Unraveling the Nearshoring Location and Logistics Trade-Offs

The growing popularity of nearshoring is influencing supply chain models, logistics strategies, and inventory management tactics, forcing companies to adapt to new paradigms. To successfully navigate this changing environment and capitalize on the numerous benefits nearshoring offers, experts urge companies to ally with the right partners in their destination country.

The COVID-19 pandemic accelerated the trend toward nearshoring and regionalization, as companies sought to reduce risks and improve agility. Ongoing trade tensions between China and the United States also redirected commerce to Mexico and other countries, contributing to a dynamic trade landscape, says Ricardo Haneine, Management Consulting Partner and Vice President, A.T. Kearney. 

Companies rethinking their supply chain strategies are exploring ways to increase proximity to customers and operations. Nearshoring minimizes language barriers and exposure to geopolitical instability. The future of nearshoring, however, will likely be shaped by geopolitical developments, labor costs, and consumer preference shifts, as companies prioritize risk reduction, agility, and technological innovation.

Nearshoring has generated significant hype, but its practical implementation reveals several challenges, says Danny Gordon, Head of Strategic Accounts, Nuvocargo. Major players actively seek to expand their operations in Mexico, but there is a shortage of individuals with specialized knowledge of the Mexico-border dynamics. Notably, this region is estimated to be 10-15 years behind the transformation observed in the domestic US market.

Nearshoring enhances logistics resilience by mitigating risks associated with geopolitical uncertainties, natural disasters, and global disruptions. The need for efficient, competitive, clean energy and streamlined border crossings is crucial to sustaining nearshoring trends. Companies must then invest in technology, talent, and infrastructure to navigate challenges and capitalize on the advantages of nearshoring.

Estimates from the Inter-American Development Bank suggest that nearshoring could bring an annual US$78 billion to Mexico, which includes US$64 billion in exported goods and US$14 billion in services across various industries, such as autos, textiles, pharmaceuticals, and renewable energy.

"Despite the growing importance of nearshoring, it now represents only 22% of overall demand. Chinese companies account for 44% of demand, while American companies contribute 22%. The breakdown of demand by industry reveals that 35% is attributed to the auto sector, 30% to electronics, and 7% to the machine and tooling sector. Notably, 80% of this demand comes from companies already established in Mexico, underlining the significance of existing partnerships," says David O'Donnell, President, O'Donnell.

US manufacturers could cut operating costs by an average of 23% by transitioning production from China to Mexico, according to a PwC report. This shift needs a reevaluation of traditional supply chain models. Companies are now focusing on rethinking business models, adopting sustainable production methods, and investing in technology and talent development to remain competitive.

"Efforts are underway to identify potential regional partners, including collaborations with truckers and freight forwarders. This involves meticulously examining various scenarios, evaluating the investments required to establish and sustain successful operations in Mexico," says Kevin Schoberth, General Manager, Dietrich Logistics. 

It is also necessary to invest in infrastructure development to meet the anticipated surge in demand, says Schoberth. Being well-prepared for the evolving landscape is paramount to capitalize on the opportunities emerging in the Mexican market. Therefore, strategic investments in industrial spaces and collaboration between small and large companies are crucial for success in this segment. The limitations in warehouse space underscore the need for innovative storage solutions and advanced inventory management techniques.

Collaboration becomes more important as more companies enter the arena of cross-border trade with Mexico, and there will be a pressing need to allocate additional resources to navigate the unique complexities of this market, says Gordon. 

Logistics companies must prioritize technological advancements, such as AI and data analytics, to optimize routes and inventories while minimizing human error. The transition from "Just in Time" to "Just in Case" inventory management models also becomes essential to address the limitations of digital transformation and infrastructure challenges.