements in other maritime facilities. Additionally, highway improvements at consumption points that transit to the United States market must be addressed. Finally, Mexico must optimize to conditions that promote the relocation of companies contemplating the option of nearshoring manufacturing in Mexico,” he points out.
According to José Ambe, CEO of the Logistics firm of Mexico (LDM), one of the challenges of the current government is to provide greater certainty to investors. From his point of view, the relatively recent cancellation of the Constellation Brands – Grupo Modelo plant in Mexicali, Baja California was a blow to private investment that generated uncertainty regarding the current government’s commitment to a positive business environment. Furthermore, this event occurred when greater investment was required to fully exploit Mexico’s competitive advantage due to its favorable geographical location.
“For Mexico to assert its place in the supply chain, it also has to overcome the challenges in terms of security and technology, as companies are accelerating their path towards digitization and require the infrastructure to support these platforms,” notes Jose Ignacio Martinez.
Mauro González, CEO of Alkimius, agreed that the increased use of technology will substantially affect manufacturing in the coming years since 80% of leading companies plan to digitize between 50 and 100% of their business.
However, for José Ignacio Martínez, coordinator of the Laboratory for Analysis of Commerce, Economy and Business (LACEN) of the National Autonomous University of Mexico (UNAM), nearshoring manufacturing to Mexico has once again become relevant to manufacturers in the face of tensions in the commercial relationship between China and the United States. This new geopolitical situation has rearranged global manufacturing and supply chains and boosted trade in other parts of the world, such as Mexico and Vietnam.
“China had become the world’s central manufacturing center. However, since the pandemic, companies have realized that having diversified and stable supply chains that do not depend only on the Asian economic giant is of the utmost importance,” he says.
He explains that Wuhan, the epicenter of the health emergency, is a logistics hub where seventeen global value chains with seven hundred companies are located. Its closure caused a catastrophic economic blockade and the interruption of supply chains. This situation had immediate and severe repercussions in various parts of the world, including Mexico.
According to a survey by consulting firm UBS Evidence, the trend of nearshoring manufacturing in Mexico is on the rise. More than Seventy-five percent of companies queried plan to relocate their operations abroad and take them out of Asia. This is reported to result from the effects that the pandemic brought to their supply chains.
If your company is exploring the possibility of nearshoring manufacturing in Mexico, we encourage you to contact the professionals at the Tecma Group of Companies.