Why More Companies are Nearshoring to Mexico
August 10, 2020
Content was updated for accuracy and relevancy on March 29, 2021.
Many companies are recognizing the substantial benefits associated with nearshoring their operations. Seen as an increasingly promising alternative to offshoring, some of the benefits of nearshoring in a nearby country like Mexico include a shorter supply chain, duty-free imports, and robust intellectual property rights (IPR) protection.
To help you understand whether nearshoring is right for you, let’s take a look at what it is, what the top benefits of nearshoring are, and why now is the perfect time to make the transition.
What is Nearshoring?
Nearshoring is the term used to signify when a company moves all or some of its manufacturing operations from the U.S. to Mexico. The term nearshoring was coined with traditional offshoring in mind. Offshoring became an increasingly popular method during the late Twentieth-century for companies to gain access to lower labor costs by moving their manufacturing operations to an offshore location such as China and other countries located along the Pacific Rim.
Offshoring didn’t occur in a vacuum but was rather one component of a US economy that was shifting from manufacturing to service. Today, the U.S. economy is largely service-based, with only a few states boasting manufacturing as a dominant sector. However, as concerns over intellectual property (IP) protections, rising wages, and vulnerable supply chains have increased over recent years, so too has an interest in taking advantage of nearshoring opportunities to begin manufacturing in Mexico.
Manufacturing Strategies Overseas or Locally
Ultimately there are three important strategies that companies will look at when they want to reap the cost benefits of moving their manufacturing to a new global location. These include:
- Offshoring: This is the act of taking the original location of a factory or team, and moving it to a lower-cost economy to produce that good or service.
- Reshoring: This term will be used interchangeably with “Onshoring” which means relocating the factory from the foreign or neighboring country back to the domestic country.
- Nearshoring: This term is used to signify when a company moves all or some of its manufacturing operations to a nearby country where the goods will be sold.
For example, in North America, some United States-based companies use Mexico as a nearshore destination for their manufacturing operations.
Top Benefits of Nearshoring to Mexico
Nearshoring is being increasingly scrutinized as a viable alternative to offshore manufacturing due to the numerous advantages associated with it. Let’s take a look at what the key nearshore outsourcing benefits are:
- IP Protections – Intellectual property is critical to the US economy, with industries that intensively rely on IP contributing to roughly 30% of U.S. employment and 52% of merchandise exports according to 2014 data from the Department of Commerce. That number has certainly only continued to grow over recent years. Yet concerns over IP protections have increasingly taken the forefront of foreign policy negotiations and is perhaps the most important challenge facing multinational corporations with manufacturing in China. Thanks to the recent passage of the USMCA as well as a long history of taking on IPR protections through international agreements, US companies are given much stronger protections for their intellectual property rights in Mexico.
- Lower Cost of Labor – The labor cost remains low in Mexico compared to the United States, while the minimum monthly wages have steadily been increasing in China. Rising labor costs in China have forced multinational corporations to begin looking elsewhere, and for U.S.-based companies, Mexico offers an attractive alternative as a nearshore outsourcing partner.
- Shorter Supply Chain – One of the most visible impacts of the COVID-19 pandemic has been the precariousness of supply chains in a globalized manufacturing world. This has forced many companies to explore alternative supply chains that are shorter, more flexible, and in closer proximity. Added advantages of a shorter supply-chain are reduced freight costs and faster time-to-market for products.
- USMCA and FTAs – The recently enacted United States-Mexico-Canada Agreement (USMCA) heavily incentivizes businesses based in the U.S. to take advantage of manufacturing in Mexico. Along with the advantages that the USMCA brings, a businesses operation in Mexico gains access to numerous markets that Mexico has entered Free Trade Agreements (FTAs) with. Whether you are curious about the impact of USMCA on duty-free imports, Section 321, and more, make sure you are ready and have all the information you need for moving your manufacturing to Mexico.
While the benefits of nearshoring to Mexico may be clear, you might be wondering why it is becoming increasingly popular now. While there are long-standing trends that have contributed to the adoption of nearshoring as an alternative to traditional offshoring, including rising wages in China and increasingly tenuous U.S. – China relations, there are two more immediate reasons that many companies are considering nearshoring their operations: the recent passage of the USMCA and the COVID-19 pandemic.
Do you know the difference between USMCA vs. NAFTA? The enactment of the USMCA is a very powerful incentive for U.S.-based companies to consider nearshoring. Against the backdrop of trade-disputes and higher wages in China which make offshoring less desirable, the USMCA modernized the North American Free Trade Agreement (NAFTA) for the 21st century. Among some of the most notable changes embedded in the USMCA are the strongest IP protections of any international agreement to-date, duty-free access to Mexican and Canadian markets, and a streamlined import-export process that reduces red-tape and facilitates the movement of goods and services across borders.
The impact of the COVID-19 created a supply chain pandemic. Although it’s early in the pandemic and the long-term impacts remain to be seen, it quickly became clear the long supply chains associated with offshoring were more fragile than was once believed. This forced many companies to explore alternative options which could shorten their time to market and strengthen their supply chain. For many U.S.-based companies, Mexico under the new USMCA regime is the best option available.
An increasing number of companies are nearshoring to Mexico because it offers numerous advantages over offshoring. Nearshoring to Mexico strengthens supply chains, which the COVID-19 pandemic unequivocally exposed as more fragile than was initially believed. At the same time, nearshoring to Mexico shortens supply chains, reducing the time-to-market.
Under the USMCA, American companies get duty-free access to Mexican markets and a streamlined import-export process. Importantly, the USMCA greatly strengthened the intellectual property registration, protection, and enforcement mechanisms in Mexico, bringing these much closer to achieving parity with laws and regulations in the United States.
If your company is interested in nearshoring to Mexico there is no better time than now! To learn more about nearshoring benefits, contact us today.