Nearshoring in Mexico: Why Is It So Important?
Nearshoring has become very relevant in our country in recent months and is now considered a business strategy that will define part of the economic course for 2023. This is not a coincidence: Mexico (as part of the North American region) has a privileged geolocation coupled with almost 30 years of experience as a trading partner for the US and Canada, making it attractive for more and more global companies to relocate their production plants in the country.
After the sanitary contingency suddenly impacted productive activity, this commercial practice began to take on global relevance because it provides an alternative that allows companies to reduce costs and, at the same time, guarantee the availability of supplies and facilitate their distribution in the market.
Nearshoring was also an important solution during the pandemic while home office or teleworking was adopted as the “new normal” in an attempt to maintain the productivity of companies while taking care of the health of employees. This in addition to it being a source to solve the constant delays in supply and transportation that affected supply chains with interruptions and increasingly higher costs.
Luckily, months after the increased implementation of nearshoring, the economic news about Mexico is starting to be positive again. Recently, the National Institute of Geography and Statistics (Inegi) announced that, during 2022, Gross Domestic Product (GDP) grew by 3%, returning to pre-pandemic levels.
Coincidence? Not at all. Under this scenario, this commercial practice has become increasingly recurrent in organizations of different industries that find, in our country (and in the North American region), optimal territory to reactivate and accelerate their production activity and logistics. Therefore, it’s not shocking that in 2022, Mexico became the second-largest commercial partner of the US, with an exchange of US$779.3 billion and a growth of 17% compared to 2021.
A Proven Solution
As one of the most important trading partners of the US and Canada, applying nearshoring successfully in Mexico implies a reduction of up to 23% in the operating costs of companies, according to the consulting firm PwC Mexico.
According to the Inter-American Development Bank (IDB), Latin America and the Caribbean could receive, in the short and medium term, more than US$78 billion per year from this practice and our country would garner the greater benefit. Mexico would obtain up to US$33.5 billion annually for this concept. Very good news for our economy after months of uncertainty.
By the way, banking analysts (Credit Suisse) say that, between February 2022 and last January, 105 announcements were registered related to the relocation of plants in the country, which represented an investment of US$19.109 billion. The same institution highlights the installations of a BMW production factory, specializing in electric vehicles, with an investment of US$850 million.
Moreover, the Mexican Association of Private Industrial Parks (AMPIP) also announced that our country has attracted up to 100 Canadian, Chinese, Korean, and Japanese companies through nearshoring,
However, even though this trend will continue to rise, the truth is that a probable recession in the US, in addition to some possible delays in the development of national infrastructure, could put a stop to this good run.
The Great Challenge of Adaptation
The increase in national GDP and the stabilization of the peso against the dollar suggest that, even with enormous challenges, the Mexican economy seems to be taking a good path. However, this does not diminish the ups and downs of the US financial system, and that is not even considering high international inflation.
Although nearshoring offers opportunities to attract investment to Mexico in the automotive, agro-industrial, pharmaceutical, transportation, storage, and logistics sectors, in addition to computer equipment, electronics, household appliances, software development, industrial design, and human capital, it’s necessary to foresee different circumstances that could affect this trend.
The key is to establish the best conditions for the relocation of production plants:
● From the public sector, the drive toward favorable fiscal and customs policies, in addition to a well-defined regulatory framework, contribute to the increase in the development of infrastructure for communication routes, which allows absorbing this growth, with which it’s possible to move merchandise (in a safe, efficient and fast way), not only from the center-north of the country to the US but also from the south and southeast.
It’s necessary to provide the efficient, competitive, and clean energy required by these industries, as well as to modernize and streamline border crossing in a safe and agile manner.
● Companies should focus their efforts on rethinking their business models, by reviewing their production processes and buying new technology and sustainable production.
Furthermore, investing in the development of talent in new technologies is also important, looking for opportunities beyond the north of the country, and also focusing on the south and southeast of Mexico, creating competitive and well-paid jobs for the more than 2 million young people who enter the labor market every year.
If all these actions are taken, strengthening trade agreements with the US and Canada, the conditions for the implementation of nearshoring in Mexico will become increasingly favorable, making the region of North America one of the most powerful and attractive in the world. Something that would surely transcend favorably to the Mexican economy.
The opportunity is there; it’s up to us to take advantage of it.