Bridging the Gap: Mexico as a Nearshoring Opportunity Amidst US-China Trade Tensions
by: Mariano Bernardez
Despite the ongoing geopolitical and trade tensions between the United States and China, global trade and business opportunities continue to expand. A key player has emerged as a "bridge" between these two economic giants: Mexico. As the concept of nearshoring gains traction, Mexico is positioned to become a crucial link for relocating Chinese industries closer to the US market, with products bearing the "Made in Mexico" label.
This article explores how Mexico's strategic location, skilled workforce, and reliable infrastructure transform the country into a nearshoring powerhouse. This enhances the supply chains of Chinese and American businesses and fosters economic growth and collaboration in the face of global challenges. By embracing Mexico as a nearshoring partner, the US and China can unlock new opportunities for trade and cooperation, transcending geopolitical barriers and fostering a more interconnected global economy
Nearshoring refers to relocating business processes or services to a nearby country that offers similar advantages as offshoring but with closer geographic and cultural proximity. This often involves moving products or services to a nearby country in the same region or continent. Reshoring, on the other hand, refers to bringing back business processes or services that were previously offshored to a foreign country back to the home country or a nearby country. Some examples of nearshoring in Mexico in the past ten years include:
BMW - In 2019, BMW announced the opening of a new manufacturing plant in San Luis Potosi, Mexico, to produce engines and transmissions for their vehicles. This plant is located in the central region of Mexico.
Honeywell - In 2017, Honeywell announced opening a new software development center in Aguascalientes, Mexico. This center will focus on software development for aerospace products and services.
DHL - In 2015, DHL announced opening a new distribution center in Queretaro, Mexico. This center is a hub for DHL's operations in Central and South America.
General Electric - In 2014, General Electric announced the opening a new manufacturing facility in Queretaro, Mexico, to produce gas engines and turbines for the energy and oil and gas industries.
Ford - In 2011, Ford announced the expansion of their manufacturing facilities in Hermosillo, Sonora, Mexico, to produce their Ford Fusion and Lincoln MKZ models.
Some examples of reshoring in Mexico in the past ten years include:
Lenovo - In 2020, Lenovo announced opening a new manufacturing plant in Guadalajara, Mexico, to produce their ThinkPad laptops. This plant was previously located in China.
Whirlpool - In 2014, Whirlpool announced the expansion of their manufacturing facilities in Ramos Arizpe, Coahuila, Mexico, to produce their KitchenAid and Whirlpool brand appliances. This production was previously located in China.
Carrier - In 2012, Carrier announced the relocation of their manufacturing facilities from China to Monterrey, Nuevo Leon, Mexico, to produce air conditioning and refrigeration systems.
Flextronics - In 2012, Flextronics announced the relocation of their manufacturing facilities from China to Guadalajara, Mexico, to produce medical devices and equipment.
Mabe - In 2011, Mabe announced the relocation of their manufacturing facilities from China to Saltillo, Coahuila, Mexico, to produce refrigerators and stoves.
It's worth noting that Mexico has become an attractive destination for nearshoring and reshoring due to its proximity to the United States and Canada, favorable trade agreements, and lower labor costs than the US and Europe.
Critical success factors to execute a reshoring or nearshoring of a part of a value chain in a country like Mexico
Some key success factors for executing a reshoring or nearshoring strategy in a country like Mexico could include the following:
Strategic location: Choose a location that offers convenient access to key transportation hubs, such as ports, highways, and airports, to facilitate the movement of goods and materials.
Skilled labor force: Ensure a sufficient supply of skilled workers who can perform the tasks required for the value chain.
Favorable business climate: Look for areas that offer a favorable regulatory environment, including tax incentives, streamlined bureaucracy, and business-friendly policies.
Strong infrastructure: Select areas with robust infrastructure, including reliable utilities, internet connectivity, and quality roads, to ensure smooth operations.
Cultural compatibility: Seek out areas with a strong cultural alignment, including similar business practices and language skills, to facilitate effective communication and collaboration with local suppliers and partners.
Supply chain resilience: Assess potential risks and ensure supply chain resilience by diversifying suppliers and establishing contingency plans in case of disruptions.
Government support: Seek out government support and incentives, such as trade agreements and investment grants, to help mitigate risks and support the reshoring or nearshoring effort.
