To Nearshore or not to Nearshore

What is Nearshoring?

Nearshoring is the practice of a company moving its business activities or manufacturing to a nearby country or close to the destination/end consumer market.

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Why Nearshore?

It’s not surprising that the United States is number one among nations with developed economies receiving the most Foreign Direct Investment (FDI), while China is number one among developing or transition economies. One of the fastest rising developing or transition economies drawing FDI is the Mexican economy.

A 2020 report by the UNCTAD (United Nations Conference on Trade and Development) ranked Mexico as the 14th best overall FDI host economy worldwide. While most of Mexican FDI currently comes from the U.S. and will continue for the foreseeable future, Mexico is in a position of strength to welcome new outside investment opportunities and diversify its inflow of foreign investment.

U.S. companies working through new rules of origin requirements under the United States-Mexico-Canada Agreement (USMCA) will have to make decisions about whether nearshoring more operations to Canada or Mexico and reducing tariffs and other costs from overseas suppliers is the better financial and/or logistical option.

Auto manufacturers must now certify that 75% of their steel and aluminum comes from Canada, Mexico or the U.S. to qualify for duty-free trade under the USMCA, up from 62.5% under the former North American Free Trade Agreement (NAFTA). In addition, there is a Labor Value Content (LVC) requirement, stipulating that a certain percentage of a finished vehicle is made by workers earning a minimum of $16 per hour. Further, USMCA requires 70% of a vehicle’s steel and aluminum to originate in North America.

Because of this change, more auto parts manufacturing companies with operations in China are likely to increase their presence in North America by nearshoring work that was previously done in the Far East to Mexico.

In summary, the ratification of USMCA, along with the impacts of the COVID-19 global pandemic and international trade tensions, has companies evaluating their opportunities to shift their manufacturing to Mexico to take advantage of the many benefits of nearshoring their production there.

Benefits of Nearshoring:

The following are examples of the types of benefits that can be enjoyed by companies who nearshore their business activities to Mexico:

Economic Benefits
Trade Advantages: According to SICE Organization of American States, Mexico has 14 free trade agreements with over 50 countries representing more than 60% of the world´s GDP; these agreements position Mexico as a location with wide market access across five continents.

Favorable Tax Factors: Depending on the type of manufacturing plant and its location in certain Mexican states, a company’s decision to nearshore can result in even greater tax savings. Two examples of tax savings that may be available include Mexico’s Maquiladora Program and its Special Economic Zone (companies should of course consult with their own tax advisor to determine eligibility for specific tax-treatment benefits):

Final products manufactured at a Maquiladora (a factory in Mexico run by a foreign company who exports its products to its “home” country) are exported into the U.S. at lower tariffs than those from other countries, making it less expensive from a tax perspective to manufacture in Mexico than an overseas country.
Businesses nearshoring in Special Economic Zones, established to promote economic investment and growth in regions lagging behind other areas of Mexico, might be eligible to receive special tax incentives on their investments.

Manufacturing Clusters: Utilizing one of Mexico’s multiple manufacturing cluster regions can also give a business a leg up as it can take advantage of the area’s highly skilled labor, sophisticated industry-specific technology, and an established knowledge base. This can lead to more competitive, innovative, and efficient operations spurring economic development in cluster regions and greater investor returns. With the establishment of manufacturing clusters, Mexico’s workforce is becoming increasingly skilled in the industries where these clusters are located. This is particularly true for those who manufacture and assemble more complex products.

Mexico’s manufacturing clusters give investors a head start in knowing the regions where they can reap the cluster benefits. For example, Mexico’s main manufacturing industries are aerospace, automotive, electronics, furniture/appliances, and medical devices.

The main manufacturing clusters for these industries have been successfully established in these states:

KCS_Nearshoring_Mexico_trackage-rights_5_19_2021

Workforce Benefits
Competitive Labor Costs: When labor is often the most expensive variable within the Cost of Goods (COGs), it must be a consideration. Mexico offers a combination of affordable labor and an emphasis on education in industrial related fields. According to Statista, while China experienced a 30% increase in labor costs between 2016 and 2020, Mexico only saw an increase of 6.8% during that same timeframe. Per IVEMSA, labor costs in Mexico are just 38 percent of a similarly skilled worker in the US.

Highly Trained Workforce: Skilled direct labor, which generally refer to those individuals with at least 5 years of experience in a specialized line of work, can be found in many of the maquiladoras in Mexico, especially those servicing the aerospace, automotive, medical device, and metal mechanic industries.

The Mexican government has also invested in higher education and specialized training for advanced, technical industries. Over 100,000 engineering graduates enter the workforce every year. A robust labor force means Mexico can remain competitive in manufacturing, while still keeping wages cost-friendly.

Young Workforce: Mexico also has a relatively young population that will continue to provide a robust workforce for generations to come. According to Index Mundi, in 2018, Mexico’s population for under 14 was at 26% while the group representing the ages of 15-24 represented 17% of the population showing a young population and a sustainable workforce.

Geographic Benefits
Shorter Supply Chain to Destination Markets: U.S. proximity to Mexico is a major advantage to businesses seeking to nearshore their operations. For example, transporting goods from Mexico to New York can take about 6-12 days while going from Shanghai to New York can take about 35 days; Mexico to Los Angeles is 4 days where Shanghai to Los Angeles, 22 – 26 days. Components can be sourced from the US, assembled in Mexico, and shipped back to the US in a short amount of time.

Improved Time Management for Greater Efficiency and Productivity: Mexico is in the same time zones as the U.S. (Pacific, Mountain and Central). Accordingly, while production may be occurring “offshore”, the time zones in Mexico align with those in the U.S. making real-time communication and supply chain operations that much easier.

Fewer language communications barriers: As more Americans speak Spanish and more Mexicans are speaking English, the issue of a language barrier is becoming less and less less of an issue in today’s marketplace.

Infrastructure/ Supply Chain Resiliency
Infrastructure support: In Mexico, transportation and communications infrastructure has been upgraded, thereby promoting the flow of freight over the border, reducing bottlenecks, and improving logistics for U.S.-Mexico cross-border trade.

Easier rebound to supply chain during global events: The nearshoring trend was already apparent before the COVID-19 pandemic further shook global trade. While it is too early to understand the full impact the pandemic has had on global trade and global supply chains, this latest disruption will compel more companies to rethink their sourcing strategies and entire supply chains. It is expected that companies will be increasingly inclined to diversify their risks as opposed to “putting all their eggs in one [offshore] basket” moving forward.

Getting Started on Nearshoring Exploration:

If you determine that nearshoring is a possibility for your business, the next step is to explore the range of favorable locations within Mexico for you and your industry. We at KCS can assist. With a network that expands across 17 Mexican states and partners throughout the country, we can help point you in the right direction. Additionally, we have real estate professionals to assist with helping you find the right location and begin the steps to build to suit and establish rail service.

Please do not hesitate to contact KCSM by emailing Linda Hernandez or by calling 011-52-55-9178-5673.

We are here to help.

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