For manufacturing and distribution businesses with operations in China or other faraway locations, nearshoring to Mexico is starting to look more attractive. For context, “nearshoring” on the same continent can be thought of as getting the advantages of offshoring without crossing an ocean.
Today’s Top 3 Drivers of Nearshoring
Our manufacturing and distribution clients have identified three main drivers of nearshoring.
- Chinese government policies impacting foreign companies
- Ongoing supply chain disruptions around the world
- Escalating commercial conflicts between the U.S. and China
China’s ever-changing policies have made it more cumbersome and costly for U.S. companies to operate in Chinese industrial centers. While these restrictions may address legitimate (and lingering) public health concerns, it is hard to ignore the chilling effect they have on companies that opened lines in China to lower costs and boost margins.
Moving to a different offshore location (Vietnam, for example) might be an effective way to avoid constraints. Even with such a move, your business could still feel the effects of persistent global supply chain disruptions. Although parts of the system have partially bounced back from pandemic crisis levels, shippers reportedly still see pricing spikes of anywhere from five to ten times historic container rates.
With offshoring in general, industry partners caution businesses to avoid making long-term decisions based on short-term conditions. Transportation market fluctuations or shifting public health policies alone may not be enough to justify setting up a nearshoring operation in Mexico, but there is another significant factor at play. What looked like a temporary tariff issue a few years back has become an extended commercial conflict between the U.S. and China that could influence offshoring decisions for years to come.
Nearshoring to Mexico: Advantages and Disadvantages
Interestingly, all three of these drivers are motivating Chinese companies to invest in manufacturing and assembly capability in Mexico. In addition to whatever margin gains these companies may realize, selling into North American markets may become significantly easier simply through proximity. The same advantages that attract investment from China could be worth a closer look from a U.S. business perspective, such as:
- Reduced workforce costs compared with the U.S. labor market
- Favorable and relatively stable currency exchange rates
- Support from established trade agreements and positive trade policies
- Access to networked clusters of potential suppliers and customers
- Potentially shorter time to market and related inventory efficiencies
Of course, these potential advantages don’t come without risk. Setting up operations in Mexico requires careful planning in several key areas, which may include but is not limited to:
- Adaptation to cultural differences, especially around U.S. business norms
- Added complexity of tax compliance in at least two jurisdictions
- Differences in regulatory requirements between the U.S. and Mexico
- Up-front investment in facilities and reliable building services
- Choice of location to ensure your operation is close to where the business is
Added to this risk/reward mix is the expanding challenge of separating business concerns from the influence of global politics. It is important to stress the long view when weighing a nearshoring investment in Mexico.
Continue the Conversation
Clayton & McKervey advises business owners in the manufacturing and distribution sector on strategic planning, financial performance and process improvement. Contact us today to learn more about nearshoring and what it can do for your company.
