Is Nearshoring Just a Trend? Three Tips to Take it Further

Nearshoring in Mexico has become an increasingly popular option for foreign companies. The term is everywhere: in economic analyses, media outlets, and on the lips of political and business leaders.

However, this is not a new concept. Although packaged differently, nearshoring refers to the outsourcing of business and technological activities to Mexican companies, a process that began decades ago and that has increased after the pandemic. This of course leverages Mexico's image as a trusted international player and as a key country in North America, but it also highlights Mexico’s abundant available resources – both human and natural.

This trend offers a wide range of advantages that not only benefit these companies but also contribute to Mexico's economic relationship with other countries and its international image as a recipient of foreign direct investment (FDI). In the first quarter of 2023, Mexico attracted over US$18 billion in FDI, according to data from the Ministry of Economy. This represents the highest amount in the past four quarters, according to the balance of payments figures from the Bank of Mexico.

This is not new. Over the past few decades, through regional trade agreements, such as the USMCA (formerly NAFTA), and international agreements like the EU-Mexico Free Trade Agreement, Mexico has become a key player in the global economy. What has changed? The professionalization and modernization of the country. Mexico is not the same as it was 30 years ago, and its economic context has also evolved. After various economic crises and a pandemic, the country is fortunately back in the spotlight.

Furthermore, Mexico now has a much more skilled talent pool. Its workforce has grown in areas such as engineering, information technology, and sciences, and the country has seen the expansion of its network of universities and research centers. This allows foreign companies to access a more diverse catalog of professionals. The cost of this talent is more competitive, with salaries lower compared to the US, for example. This enables cost reduction without compromising quality.

Some of the most obvious advantages (often forgotten), include cultural integration and the privileged geographical location of the country. Cultural similarities between countries minimize language barriers, reduce corporate friction, and promote operational efficiency. Moreover, proximity to the US and alignment of time zones facilitate real-time collaboration, regular visits, and in-person meetings when required. Traveling 20 hours to Asia is not the same as taking  a three-hour flight from Dallas to Mexico City.

However, the distinguishing factor between the relocation of companies today and that of 20 years ago is the professionalization of the industry. While manufacturing is the driving force of the Mexican economy, nearshoring of advanced professional services should emerge as a complementary option. Currently, approximately 90% of Mexican exports come from the manufacturing industry, leaving only 10% for service exports.

This needs to change. In a context where economic diversification means survival, Mexico can seize this opportunity to build a more competitive and modern nearshoring ecosystem. Here are three specific recommendations:

1. A new industrial policy: Invest in key technological sectors to modernize services and achieve more balanced growth in the country. This industrial policy should be accompanied by an innovation strategy, consider Industry 4.0 trends, and foster a friendly business environment that attracts bigger flows of domestic and foreign investment. It is not just about creating more plants or factories; it is about making the most of them through effective industrial policies and a virtuous industrial ecosystem. 

2. Invest in the development and growth of local talent: Maximizing the potential of nearshoring services requires investing in people's education and companies retaining their talent. This can be achieved through binational education programs, corporate partnerships with universities, and the establishment of a STEM education policy with a gender perspective. Equally important is investing in English language proficiency as it is a major link if Mexico is to increase its services and consultancy offerings. None of these highly skilled engineers will be hired without a strong command of the language.

3. Thorough research and appropriate selection of partners: It is important to choose reliable partners with experience in the services sector who can comply with national regulations. This will help meet the companies’ expectations and their expansion plans and increase trust in the local market. Successful collaboration is based on mutual trust, a solid relationship, and a well-planned cultural fit. Investing time in the selection process is key.

Relocating companies to Mexican territory is not a new phenomenon. The competitive costs, quality talent, and geographic advantages of Mexico make it an attractive destination for regional and global companies. 

This has been a process that has taken decades. Leveraging these advantages requires an ambitious industrial policy, increased binational collaboration, and significant investment in STEM education. The potential of this strategy mixed with the services and consultancy sectors will transform nearshoring into more than just a passing trend