Why nearshoring to Mexico decreases costs
When it comes to outsourcing, the cost of doing business can be greatly diminished by choosing the nearshoring to Mexico option.
Twenty or thirty years ago, successful manufacturers understood that offshoring production to China or other far flung Pacific Rim countries made economic and competitive sense, because production costs overseas were so low that they offset the added costs such as of doing business across an ocean, such as those associated with keeping larger stocks of emergency inventory and additional freight. These conditions, however, have been changing steadily over the past several years, and many of those same North American businesses that located their manufacturing operations in Asia are now moving them to closer to home Mexico – a phenomenon that has come to be referred to as “nearshoring.”
Wages have been rising quickly in China while quality, and productivity have flatlined. Volatility in the price of oil and unpredictable currency fluctuations have made doing business overseas difficult to navigate, and less and less profitable. Environmental factors have also impacted supply chain reliability and stability – from typhoons to tsunamis – resulting in a gradually waning enthusiasm to maintain Asian offshore facilities. Add to these challenges other troublesome headaches related to things that range from weak intellectual property protections and extended and costly supply chains, and one is not surprised to see manufacturing is increasingly making its way back to North America from far off places.
Nearshoring in Mexico
Nearshoring to Mexico provides an opportunity to decrease costs for the offshoring company at nearly every turn. A myriad of competitive advantages have turned this southern neighbor into a partner of choice for US and other nations’ manufacturing powerhouses from Ford to LG to Honeywell to Hyundai. Some of those advantages include:
- Labor costs in Mexico: these are approximately 20% of labor costs north of the border. When visionary CEO’s look south of the border and study the ‘real’ numbers they come to realize that production costs of virtually most products can be reduced as much as 50% or more.
- Shorter supply chain: rather than three or four weeks in transit, the supply chain from Mexico to US distributors is typically only three or four days. Nearshoring to Mexico reduces costs both by reducing transportation expenses and by allowing for the maintenance of smaller inventories.
- Ease of quality control: less is spent on supervising and ensuring the quality of product when operations are just south of the border; and because the skill and quality of Mexican labor is on the rise, less is spent on maintaining superior product quality overall.
- Security for intellectual property: the risk of compromised trade secrets or intellectual property infringements is minimized by doing business in Mexico where IP laws are strictly codified and enforced.
- Lower tariffs: due to North American Free Trade Agreement protections and Mexico’s own free trade agreements with over 40 nations around the globe, duties for inputs and exported product are typically reduced or eliminated.
- Higher productivity: Mexican labor is not only outpacing the quality output of Chinese labor, but also the productivity rate as well.