Nearshoring in Mexico: Its Development and Practical Aspects

In today's economy, which has shifted away from complete globalization amid the disruptions of the past few years, businesses are seeking ways to optimize their supply chains and enhance their competitive edge. One strategy that has gained significant attention worldwide is nearshoring, which refers to the relocation of supply chains to nearby countries. This strategy is typically driven by factors such as cost savings, improved logistics, a capable workforce, and proximity to key markets.

For the US, Mexico is often considered a favorable nearshoring destination due to its geographical proximity and other relevant factors. By moving production or sourcing activities closer to the US, companies can effectively reduce transportation costs, shorten lead times, maintain a more agile supply chain, and take advantage of lower direct and indirect production costs.

The Mexican Nearshoring Landscape

Nearshoring in Mexico is a reality. The US, as Mexico's neighbor and largest trading partner, remains the primary market for Mexican nearshoring operations. Geographical proximity and trade agreements like the US-Mexico-Canada Agreement (USMCA) make Mexico an attractive choice for US, European, and Asian companies seeking cost-effective production solutions and an uninterrupted flow of merchandise.

However, despite the ongoing trend of nearshoring — mostly motivated by regionalization and trade and political conflicts between the US and China — Mexico has not attracted foreign investment to the extent that its privileged location and available natural resources might suggest. Several factors contribute to this, including the Mexican government's energy policies, uncertainty regarding the country’s rule of law, security concerns in specific regions, insufficient investment in logistical infrastructure, and most importantly, the absence of public policies specifically designed to promote and develop nearshoring.

These circumstances are deterring potential investors, many of whom are holding off on substantial investments while awaiting signs of how the political landscape will look in 2024 — a presidential election year in Mexico — and beyond. Nonetheless, considerable nearshoring activity is occurring, mostly in the northern regions near the Mexico-US border.

Nearshoring Through Production Capacity Expansion

Still, a steady rise in nearshoring activities in Mexico since 2018 is evident and can be measured through the consistent influx of foreign investment, which Mexican governmental authorities closely monitor. While an ideal scenario would involve massive investments in new Mexican entities and their production and warehousing facilities, the reality is that nearshoring in Mexico mostly involves expanding the capacity of existing entities or acquiring companies already engaged in maquila and export manufacturing so that new production lines can be quickly established.

According to the latest official figures available for the first half of 2023, foreign investment has been distributed as follows: 78% has gone into reinvestments in existing companies, 15% has been allocated to intercompany accounts, and 7% has been directed toward new investments.

Such figures, along with our experience and close contact with large transnational companies, lead us to assert that Mexico's most significant nearshoring aspect currently involves expanding the production capacities of existing entities, rather than establishing new ones.

We attribute this particular expansion in capacity to the intricate complex and time-consuming requirements faced by new Mexican entities aiming to enter the maquila or export manufacturing sector. These challenges often discourage potential investors from establishing new operations. In particular, these deterrents relate to compliance with the Decree for the Promotion of the Manufacturing, Maquiladora, and Export Services Industry (commonly known as the IMMEX program), as well as the Registration in the Corporate Certification Scheme for VAT and Excise Tax (VAT Certification). These approvals aim to streamline import and export operations in terms of customs and tax deferral efficiency.

Legal and Practical Factors When Expanding Capacity

Entering Mexico through an entity already benefiting from an IMMEX program and VAT Certification allows investors quicker market entry, while also benefiting from established infrastructure and local expertise. However, this path is not without risks and requires precautionary measures to avoid inheriting flaws from the existing operations.

Companies expanding their productive capacity must ensure full compliance with tax and customs obligations. This includes maintaining an updated and automated Management Inventory Control System (Annex 24), demonstrating the legal stay of temporarily imported merchandise in Mexico, and continuously filing numerous reports with tax and customs authorities. Otherwise, they risk incurring existing customs and tax liabilities.

Before beginning production, any additional production or warehouse facility must be registered under the IMMEX program and VAT Certification. While this is a straightforward requirement, it is often overlooked, resulting in operational risks and tax liabilities.

Finally, it is essential for companies to understand that the tax treatment of income generated by expanded activities will follow the treatment granted to their existing operations. This treatment will vary depending on who retains title over the products.

In summary, most nearshoring in Mexico occurs under a very specific modality. While faster, this method also allows companies to evaluate, and if necessary, correct any existing deviations to ensure new operations are not compromised.