Nearshoring in Mexico: The Healthcare and Pharma Opportunity

Nearshoring, defined as transferring a business operation to the low-cost country closest to the consumer market, especially in preference to a more distant one, is a growing trend given the tensions and trade war between the US and China. Moreover, since 2020, supply chain disruptions stemming from COVID-19, and thereafter the Russia-Ukraine war, have caused many US companies to take steps to bring some of their manufacturing closer to home, striving to reduce dependence on China or the EU.

With a strong free trade agreement in place, Mexico is already the second-largest US trading partner after Canada, with almost 88% of US-bound exports transported by road, with the benefit of avoiding the port congestion and supply chain delays of recent years. By the end of May 2022, the National Geography and Statistics Institute (INEGI) of Mexico reported a rise of 22.4% in exportations, compared with the same month in 2021.

Not all countries are an attractive candidate for nearshoring activities. However, several elements make Mexico a reliable partner for these operations. Mexico’s border with the US and its strong manufacturing industry, which includes a specialized, skilled, and cost-effective workforce, position the country to take the box seat for the growing US appetite for nearshoring. 

Mexico holds several advantages over China for American buyers. Among them, it is a signatory to 13 free trade treaties, including the US-Mexico-Canada Agreement (USMCA), resulting in lower to no tariffs; its proximity and vast border with the US shorten any lead times; and its massive transport network and well-established cross-border infrastructure reduce the chance of supply chain delays. All of this allows for just-in-time manufacturing and potentially smaller production runs with less risk of inventory overstocking.

Furthermore, Mexico also has a large workforce of around 59 million people, with millions who are available to work and at lower labor costs than in China – around US$4.80/hour versus US$6.50/hour. In contrast to China’s aging demographic, Mexico’s is also a younger population. Labor standards have significantly improved in Mexico over the past two decades. The implementation of the USMCA was a key element for labor reforms in Mexico in 2019 and 2020, with the aim of further enhancing conditions for workers to create a homogenous labor market in the region – a process that is still underway. 

The development of integrated supply chains between Mexico and the US, which cover diverse economic sectors like manufacturing, automotive, aerospace, agriculture, and textiles, has contributed to Mexico retaining its place as the second-largest US trade partner in 2022. 

Over the past years, Mexico has developed a strong commercial exchange point near the Tijuana region, which concentrates several industrial parks primarily destined for the chemical, manufacturing, and logistics industries. However, the opportunity to benefit from companies looking to nearshore is greater than what Mexico has planned for. If more companies begin nearshoring to Mexico, it will have a sizeable impact and significantly improve Mexico's economic standing beyond the five-year outlook. 

Zooming into the healthcare and pharma sectors, the US market is the largest worldwide. Mexico is the 11th pharma market globally and the second largest in Latin America. There is a great incentive for North American countries to trade with each other and promote nearshoring, given the advantages highlighted above, but more specifically, lower overhead costs and ease of logistics. Many of the world’s largest pharma companies already operate facilities in Mexico, and nearshoring could further increase international investment. At the same time, the US has had trade disputes with a major pharma exporter, China, in recent years, so honing into this opportunity is a must.  

Furthermore, US healthcare can be restrictively expensive and inaccessible for many Americans, and today, Mexico provides a viable alternative. The two countries’ proximity has led to US citizens engaging in health tourism in Mexico, particularly from the nearby states of Arizona, California, and Texas. This is primarily due to more affordable medical services, especially prescription medicines, outpatient surgical procedures (such as ophthalmology, aesthetics/cosmetic) and dentistry, ease of travel, state-of-the-art infrastructure, and the presence of qualified medical professionals. These factors could further bolster growing Mexican revenues for the pharma and healthcare industries.

Mexico has one of the most developed pharmaceutical industries in the region, with more than 400 companies. These include renowned multinational firms (20 out of the 25 largest companies worldwide, although most without in-country manufacturing capabilities) and Mexican manufacturing firms that have expanded a significant industry footprint. There are four strategic life science regions identified in Mexico and growing: Guanajuato, Jalisco, Morelos, and Nuevo Leon. Each boasts strong clinical research clusters, along with other clusters driven by foreign investment specifically oriented to pharmaceutical manufacturing. The industry continues to grow. More recently, Baja California has developed an industrial and academic potential in biotechnology and earlier this year, the state of Hidalgo signed agreements with six Indian producers to promote a new cluster of generic medicines. Puebla and Michoacan are starting to invest in this sector too. 

