Nearshoring in Mexico: Advantages and Savings for Foreign Direct Investors
In the last decade or two, the phenomenon of offshoring – a strategy by which manufacturers contract part or all of their production to suppliers in distant countries, mainly China, has lost much of its appeal. Increasingly, more and more companies are moving to relocate critical links in their supply chain from China to sites that are closer to their bases of operations. In the case of United States manufacturers that are doing business in China, returning operations and nearshoring in Mexico is the most attractive option. This is true for a number of important reasons.
Nearshoring in Mexico is due to change on several fronts
According to industry watchers, among the main factors that manufacturers have focused on when considering nearshoring in Mexico is the rising cost of labor in China.
According to data recently published in the International Labour Organization’s World Wage Report, the average manufacturing wage for Chinese workers more than doubled between 2006 and 2016.
In addition to rising manufacturing wages, China has also seen a reduction in the size of its workforce over the last several years. For instance, the working-age population of the Asian nation decreased by approximately 25 million between the years 2000 and 2017.
For the purpose of illustration, this figure represents a number that is equal to the entire population of Australia disappearing from the workforce. This state of affairs is due mainly to the fact that, for decades, the Chinese Communist Party (CCP) government limited couples to having only one child per family. Although this policy was abandoned by the CCP in 2015, demographics have not yet been able to catch up with the growth in demand for workers in the labor market.
Because of this shift in the Chinese population, nearshoring in Mexico has become a more attractive option to companies seeking not only to reduce their production costs but also to operate in an environment that ensures the provision of a steady supply of able manufacturing workers.
More reasons for nearshoring in Mexico: Intellectual property and trade wars
In addition to cost and demographic considerations, there are other issues have made Mexico a more attractive manufacturing venue when compared to China. In addition to the fact that Mexican labor is outperforming China not only in productivity rates but also in quality, Chinese manufacturing partners have been prone to committing blatant and frequent acts of intellectual property theft.
It is an open secret that IP theft in China has been rampant for decades. A 2017 report by the National Bureau of Asian Research determined that the annual cost to US firms of intellectual property theft by Chinese companies routinely exceeds an annual cost of approximately US $225 billion in counterfeit goods, pirated software, as well as in theft of trade secrets.
Nearshoring to Mexico saves companies the costs that are associated with intellectual property theft in China. On the other hand, South of the US border IP protection is covered under Mexico’s Law of Industrial Property of 1991 and the Mexican Federal Copyright Law of 1996. Under the protection of these two statutes, companies that are nearshoring in Mexico enjoy IP protections that are similar to those found in the United States.
Another issue that makes nearshoring to Mexico a more attractive option than offshoring to China is rooted in the trade differences that are currently being disputed by the United States and Asia’s largest economy.
While on one hand, the United States has recently levied significant tariffs on billions of dollars of Chinese goods entering into the country’s commerce, the United States and its North American neighbors, Mexico and Canada, have renegotiated the North American Free Trade Agreement in order to implement the new United States – Mexico – Canada (USMCA) Free Trade Accord. Under the provisions of this treaty, virtually all of the trade transactions that transpire between the three signatory nations will do so on a duty-free basis.
Beyond the issue of tariffs, other features of the USMCA will provoke more nearshoring to Mexico. Most prominent among these are the new rules of origin that have been formulated for the automotive industry. Under the NAFTA, 50% of the value of the component parts of the automobile had to be sourced in North America in order to be considered an “originating,” product and given duty-free treatment. The new USMCA stipulates that this figure is now to be raised to 62.5%.
Because of this change, more auto parts manufacturing companies with operations in China are likely to increase their presence in North America by nearshoring work that was previously done in the Far East to Mexico.
Nearshoring to Mexico shortens supply chains
Instead of waiting three or four weeks to receive a trans-Pacific shipment, the ground supply from Mexico to customers in the US usually takes between 3 and 4 days. This enables companies to keep smaller inventories of their products, which, in turn, has the effect of reducing overall transportation and storage costs. Furthermore, shorter supply chains operate at a greatly reduced level of risk. Minimizing the distance and the number of intermediaries between the consumer results in the building of a more secure supply chain, as well as makes it easier to identify where errors may have been made.
Shortening a supply chain by nearshoring to Mexico is an especially important goal in the North American automotive sector. Shorter auto parts and component manufacturing supply chain is generally recognized to be leaner, more agile, more accountable, and, most importantly, less expensive than one which stretches across the Pacific Ocean to China.
In addition to shortening its supply chain, companies are interested in strengthening their capacity in the auto industry. This has become a fundamentally important consideration and concern of automotive industry players that are looking at nearshoring to Mexico for the purpose of supplying the growing number of OEMs with major assembly plants located there.
Communications and plant management are easier for companies that have chosen nearshoring to Mexico
There is a maximum 3-hour time difference that facilitates communications between US plants and their Mexican counterparts. Engineers in the United States can speak with the production floor in its Mexican maquiladora in a way that can make it easier to make changes to production and/or design processes.
Nearshoring to Mexico, as opposed to operating in China, also means less travel time and expense for manufacturing executives. This greater accessibility to the Mexican production floor usually results in increased and more effective oversight of operations. This will, of course, benefit company productivity and the quality of the goods that it manufactures. Additionally, shorter travel times will reduce the burnout that may affect executives that have a need to make regular trips to China.
Nearshoring to Mexico is the best option for companies that wish to cut their costs, protect their intellectual property, and enhance their overall quality and productivity.
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