SWAT analysis of Mexico as a location for nearshoring or reshoring. Which industries would be the most likely to be attracted to nearshore or reshore to Mexico
SWOT analysis of Mexico as a location for nearshoring or reshoring: Strengths:
Proximity to the United States and Canada, allowing for faster and more cost-effective transportation of goods and materials
Favorable trade agreements, including USMCA, make it easier to do business with North American countries
A large and growing middle class provides a significant consumer market for businesses
Availability of skilled labor force, particularly in industries such as automotive, aerospace, and electronics manufacturing
Attractive cost structure, including lower wages and operating costs, compared to the United States and Europe
Weaknesses:
Security concerns in some regions, including drug-related violence and organized crime
Limited access to financing for small and medium-sized enterprises (SMEs)
Infrastructure challenges in some areas, including unreliable utilities and poor transportation networks
Bureaucracy and corruption can make it difficult to navigate regulations and do business
Income inequality and poverty remain significant challenges in many parts of the country
Opportunities:
Growing demand for nearshoring and reshoring due to rising labor costs in China and other Asian countries
Increasing the use of automation and robotics, allowing for higher productivity and lower costs in manufacturing operations
Diversification of supply chains, creating opportunities for Mexico to become a key supplier for North American companies
Expansion of e-commerce and digital business models, providing new opportunities for Mexican businesses to sell products and services globally
Opportunities to develop new industries, such as renewable energy and biotech, to meet global demand for sustainable solutions
Threats:
Political instability and uncertainty, including potential changes to trade policies or immigration laws
Competition from other nearshoring and reshoring locations, such as Central America and Eastern Europe
Potential disruptions to supply chains, such as natural disasters, cyberattacks, or pandemics
The ongoing COVID-19 pandemic, which has disrupted global trade and caused economic uncertainty
Increasing pressure to address environmental and social issues, such as climate change and human rights, which could impact business practices and regulations
Industries most likely to be attracted to nearshore or reshore to Mexico:
Automotive manufacturing, due to the presence of major global automakers and a strong supply chain ecosystem
Aerospace and defense manufacturing, due to a skilled labor force and favorable government policies
Electronics manufacturing, due to a large pool of skilled engineers and technicians and proximity to North American markets
Medical device manufacturing, due to a growing demand for healthcare products and a favorable regulatory environment
Due to a large and growing middle class and increasing e-commerce adoption, consumer goods and retail.
Leading value chains in which Mexico can become a reshoring or nearshoring attractive alternative.
Mexico has the potential to become an attractive alternative for reshoring and nearshoring in various value chains, including:
Automotive manufacturing: Mexico is already a leading destination for automotive manufacturing, with a well-established supply chain ecosystem and proximity to key markets in the United States and Canada. The country offers a large pool of skilled workers, lower labor costs than in the US and Europe, and favorable trade agreements such as USMCA, which incentivize automotive manufacturers to increase regional production. Additionally, the Mexican government has proactively invested in infrastructure and created a favorable business climate to attract foreign investment in this industry.
Electronics manufacturing: The electronics manufacturing industry is multiplying in Mexico, with major companies like Samsung, LG, and Foxconn investing in the country. Mexico offers a skilled workforce, access to North American markets, and a favorable regulatory environment. Additionally, the country has proactively invested in infrastructure and developing high-tech industrial parks to attract electronics manufacturers.
Medical device manufacturing: Mexico is becoming an increasingly attractive destination for medical device manufacturing due to its skilled workforce, favorable regulatory environment, and proximity to the United States. The country offers a lower cost structure than the US, making it an attractive location for manufacturing high-volume, low-margin medical devices. Additionally, the Mexican government has implemented policies to support the development of this industry, including tax incentives and investment in research and development.
Aerospace manufacturing: Mexico has a growing aerospace industry, with companies like Bombardier, Airbus, and Safran investing in the country. Mexico offers a skilled workforce, favorable tax incentives, and proximity to the United States, making it an attractive location for aerospace manufacturing. The country is also investing in research and development in this industry, focusing on developing the engineering and technological capabilities needed to support the growth of this sector.
Consumer goods and retail: Mexico's large and growing middle class, combined with its proximity to North American markets, makes it an attractive location for consumer goods and retail companies looking to serve the North American market. The country offers lower operating costs than the US and Europe, making it an attractive location for manufacturing and distribution. Additionally, the Mexican government has implemented policies to support the development of this industry, including investment in infrastructure and the promotion of e-commerce.
Dr. Mariano Bernardez (US): Executive Director of Performance Improvement Institute, Director of ISPI Global Network and Kaufman Center, an international expert in social business development, incubation, and city turnarounds. Author of six books and numerous articles on management in Latin America, Europe, and the US.
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