The Challenges of Nearshoring in Mexico

The latest challenge for the logistics industry is the implementation of the nearshoring model that has gained strength, increasing the number of companies that decide to relocate their plants and production closer to consumption centers in order to reduce costs. 

The pandemic highlighted the disadvantages of offshoring, a very common practice in previous decades, which consisted of moving factories to other countries, generally to Asia in the search for cheap labor, diversifying risks, opening new markets and increasing productivity at a low cost. However, recent disruptions in global supply chains, mobility restrictions, the transportation of goods over long distances and time differences between continents have significantly affected production in many industries, such as automotive, textiles, pharmaceuticals, technology and telecommunications, to name a few.

This complex environment is compounded by the conflict between the US and China over Taiwan, which has generated concern among multinationals and the possibility of closing their operations in China in the face of growing fears of an invasion of Taiwan and pressure from Washington to diversify and move away from the continental market, which threatens economic ties between the superpowers.

Within this geopolitical context associated with the growing demand for logistics services worldwide, a window of opportunity has opened for Mexico to take advantage of nearshoring or relocation of companies, since our country continues to be the best positioned destination in Latin America for this purpose and the situation has laid the groundwork to attract manufacturing plants to Mexican territory, not only from Canada and the US but also plants from other regions, such as Asia and Europe, that seek to settle in the country to benefit from the advantages and the domestic market. 

Analysts globally agree that Mexico is ranked fourth in terms of generating the most interest in nearshoring investments, after Japan in third place, Canada in second place and the US in first. 

Moody's Investors Service considers that an acceleration in the arrival of Asian companies to Mexico would increase gross domestic product (GDP) by 3 percent annually, which would give the government much more room to maintain fiscal accounts at orderly levels and stabilize debt metrics.

Meanwhile, the Inter-American Development Bank (IDB) states that Latin America and the Caribbean could increase their annual exports to the US by US $78 billion in the short and medium term thanks to nearshoring, and in the case of Mexico, it would be the country in the region with the greatest opportunities, adding an additional US $35.3 billion just taking into account the export of goods.

Data from the consulting firm Bain & Company also reveals that Mexico could consolidate as a leading market in nearshoring in North America. If the forecast is fulfilled, the country could accelerate growth in the coming years by at least 2 percentage points, that is, from 4.5 percent to 6.7 percent in manufacturing exports, which would be equivalent to US$8 billion per year in addition to the amount that the industry usually produces.

The outlook is very promising; however, issues such as insecurity, infrastructure, the use of renewable energies and the lack of certainty in public policies are the main challenges to be resolved for Mexico in order to prevent this window of opportunity from closing if investors do not consider that the right conditions do not exist for the relocation of their value chains in our country. 

Although the time has come to make the most of the global situation and install production in Mexican territory, a long road full of challenges lies ahead and companies that decide to relocate will have to comply with current regulations and the different administrative procedures that could take between three and nine months, in addition to considering the costs involved in their relocation.

In terms of security, time is of the essence and immediate action is required to guarantee a favorable climate for investment, especially in areas affected by violence and on highways where cargo theft has worsened, with a 1.3 percent increase in the first quarter of 2022 compared to the same period of the previous year.

Another challenge facing our country is energy efficiency, as the lack of renewable, affordable and reliable energy could deter investments. Today, several business organizations have raised their voices to denounce the uncertainty that transnational companies are experiencing despite the fact that a wide range of opportunities have opened up for them to set up operations in our country. 

Technology and innovation will also play a fundamental role in making us the main investment destination of the future; we need to train human talent, adopt technological solutions, commit to digital transformation and implement Industry 4.0 in national manufacturing.

In the case of Onest Logistics, we are preparing at all levels to take advantage of the opportunities that nearshoring brings through a new warehouse in Atizapan de Zaragoza, which will allow us to get closer to customers and integrate the areas of receipt, stock, validation and prepared dropship, full orders, shipping, returns and maquila. 

Mexico should benefit from its competitive advantages with other Latin American and Caribbean countries. In this sense, the government's decisions will be fundamental to promote public and private, domestic and foreign investment; it is also obliged to generate favorable conditions to meet the demand for sufficient energy, provide legal certainty and foster a climate of certainty. 

The pandemic has taught invaluable lessons to all industries and exposed the fragility of supply chains, accelerating the relocation trends that have burst onto the global scene and will undoubtedly profoundly benefit the economies of the countries that take advantage of this historic opportunity for growth.