2021 Manufacturing Tip: Reshoring From China
February 16, 2021
After a year of manufacturing and supply chain challenges due to COVID-19, it’s more important than ever to streamline and diversify your supply chains. An important lesson from 2020 is that a shorter global supply chain provides fewer opportunities for delays and issues.
However, many businesses have long hosted their manufacturing in China, enjoying low labor and material costs.
The best solution for keeping production costs low while shortening your supply chain is reshoring your manufacturing from China and beginning to produce your goods in North America—and more specifically, in Mexico.
In this short guide, we’ll discuss the benefits and logistics of reshoring from China.
What Does Reshoring Mean?
You’re probably familiar with the terms offshoring, so what is reshoring?
In short, it’s the processing of bringing your manufacturing operations to the shores where you do business (i.e., North America). A reshoring initiative can refer to:
- Moving operations that were previously overseas to their original, domestic location
- Moving your operations to another location in North America (Mexico or Canada)
One action that doesn’t fall under the category of reshoring is opening a new domestic manufacturing operation while maintaining your operation in China. That’s just expanding, since you’ll theoretically be increasing your output rather than moving your center of operations.
Why Are American Companies Reshoring?
In May 2020, 64% of respondents to a Thomas survey stated that their companies were considering reshoring manufacturing operations.
Perhaps that’s no surprise.
A number of economic and natural forces increased the risks of doing business in China and other offshore locations. These included:
- The COVID-19 pandemic – During the global pandemic, over 75% of companies within the United States experienced supply chain disruptions of some kind. Whether these were due to localized quarantines or increased time to clear U.S. ports of entry, supply chain issues inevitably affected companies’ bottom lines. The difficulty of communicating with partners in different time zones as they dealt with disruptions to their own workflows further compounded the issue.
- Tariffs – The 2020 trade war between the United States and China raised the cost of doing business by up to 25%. Increased tariffs from the trade war had a particularly strong effect on clothing & footwear manufacturing, electronics, and the active pharmaceutical industry (API). As of early 2021, there was still no plan in sight to end these disruptive tariffs.
- Rising costs – Even before the advent of the above, the costs of maintaining manufacturing jobs, shipment, and transportation were all slowly rising in China.
Despite low costs, there are increasing disadvantages to locating your manufacturing operation far away from your center of operations and end-point consumers.
Thus, many companies have begun to weigh the costs and benefits of relocating their operations back to North America.
The Forecast for North American Manufacturing
As we look forward to government-backed economic stimulus in 2021, many are anticipating more “Buy American” initiatives. Rosemary Coates, executive director of the Reshoring Institute, believes that the next four years could bring further incentives to reshoring:
“There are also key infrastructure things, like modernizing airports and ports, that Biden has clearly identified as part of his strategy. So I think we’re going to see a lot of emphasis placed on manufacturing within the next couple years.”
These initiatives could continue to prioritize goods made with USMCA partners Mexico and Canada.
The Benefits of Reshoring to Mexico
As you look for a new manufacturing hub, there are many potential benefits in reshoring or “nearshoring” in Mexico.
In 1994, the NAFTA agreement reduced trade barriers between the U.S. and Mexico. The elimination of most tariffs paved the way for Mexico’s transformation into a major manufacturing center. The 1990s saw the rise of “maquiladora” factories at the Northern border, and many companies began to see the benefits of utilizing Mexico manufacturing operations.
Now, the USMCA agreement and the well-established manufacturing sector have added to the value proposition of reshoring to Mexico.
Locating your manufacturing facility on the same continent as your company headquarters has the following advantages:
- Conduct all your operations in the same time zone (depending on where you choose to locate your manufacturing)
- Enjoy reduced shipping speed and cost, whether you’re making large shipments to business partners or shipping your product directly to consumers.
Infrastructure and Human Resources
In the past few decades, numerous clothing, automotive, and aerospace companies have developed supply chains in Mexico.
Major brands with manufacturing facilities in Mexico include:
- Lockheed Martin
Thanks to increased trade, there are now well-established routes for shipping and receiving raw materials and finished goods.
The manufacturing jobs have risen to meet the demand for skilled laborers, engineers, and administrative professionals to support manufacturers. Mexico’s workforce is at once young, highly skilled, and relatively affordable to employ.
In July 2020, the USMCA trade agreement further incentivized North American manufacturing through a number of updates to the NAFTA agreement.
