Exploring the Nearshoring Mega-Trend and its Implications

The strategic sourcing of manufacturing operations worldwide relies heavily on effective industrial site and city selection processes. In this regard, Mexico has re-emerged as a preferred destination for companies seeking to establish or relocate their manufacturing facilities. The rise in Mexico's popularity can be attributed to the nearshoring mega-trend and its variations: onshoring and reshoring. Nearshoring, a term commonly used to describe the shift from offshore manufacturing in distant locations like China, has now come to represent a transition toward closer proximity to the US — the primary source of demand and consumption. By capitalizing on lower costs, shorter and more reliable supply chains, companies can embrace this evolving paradigm of nearshoring, departing from the traditional notions of globalization toward regionalization.

Within the context of industrial site and city selection, nearshoring results in both catalysts and deterrents, introducing complexities for companies considering Mexico. The perspectives of strategic sourcing candidates and industrial real estate institutional investors contrast and converge when it comes to the broader implications of factors like global supply chain restructuring, labor scarcity, infrastructure limitations, trade duties and tariffs, risk aversion, and sustainability. Nevertheless, one fundamental rule remains constant: location. .

Catalysts

• Proximity to the US: One of the primary advantages of nearshoring to Mexico is its close geographical proximity to the US. This proximity reduces transportation costs, lead times, and logistical complexities, allowing for improved supply chain responsiveness and flexibility. Favorable time zones, common cultures, value systems and overall ease of business conduction increasingly play a predominant role in the site and city selection equation where one rule remains constant: location, location, and location (the closer to the US the better). This steadfast principle continues to reinforce Mexico's long-term potential in attracting and retaining its manufacturing and logistics industrial investments.

• Lower Manufacturing Costs: Mexico offers competitive labor costs compared to the US, allowing companies to achieve significant cost savings while maintaining quality standards. Coupled with lower overhead expenses and operational costs, logistics, duties and tariffs, nearshoring/reshoring manufacturing operations from China to Mexico could save in excess of 30% Total Cost of Operation (TCO) hourly wrap rates.

• Regionalization and Just-in-Case Manufacturing: The nearshoring trend aligns with the evolving paradigm of supply chain management, which is shifting from a just-in-time, single-source model to a just-in-case, distributed manufacturing approach. Regionalization allows companies to mitigate shortages and availability risks associated with global disruptions, such as natural disasters, trade conflicts, and pandemics, by diversifying their manufacturing bases.

Deterrents:

• Labor Availability in Hot Border Cities: Popular border and near border cities like Tijuana and Ciudad Juarez, Reynosa and especially Monterrey, which attract many manufacturing operations, face challenges related to labor availability. As the demand for labor-intensive jobs increases, finding skilled and affordable labor becomes challenging, potentially impacting time to market, production capacity, operational efficiency and cost. These deterrents tend to self-correct by the natural domestic migration of the Mexican population, typically from the south of the country, looking for better employment offerings. 

• Infrastructure Restrictions: While Mexico has made some improvements in its infrastructure, certain areas still face significant limitations in terms of electrical and hydraulic infrastructure, where demand is high. These restrictions can affect operational scalability, growth and reliability, posing fundamental challenges for industrial site and city selection from readily deployable power transmission and distribution to long lead-times to get them and financial feasibility to consider.

• Trade Tariffs and Geopolitical Factors: The imposition of US tariffs on Chinese imported goods has driven many companies to seek alternatives. However, geopolitical factors and trade policies can introduce uncertainties that may impact nearshoring decisions. Changes in tariffs or political relations between countries affect the competitive advantage of nearshoring to Mexico — for the better, more recently.

Factors Influencing Strategic Sourcing 

• Manufacturing Operations: Strategic sourcing candidates focusing on industrial site and city selection prioritize factors like cost-effectiveness, skilled labor availability, operational efficiency, and proximity to key markets. These companies assess the overall suitability of the location based on their specific manufacturing needs, supply chain requirements, and market demands. The protagonist role of manufacturing operations in the nearshoring equation and their fundamental requirements in the global supply chain reconfiguration indicate that the demand driver is effectively positioned for the long term. 

• Industrial Real Estate Investors: Institutional investors in industrial real estate consider long-term investment potential, rental yields, demand-supply dynamics, infrastructure development plans, and government policies. They evaluate market conditions, tenant diversification, and the attractiveness of specific regions within Mexico. While it may seem counterintuitive, a high-interest-rate environment (slowing down apparently), such as the one we are living in, is coexisting with cap rate compressions resulting from supply and demand imbalances in key markets driven by the nearshoring impetus to unprecedented zero vacancy levels, fueled by infrastructure restrictions and industrial land scarcity, preventing new developments in these markets. 

Supply Chain Restructuring and Risk Aversion

The global supply chain landscape is undergoing significant restructuring due to the shift from just-in-time, single-source strategies to just-in-case, distributed manufacturing sourcing. Recent disruptions, such as the COVID-19 pandemic, duties and trade conflicts, and geopolitical instability have highlighted the vulnerabilities of concentrated supply chains, especially in China. Nearshoring/reshoring to Mexico aligns with this restructuring drive by providing companies with increased resilience, reduced dependency on single-source locations, unilateral governmental policies and improved risk management capabilities.

Sustainability Considerations

Sustainability is increasingly becoming a critical factor in site and city selection decisions. Mexico offers opportunities for companies to align with sustainable practices, such as investing in renewable energy sources and adopting eco-friendly technologies. The country's commitment to reducing carbon emissions and promoting sustainable development can appeal to organizations seeking to integrate environmental considerations into their operations. The financial sector is paying special attention to these sustainable practices, that when diligently proven, could translate/monetize into discounts of up to 50 basis points from credit facilities. 

In closing, the selection of industrial sites and cities in Mexico, fueled by the growing nearshoring trend, offers both opportunities and challenges. To make informed decisions, strategic sourcing candidates for manufacturing operations and institutional industrial real estate investors must adopt a dynamic approach considering these factors, including cost-effectiveness, proximity to the US (Mexico's border and near-border cities), labor availability, infrastructure quality, time to market, raw material/component shortages and geopolitical risks.

As supply chains undergo restructuring, businesses are increasingly drawn to Mexico due to its lower manufacturing costs, regionalization benefits, and sustainability considerations. Mexico's potential as a premier manufacturing hub in the ever-evolving global business landscape continues to attract enterprises aiming to optimize their operations. By leveraging Mexico's strengths, companies can position themselves for long-term success.

Overall, the industrial site and city selection process in Mexico demands careful evaluation and consideration of the aforementioned factors. By adopting a comprehensive approach and adapting to the changing dynamics of the industry, businesses can unlock the immense potential offered by Mexico's strategic location and favorable conditions.