Nearshoring Looking Increasingly Attractive to U.S. Manufacturers

 

Every company seeks to increase revenues and profitability by reducing costs. However, one of the most common practices in recent decades, off-shoring manufacturing operations to Asian countries, is losing its lustre. The once-irresistible siren call of cheap wages, government-subsidized materials and low overhead costs is now being supplanted by demands for higher wages and improved working conditions as those countries begin to feel their economic might.

Moreover, rising fuel and transportation costs are starting to offset any gains realized by the off-shoring initiative. On top of all that, those countries, especially China, have very weak intellectual property (IP) protections by Western standards, some governments going so far as to consider IP as theft from the workers, and do little to regulate black markets. An alternative that many companies are now exploring is a nearshoring solution in Mexico.

Many manufacturers are starting to recognize the value of nearshoring, according to Industry Week:

“For manufacturers, Mexico offers opportunities to manage costs and reduce supply chain risks. First and foremost, Mexico’s close geographical proximity to the U.S. means that goods from Mexico can reach U.S. cities within days — instead of up to a month from China or India. This can reduce inventory lead times and transportation costs significantly. Closer proximity also helps mitigate risks. With more regular site visits, it’s easier for companies to monitor quality, prevent intellectual property theft and keep channels of communication open.”

Three factors are combining to make Mexico very attractive for nearshoring opportunities.  The first is the legacy of the Maquiladora system, in which U.S. companies manufactured goods in Mexico in plants they owned.  But now, rather than being tied to just one U.S company, Mexican suppliers are prepared to participate in an ever-growing supply base to all U.S companies.

The Mexican government, recognizing this dynamic, has put the second factor in place: a major change in the federal tax structure. The newly-created IMMEX system gives most Mexican companies similar tax advantages that the Maquiladora system previously enjoyed, making it easier for all Mexican companies to participate in growing global enterprise opportunities.

The third factor helping to guide Mexico’s ascension as a competitor in the global sourcing marketplace is the ongoing fine-tuning and implementation of the North American Free Trade Agreement (NAFTA). Overall, the cooperation with the U.S. that NAFTA has fostered has enabled Mexican companies to rise to the standards that U.S. companies expect of their suppliers. Moreover, ongoing fine-tuning of NAFTA’s trucking and other provisions continue to make trade between the U.S. and Mexico easier and more advantageous for those U.S companies seeking to work with Mexican suppliers.

These three factors combine to offer these benefits of nearshoring in Mexico:

  • Ongoing reductions in the cost of manufacturing in Mexico
  • Cheaper deliveries and a faster, more accurate quoting process
  • Greatly reduced lead times for product delivery, thereby enabling U.S. retailers, for example, to enjoy enhanced inventory planning and the ability to more readily capitalize on “hot” products
  • Overall, an opportunity for companies to diversify low-cost company sourcing strategies and further mitigate risk from sources in the Far East

Navigating the intricacies of establishing a nearshoring program, however, can be rather complicated.  An experienced partner like Source One can guide your company through many of the roadblocks typically encountered when undertaking a supply chain exploration opportunity in Mexico.

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