Nearshoring: Evolution, Opportunities and Growth for Whom?

After almost 17 years in the automotive industry, I have had the opportunity to work and develop in different areas: commercial, financial, marketing, communications, management, to name a few. I can say that I have been a participant and witness to  the automotive industry for almost two decades. 

The automotive industry in Mexico from the perspectives not only of the assemblers but also of the auto parts industry, suppliers, labor, commercial and all the areas that make up a productive chain in Mexico have experienced a constant evolution in the last three decades, from the signing of NAFTA, or the North American Free Trade Agreement between Mexico, Canada and the US in 1992, to the technological disruption due to the arrival of Industry 4.0, automation, the clear evolution toward less-polluting vehicles, such as hybrids and electrics, the unfortunate arrival of COVID-19 that stopped the entire world and its own consequences on multiple fronts, one of them being the devastating consequence on the global supply chain of semiconductors, a preamble to the birth of one of the most often-heard phrases in recent months: nearshoring.

What Is Nearshoring?

Nearshoring is an anglicism that in Spanish we translate as “close relocation”. It is the practice of transferring the operation of a company to a country close to the target market and final consumer and its base of operations. This is a response to the serious situation presented throughout 2020 and 2021 as the COVID-19 pandemic affected the supply chains of companies around the world, mainly those that depended mostly on Asian countries and that practiced business models — although functional and productive — that were carefree due to the systematization that took place for almost a century.

Business models and practices like offshoring and production systems like the "Just In Time" (JIT) system created by Toyota more than 80 years ago, in which the objective is to have on hand only the exact amount of product needed, contributed greatly to the worsening of adverse circumstances for the automotive industry’s supply chain around the world, mainly from countries where most of the 

was concentrated at that time: China. Although the global pandemic was the drop that spilled the glass, China was dragging other problems, such as delays due to natural disasters, tsunamis, uncontrolled piracy that affected intellectual property, situations of labor exploitation as well as the outbreak of COVID-19. 

Nearshoring Opportunities for Mexico

Mexico is the second-most important trading partner for our northern neighbor, the US, representing 13.7% of imports, just 5.3% under its main trading partner, China, with 19%, according to figures from comtradeplus.un.org for2020. The US and China  continue to have commercial and political conflicts due to different circumstances that for the moment we will not discuss but that do benefit Mexico directly by increasing the percentage of commercial participation, of which according to the Inter-American Development Bank (IDB ) US$33.5 billion would correspond to Mexico.

Opportunities for Mexico are presented in the form of foreign investment, which would favor industries like manufacturing, real estate, transportation, and energy, encouraging the economy to recover pre-pandemic levels of economic activity as well as strengthening the USMCA. Investment is attracted by multiple factors, such as:

1. Geographic: The proximity to the US. Mexico shares a 3,152km border with its neighbor to the north as well as access to its national market.

2. Demographic: Providers of cheap, abundant, and qualified labor.

3. Tax forgiveness or reduced taxes.

4. Low tariffs: Because Mexico is part of the favored nations of the USMCA.

5. Lower labor and social costs compared to Asian countries.

6. Low logistics costs in its main ports, airports, railways, and highways, among others.

The opportunities favor foreign companies, turning Mexico into a hotel on the way to the American market. Although this will have an economic spillover in different areas, in my opinion, it is a bittersweet growth opportunity.

Does Nearshoring Affect Mexico?

Nearshoring focuses mainly on transferring production from Asian countries, such as China, to countries closer to the market for which they produce and where their main consumer is, in this case, the US. Upon settling in our country, these Asian-based companies will not only bring with them their own operations, a consequence of nearshoring, but they will support the globalization of companies that do not have operations in our country, increasing their participation in sectors as important as the automotive and auto parts industries in Mexico.

Every year, more foreign car brands arrive in Mexico. Although competition is always welcome, they are coming to a country and an industry that is already saturated, with more than 60 car brands. Where is local consumption? Where is the support for national brands?

Mexican car assemblers, such as VUHL and Zacua, the first brand of electric cars in Mexico, are the clear examples that in our country we have the potential to raise the name of Mexico worldwide — and not just as  the hand that does the work of multinational automotive companies or as a springboard for foreign brands to the US  but, rather, as a world power in the production of Mexican vehicles, integrating 100% national auto parts suppliers, and encouraging our own economy. But emerging Mexican automotive brands face great challenges, including the lack of government incentives to support their growth and the indiscriminate and permitted arrival of foreign automotive brands and auto parts, among others. This is a topic that has a lot of material to cover  in the next article. As we say in the north, “The best way to help is to not get in the way”