Recently, nearshoring and reshoring have entered the common slang of supply chain professionals across the United States. These practices have gained tremendous popularity in recent years, and with good reason.
Bringing manufacturing closer to home is a more attractive alternative to the offshoring business operation model. Although offshoring offers numerous advantages – including access to a more diverse range of skills, proximity to raw materials and low labor costs – numerous crises in the supply chain have collectively put both suppliers and retailers at a disadvantage today.
Offshoring thrives on outsourcing supplies to technologically advanced areas like China and the United States. However, the COVID-19-related surge in demand and restrictions resulted in massive delays and most manufacturers and retailers were impacted.
In search of greener pastures, most companies consider nearshoring to streamline operations and supply chains. Nearshoring ensures faster time to market and faster transit from manufacturer to customer. Additionally, suppliers and retailers enjoy the ease of working in a more convenient time zone.
“Anyone who had sprawling, long supply chains has been beaten up during the pandemic, and one of the solutions is to move your location closer to your market,” my colleague and former President of Redwood Mexico, Troy Ryley, told me recently. “The advantage of shorter lead times extends cash-to-cash cycles and provides an advantage that many shipping customers cannot match.”
Nearshoring vs Reshoring
Although nearshoring and reshoring are often used interchangeably today, they are not the same thing.
Nearshoring is the practice of partnering with suppliers, manufacturers and other necessary entities within a supply chain that are in countries close to the business in question. For example, a US company could practice nearshoring by working with a supplier in Mexico instead of one in China.
Reshoring, on the other hand, is the relocation of manufacturing and production services back to the country or region in which the company operates. For example, a North Carolina-based company might practice reshoring by working with Georgia manufacturers.
As global supply chains continue to face several cross-border trade challenges – particularly when importing items from Asia – many companies are turning to nearshoring, investing millions of dollars to build plants close to their target markets. For example, many manufacturers with a major customer base in the United States and Canada are now setting up factories in Mexico.
Nearshoring investments are increasing
In 2021, hundreds of foreign companies announced they would expand or build export factories in Mexico. Notable companies include Unilever, Dana Inc., NYX LLC, Continental AG, Davico MFG, Kuka Home, Perennials and Sutherland LLC, and Denso Corp.
Mattel announced https://www.reuters.com/business/retail-consumer/toymaker-mattel-expands-mexican-plant-nearshoring-push-2022-04-01/ that in mid-March it had raised $50 million for the Expansion will be the company’s largest facility in Mexico, overtaking other hubs in China, Vietnam and Malaysia. Additionally, US companies want to invest 40 billion dollars in Mexico by 2024.
There are many reasons for this tidal wave of relocations to Mexico. First, shippers escape the 25% tariffs imposed on everything imported from China. Even Chinese companies are moving to Mexico, using this strategy as a sort of backdoor into the United States and away from direct tariffs.
Shipping is also much easier if you take sea logistics out of the picture. The costs are also drastically reduced. The average freight cost last year to move a 40-foot container load from Shanghai to the inland United States often exceeded $10,000; Transporting a 53-foot trailer from central Mexico to the same location costs less than half that.
Additionally, by partnering with Mexican suppliers, retailers can expect to receive deliveries faster. Estimated delivery times for products shipped from Asia are usually in weeks – or sometimes months. On the other hand, the product can be shipped from a Mexican maquiladora to customers in the United States or Canada within a few days.
Mexico has competitive advantages
Mexico is one of the most attractive countries for locating companies due to various competitive advantages, including its geographic location, various free trade agreements and human capital. Additional benefits not commonly considered or reported include:
- Stronger protection of intellectual property rights in Mexico compared to China
- More stable free trade agreements with the USMCA
- Less volatile currency swings for foreign direct investment (the peso has outperformed the yuan in value and stability over the past two years)
- More efficient communication (time zone aligned; more than 24 million people learn English in Mexico)
- ‘friend-shoring’, meaning greater cultural similarities; Nor is Mexico a threat to a US military invasion
- Easy travel for local access
- More concern from Mexico about social responsibility and sustainability with CO2 emission controls
Nearshoring is not for everyone
Although Mexico is a big winner of the pandemic-driven nearshoring boom, nearshoring is not for everyone. It’s not a panacea. In fact, companies must overcome many hurdles before pursuing a nearshoring (or reshoring) strategy. In order to initiate nearshoring, it is important to consider several aspects of your business.
First, decide whether a nearshoring or reshoring strategy is the right move for you. In all honesty, if your supply chain is working well with global partners, it might not make sense for you to bring your manufacturing “home” (at least not now). Instead, you could slowly start investigating a few potential suppliers in your area without completely cutting ties with your existing partnerships.
However, if you are confident that nearshoring is the right strategy for your business, start as early as possible. You should be prepared to anticipate a few years of hard work to get your operation up and running.
Most importantly, you will first want to create a shortlist of nearshoring companies that you may want to work with. Then you should consider visiting these sites in person if you can. This can help give you further assurance that they can deliver on their promises.
Popular manufacturing hubs in Mexico include high-tech clusters near Guadalajara, automotive in Toluca, aerospace and white-line equipment near Queretaro. And most major industries are present near or around Monterrey.
From there, make sure you can legally work with your nearshoring partner. You don’t want to find out five months later that there are import or other restrictions that are crippling your operations. Some companies have approached a accommodation company to streamline the process and reduce bureaucracy.
Other potential pitfalls to be aware of are:
- Mexican regulations: NOMs, IMMEX, Outsourcing/Federal Labor Law, CCP & CFDI, B/C initiatives
- Investment costs: labour, logistics, service, taxes, infrastructure
- Cross-cultural adjustment and lack of empowerment
- “Us vs. them”: trust issues
- Political unrest and uncertainty
Many other considerations are of course specific to your industry.
Jordan Dewart is President of Redwood Mexico.
