Nearshoring in Mexico: Why US manufacturers should consider it?
You'll often hear that this is a small world. Well for US businesses waiting on goods from Asia, it's not small enough.
Ships travel slowly. Add delays for crating, loading, unloading and customs clearance, and it can take weeks for an order to get from China to your US factory, warehouse or distribution center (DC.) That time creates additional inventory, increases costs, reduces flexibility and eats into any savings that might accrue from offshoring. Little wonder many US manufacturers are taking a close look at nearshoring.
Nearshoring is the practice of having your products manufactured in a country bordering the US. While there are two, it's Mexico that gets all the attention from manufacturers. Here's a look at why nearshoring in Mexico is, or should be, a key strategy for US businesses.
Factors Driving Manufacturers Offshore
For three decades at least, manufacturers have viewed low labor costs in countries like China and Vietnam as a way of improving their competitive position. Even after factoring-in shipping and inventory costs, the differential between Asia and the US made such offshoring attractive.
Today there's growing recognition that the calculus has changed. Wage costs in China have risen considerably in recent years, productivity less so. Shipping container quantities and lead times measured in months create supply chain inflexibility, and IP concerns grow more pressing every day. Plus, for manufacturers in some markets, there's increasing awareness that customers may see offshoring as unpatriotic.
The Nearshore Alternative
In response to the declining attractiveness of Asia for manufacturing, some US businesses have looked at reshoring. While there may be exceptions, for many the numbers still don't add up. Consider the following:
US labor is significantly more costly than that in Asia, even with additional automation.
Factory space is expensive.
Plus, less tangibly, there's a growing skills shortage in the US. More specifically:
Skilled trades like welders have been in high demand for many years, but the problem is growing and spreading.
Older workers are retiring while Millennials seem to have little interest in manufacturing careers.
Engineering graduates would rather move to Silicon Valley than Greenville, Midwest USA.
In short, it's hard to find people to work in US factories.
Put these factors together and it's clear, reshoring could put a manufacturer at significant cost disadvantage with regards to competitors.
Manufacturing in Mexico addresses all these points.
Mexico is very much a manufacturing-based economy. The workforce is young and experienced in assembly and manufacturing work. Plus, Mexican universities graduate large numbers of engineers every year so there's a large pool of technically trained talent. Indeed, this talent is propelling Mexico into increasingly high-tech manufacturing such as in electronics and medical devices.
Wage costs are much lower for factory workers in Mexico than in the US. Figure on $4/hr versus $16 - $21/hr in the US.
High quality factory premises are available for a fraction of what US equivalents would cost.
IP protection is far stricter than in some Asian countries.
The Mexican government is committed to a program of infrastructure investment, improving road, rail and sea links with its northern neighbor.
Mexico cultivates a business-friendly environment and maintains a large number of international trade agreements, (not just the USMCA.)
Furthermore, and while this may be obvious it's also a very big factor in choosing to nearshore manufacturing: Mexico is very close.
Moving product from a factory in Mexico to a DC in the US heartland takes just a few days. This makes it attractive to ship quantities smaller than a container-load. It eliminates inventory and the risks of both discounting and stock-outs. It increases flexibility and enables better responsiveness to demand changes. According to some manufacturers, the proximity to product development activities even makes a business more innovative.
Sometimes overlooked, Mexico is a big country with diverse manufacturing centers. There's more information on this in, "Manufacturing in Mexico: Who, Why, Where, and How."
Offshore, Reshore, Nearshore
US manufacturers looking for competitive cost advantages have three options:
Move production to Asia, (or leave it there)
Bring production back to the US (and deal with expensive labor and building costs)
Relocate production to the southern neighbor
Every business faces unique challenges. However, many find the answer is the same: take advantage of low costs and proximity by nearshoring production to Mexico. There's more detail in our blog post, "Manufacturing Opportunities in Mexico for US Companies."
How to Nearshore
Mexico is welcoming to foreign direct investment and business-friendly, but it's not the US. Laws and regulations are different, and language can be a barrier for non-Spanish speakers. While it's feasible for a US manufacturer to set up their own operation, enlisting the help of a shelter company will accelerate the process.
A shelter company is a Mexican business formed specifically for the purpose of helping US manufacturers set up shop south of the border. Services are generally tailored to meet the needs of individual US clients.
At one end of the spectrum this could mean helping with legal and tax procedures. At the other extreme, a shelter company might provide a complete turnkey manufacturing operation, fully staffed and equipped. In between, there's a range of assistance with finding premises, recruiting local managers, and making purchasing and shipping arrangements.
The bottom line is this: nearshoring should be part of every US manufacturer's business strategy. A shelter company will handle the bureaucratic challenges along with the practicalities of setting up a factory in Mexico. Isn't it time you were nearshoring your manufacturing operations?