- The agreement set industry-specific standards for the removal of tariffs. For example, automotive manufacturers must produce more of a vehicle’s content in North America to qualify for tariffs than under NAFTA. Previously, cars had to be 62.5% manufactured in North America, and now they must complete 75% of the manufacturing process within a USMCA nation.
- In addition, updates to intellectual property law have removed duties on electronic data and increased protections for source code. This means that tech companies doing business in Mexico will face fewer duties while ensuring the protection of their IP.
- Likewise, pharmaceutical companies will enjoy longer copyright protections.
- Finally, the new Section 321 De Minimus requirements allow companies to ship some low-value goods directly to consumers through an informal entry process. If you’re manufacturing goods in Mexico, it can also be efficient to outsource fulfillment to a Mexican distributor.
These trade incentives can further reduce the cost of your manufacturing and fulfillment operations.
Supporting Your Company Values
Besides the financial advantages, reshoring to Mexico also allows companies to meet their goals for sustainability and corporate social responsibility.
- Locating manufacturing operations in North America can shave 8,000 miles off your goods’ journey before reaching their final destination. Less distance between manufacturing operations and consumers means fewer carbon emissions over each product’s lifecycle.
- Strong labor protections under the new USMCA trade agreement guarantee that workers are paid fairly.
Accessing New Markets
Establishing a presence in Mexico also provides opportunities for expanding your market.
Mexico itself has a young and growing population of potential customers. Once you begin manufacturing in Mexico, it’s a natural fit to begin marketing and distributing your goods there, too.
In addition, Mexico’s free trade agreements with other nations make it a convenient entry point to a global marketplace. After establishing a legal presence in Mexico, you can export to the nation’s trading partners with reduced tariffs and trade barriers.
The Costs and Opportunities of Relocation
While there are clear fiscal and tactical advantages to reshoring, there are also costs.
Once a company has established its manufacturing operations in China, barriers to exit include:
- Acculturation – If you have little familiarity with the Mexican market, you’ll need to research potential geographic areas and specific locations for your new facility.
- Relocation costs – Likewise, you’ll need to invest significant capital in your new location while preparing to wind down operations in your offshore facility. There’s a long-term payoff to reshoring, but it can be expensive upfront.
- The challenge of building a new network – You have years or even decades of business connections in China, from suppliers to qualified local proxies and beyond. Establishing a facility in a new nation where you may have zero or few connections can be challenging, especially if you proceed without a trusted business partner.
- Timeline – Rome wasn’t built in a day, and it takes time to build up your reshoring production. Depending on the approach you take, starting up your manufacturing operations can take anywhere from months to years.
To minimize these costs, it’s essential to review all possible solutions and chart the best course forward for your company.
Options for Reshoring
How did your company approach offshoring?
As you consider reshoring, it can be helpful to follow a similar playbook—but there are many potential solutions available.
Each of the following options has potential pros and cons:
- Building a new facility from the ground up allows you to control all aspects of your operation, from location to layout and beyond. However, this solution will have the longest timeline and require the most startup capital.
- Forming a joint venture with a Mexican company can help you share the risk of establishing a new facility while benefiting from your partners’ expertise. You’ll be able to create a business presence in Mexico with a shorter onramp.
- Shelter services enable you to begin manufacturing under the legal umbrella of an extant Mexican company. The right partner can handle most aspects of your business in Mexico, including manufacturing and payroll—all according to your specific needs.
Reshoring With NAPS
At NAPS, we offer a range of tailored solutions for businesses interested in reshoring to Mexico. Our years of experience in regions throughout the country equip us with the professional network and experience to help you establish a legal, cost-effective manufacturing facility.
Our Shelter Services provide a quick, full-service solution for reshoring and diversifying your global supply chain. However, we also provide custom quotes and services depending on your specific needs.
Get in touch today to learn more about the upfront costs and long-term benefits of reshoring.
Supply Chain Dive. 64% of manufacturers say reshoring is likely following pandemic. https://www.supplychaindive.com/news/manufacturing-reshoring-pandemic-thomas/577971/\
Washington Post. Biden signs order pushing the federal government to buy more American-made products. https://www.washingtonpost.com/us-policy/2021/01/25/biden-buy-american-rules/
Tech Target. Supply chain trends for 2021 include reshoring, digitization. https://searcherp.techtarget.com/feature/Supply-chain-trends-include-reshoring-digitization
Santander. Mexico. https://santandertrade.com/en/portal/analyse-markets/mexico/reaching-the-consumers