Moreover, under US President Joe Biden’s supply chain resilience plan, the US identified four strategic sectors to mitigate supply chain risk. These include semiconductor manufacturing and advanced packaging; high-capacity batteries; critical minerals and rare earth elements; and pharmaceuticals and active pharmaceutical ingredients (APIs). This is an opportunity for pharma to catapult the sector in the country as incentives for nearshoring to Mexico are likely to remain high for companies serving the US market, particularly for these four strategic sectors in Biden’s plan. Nevertheless, labor concerns and security-related risks in Mexico may persist and will need to be addressed. 

Before the COVID-19 pandemic, Mexico was highly dependent on certain suppliers for key drug components and APIs, especially from China, India and increasingly the EU. However, the pandemic had a significant impact on the global production and supply of APIs, forcing many local companies to rapidly pivot and seize the opportunity, becoming manufacturers to eliminate reliance on foreign countries. This is still a work in progress, but a huge opportunity quickly identified by sector incumbents.  
On the other hand, beyond all the above advantages and opportunities for nearshoring, there are a few challenges, specifically impacting the health and pharma sectors, that would need to be considered and assessed before shifting production to Mexico:

• Structural 

  • Corruption, internal fraud, and the weak rule of law are nationwide problems that sometimes deter business activity in Mexico. Companies need internal controls, robust ethics, and a compliance cultural foothold. 

  • Perceptions of insecurity also affect the business environment. Small companies typically
    find themselves more vulnerable than larger ones because they generally have fewer human and financial resources to design and/or implement strong security and anti-corruption mechanisms.  

  • Risk to cargo from theft or extortion. The theft is usually targeted at higher value goods, such as biopharmaceuticals.

With the proper measures in place, companies can usually overcome these obstacles.

• Operational 

  • Infrastructure – Mexico lags China in infrastructure investment, especially in the poorer and less connected southern regions. Most investment goes to the states bordering the US or to central Mexico, which holds an important manufacturing hub. This year, however, Mexico announced an infrastructure package that would invest US$38.6 billion in road and rail infrastructure. Today, the quality of infrastructure, however, is better in industrial hubs in the Bajio region and northern Mexico than in other areas of the country.

  • Additional challenges include public infrastructure deficiencies and uncertainty
    regarding the reliability of electricity given the AMLO administration’s stance on renewable energy. Although the power sector will remain a top concern, compliance with USMCA provisions combined with a change in the federal government in 2024 will improve the operational landscape in the coming years.

• Regulatory 

  • COFEPRIS, the regulatory agency, has been undergoing major restructuring due to alleged corruption concerns, which has caused a significant backlog of market authorizations (MAs), import permits, and Good Manufacturing Practices (GMPs) certifications. Part of COFEPRIS’ transformation strategy includes plans to digitalize its procedures and go paperless by 2030.  

  • In the meantime, companies continue to struggle with delayed response times resulting in uncertain product approval and registration timings that hinder proper planning and predictability.

• Government Procurement

  • The public sector recently underwent a broad series of changes in the procurement system and distribution structure that has created uncertainty, lack of transparency, absence of clear rules, heightened receptivity to generics and preference for low-cost providers. 

  • However, the private sector – out-of-pocket segment – has grown significantly (double-digit YoY) and is expected to continue growing. 

• Sustainability

  • Because of the barriers that the AMLO administration has erected in the renewable
    energy sector, there have been growing concerns about Mexico’s commitment to
    sustainability. That said, the USMCA and North American efforts to expedite the energy transition (such as with the EV – Electric Vehicle – market) are already pushing Mexico to a more sustainable pathway.

If these factors can be managed, both between the private sector and potentially through great government intervention, Mexico becomes a formidable alternative to China for pharmaceutical manufacturers and with unrivaled comparative advantages. On the plus side, the US government is actively supporting nearshoring initiatives and the pharmaceutical sector under Biden’s supply chain resilience plan.

In summary, conditions in Mexico are particularly attractive to become a reliable partner to the US, due to its proximity, advanced trade infrastructure and adherence to the rules set out in the USMCA. To capitalize on these opportunities, pharma organizations must not only understand the breadth and depth of the challenges in the country and region, but also ensure that they are well equipped to navigate security, operational and regulatory risks as they transfer one set of risks for a different set.