A Nearshoring Soft Landing in Mexico

Labor scarcity at all levels, component shortages, longer lead times, demand “bullwhip effects” and escalating costs continue to drive uncertainty and disruptions on all tiers of the industrial supply chains in the US and the world.

A tangled web of global and local factors ranging from the compliance requirements/rules of origin of the USMCA, the escalation of geopolitical hegemonic power tensions between the US and China resulting in import duties and trade wars, international ports limitations/overload, in-land logistics containers and drivers shortages, the geometric increases of ocean freight’s costs and the previous strict zero-COVID-19 mandatory lockdown policies in China, are driving the professional strategic sourcing professional teams to desperately look for alternatives to relocate their Chinese in place offshore supply sources into nearby and/or allied countries, effectively promoting the nearshoring trend everyone is talking about nowadays.

Not surprisingly and according to Newmark, close to 80 percent of all American companies that had previously sourced manufacturing in China are actively engaged at various stages of their relocation nearshoring planning strategies or effectively deploying them as we speak, and ditto for Chinese suppliers to the U.S.   

There are four fundamental building blocks in the nearshoring equation: labor, location and logistics, infrastructure and time, and complexity. Let´s drill down into each one:

Labor:

With an average population age of twenty-seven, Mexico is still a young country holding a comparative advantage known as the “demographic bonus” that will last for at least two more decades, according to the CONAPO (Mexican Demographics Agency). A very competitive labor pool has been nurturing and developing over the past six decades from the continuous exposure to world- class manufacturing practices across all industries, not limited to automotive, aerospace, medical, electro-domestic appliances, and their high precision associated processes and standards, evolving from the early twin plants, maquilas, and more recently NAFTA, its USMCA successor and the IMMEX programs, which continue to systematically postulate Mexico as the natural recipient for most distributed manufacturing nearshoring initiatives.  To various degrees and as a function of supply and demand, qualified competitive labor is becoming scarce, especially across the border cities and states, creating increased employment opportunities and fostering in-country-migration from southern Mexican states looking for promising, formal and more structured jobs, thus palliating the labor deficits with north bound-shifting demographic dynamics, while maintaining its relative manufacturing cost competitiveness to its Asian peers. According to PwC Mexico, on average, there are 23 percent potential savings in any nearshoring relocation initiative when considering the labor and the imposed duties cost components of any given manufacturing process. (Juan Tolentino Morales Expansion.Mx  11/21/2022).  Even more for labor intensive processes. 

Location and Logistics:

Mexico is a US nearby/allied country with its “God- given” strategic comparative advantage border with the U.S. that stretches for nearly 2,000 miles from the Pacific Ocean to the Gulf of Mexico and touches the border US/Mexico states of California/Baja California, Arizona/Sonora, New Mexico and Texas/Chihuahua, Coahuila and Tamaulipas respectively, offering many options for city and site selection, with a myriad of industrial vocations and already constituents of sophisticated “cross-border” manufacturing clusters, that benefit, entice and facilitate the establishment of distributed manufacturing candidates.  Mexico´s natural location offers significant freight´s cost, time zone and lead times advantages, improving over any other location worldwide (with the exception of Canada) while virtually eliminating the inherent risks, long lead times, uncertainties and the escalating cost of ocean freight and inventory complexities (safety stocks) associated with “far/offshoring.”  The location, location, location mantra holds true more than ever, consequently materializing and focusing the nearshoring strategic approach on these border cities and states. 

Infrastructure:

For a long time, Mexican border cities and states have been the natural beneficiaries of manufacturing foreign investments (location and logistics) and they continue to be the preferred destination for establishment of distributed manufacturing candidates. Border cities like Tijuana and Cd. Juarez dispute their leadership as recipients of most new manufacturing projects and the expansion of existing ones, but not without a toll. The availability of industrial real estate facilities is virtually nonexistent, and there are important structural challenges to satisfy these manufacturing operations’ ever- growing appetite for electrical power, natural gas and water/sewage, as their associated processes have evolved from basic light “assembly” to sophisticated “fabrication” processes, elevating “higher-level- assemblies” and finished goods overall value added. Industrial developers and state governments to a greater degree and the federal government to a lesser degree, are working together to address these complex infrastructure challenges. Nevertheless, these “deficits” are very real and are required to be factored into any distributed manufacturing initiative by planning for them to be progressively resolved over time, yet effectively becoming the true “bottleneck” for the nearshoring drive. 

Time & Complexity:

The relocation of any manufacturing operation is no small endeavor. From the planning stages to the actual operation´s deployment and compliance, as well as the first article inspection approval and certifications, could take several years. Additionally, there are inherent challenges for the actual successful establishment and operation of any international manufacturing operation in a different country, far or near, that range from the inherent manufacturing processes and technology transfer complexities to the new country’s culture, environment, regulatory framework and overall legal compliance requirements. Considering these long time frames and challenges suggests that nearshoring as a global trend is only at its initial stages (infancy) and may take years to complete its cycle to maturity. 

Soft Landing In Mexico Through The Shelter Program:

Accelerating and de-risking the nearshoring initiative is most desirable for nearshoring manufacturing candidates and, fortunately, made possible by considering a “program” that could facilitate the successful establishment and operation of any distributed manufacturing initiative in Mexico by focusing its efforts on the operation’s core processes and technology transfer aspects themselves while outsourcing all the non-core, non-strategic compliance complexities and “distractors” of operating in a different country, to a proven experienced local player.  

The “Shelter” is such a program that for years has demonstrated to be the preferred strategy for a “soft landing” deployment of international manufacturers in Mexico, from large projects to smaller ones as well.

The Shelter program provides for a local, strategic ally, which will shield the manufacturing operation´s candidate from all compliance “red tape” aspects for operating in Mexico, allowing the sourcing company to focus on its manufacturing processes in a significantly reduced risk environment, accelerating and facilitating the successful establishment and operation of nearshoring initiatives. 

In closing, the Shelter essentially achieves its mission by guiding the manufacturing company throughout the deployment cycle, starting the process with the population of key questionnaires encompassing a “one-stop shop” approach that identifies and navigates together with the candidate, through the challenges of city, site and suitable industrial facility selection, providing detailed pro-forma operating comparative cost models and sensitivity analysis, qualitative metrics that evaluate key discriminators, checklists and deployment schedules, allowing the manufacturing company to focus concurrently on its core manufacturing business technology transfer while supplementing it with cost-effective operating economies of scale for the non-core compliance processes.  Also, the Shelter acts as the manufacturing company´s vehicle shield through a bailment agreement and a Shelter Contract, effectively becoming the repository for the sourcing company´s employees, raw materials and equipment, while maintaining the full ownership, control and command of the sourcing company’s Mexico´s operations without the need for incorporating a permanent establishment, essentially de-risking and catalyzing the success of the specific nearshoring initiative.

The Shelter program needs to become a mandatory consideration in all nearshoring strategic sourcing distributed manufacturing planning processes.