Nearshoring Boom in Mexico
Recently, nearshoring has become a more common option for companies looking to outsource their operations. First, the impact of the Covid-19 outbreak on the world economy demonstrated how risky it was to rely heavily on a depending supply system. Second, more manufacturers from the US, Europe and Asia are regionalizing their strategies as a result of the clauses included in the USMCA (United States Mexico Canada Agreement), which came into effect on July 1st, 2020. Nearshoring facilitates operations as opposed to offshore, which entails transferring manufacturing to regions where producing goods or providing services is less expensive. Mexico has become one of the best places for nearshoring because of its closeness to the United States, enticing economic climate, and highly qualified workforce.
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Globally Operating Companies Nearshore to Mexico
Mexico’s geographical advantage as a direct neighbor of the USA, with cities such as Monterrey, Coahuila, Chihuahua and Ciudad Juarez, offers the country considerable advantages. This proximity makes Mexico an attractive and advantageous location for logistics activities and attracts foreign direct investment (FDI).
Much of the FDI flows into the state of Nuevo León, which, with its capital city of Monterrey, is well equipped to quickly turn these investments around. Thanks to its strong infrastructure and well-developed business environment, Nuevo León attracts companies from various industries. Notably, companies such as Boeing, General Motors, Honda, and Samsung have relocated their production capacities to Mexico, amounting to more than $3 billion per year.
In the west of the country, specifically in Tijuana and Mexicali, production facilities for the automotive industry have been thriving for many years. As a result, these regions have actively and successfully established themselves as crucial centers for automotive production.
Mexico has been the largest trading partner of the United States for about 3-4 years. As a result, U.S. investment in China has decreased significantly, and imports of Chinese products have been reduced by up to 35%. This trend strengthens the attractiveness of Mexico as a manufacturing base for U.S. companies. The close economic ties between the two countries foster a robust trade relationship, generating numerous opportunities for cooperation and growth.
Additionally, prominent Western companies, including Bosch, BMW, Continental, Honeywell, and Lego, have recently made investments in Mexico. They have astutely recognized the potential and benefits of establishing their presence in the country.
The entire sales market for European companies producing in Mexico is secured by the U.S.-Mexico-Canada Free Trade Agreement (USMCA). This agreement ensures trade facilitation and promotes economic integration between the countries, providing European companies with stable and advantageous market access.
Advantages And Opportunities Mexico Offers to European Companies
- Demographic Advantage: Low average age (28-29 years) of the Mexican population compared to Germany, Austria and Switzerland (48 years)
- Highly Skilled Workforce: Increasing proportion of well-educated professionals, including those with experience abroad
- Cost advantage due to low personnel costs (up to 30-35% savings compared to production in the USA)
- Large Domestic Market: Mexico is the second largest economy in Latin America and fifth largest in the Trans-Pacific Partnership (TPP)
- Strong Value Chain: Extensive network of supply chains from different sectors, consisting of certified and well-trained SMEs
- Dual Education: Collaborations between universities, businesses and government
- Surplus of Skilled Workers: More graduates than demand on the labor market every year
Do’s and Don’ts When Softlanding in Mexico
When planning to expand to Mexico, it is important to have good workforce planning in order to attract the right and best workers. Another crucial aspect is the choice of the right location and the accurate site analysis to determine the appropriate city and area within that city. Here it is relevant to check how the access to labor is and if there are already existing suppliers. It may also be beneficial to consider an industrial park that offers existing infrastructure and amenities, such as cafeteria and transportation options for employees. In northern Mexico there are up to 150 industrial parks, more than half of them are located in and around Monterrey.
The following steps are recommended for successful expansion into Mexico:
- Conduct an industry-specific market study or market analysis, preferably in collaboration with a team of experts such as Ongresso. This will provide important information about the market and its specifics.
- Seek exchanges with companies already established in Mexico to benefit from their experience and insights.
- Choose a partner that maintains good relations with all levels of local and national government, as this can simplify issues such as taxes and permits.
- When selecting a construction company to build the production facilities, it is of great importance to ensure that all the necessary permits are obtained. In this regard, political relations with the governor and the Federal Ministry of Economy can be helpful. It is advisable to get in touch with experts in this field to make sure that all the necessary steps are taken properly.
- Promote social projects around the production site can bring benefits and “good will” from the government.
Logistical And Social Challenges in Mexico
Our specialists also discussed challenges companies might face when nearshoring to Mexico. Nevertheless, by making a thorough plan in advance, issues can be successfully avoided.
Both energy production and water supply in northern Mexico remain a challenge and must be taken into account when determining location. Furthermore, social problems regarding crime, drug cartels or corruption should not be overlooked. However, they usually occur in closed clusters. Local experts can advise which neighborhoods to avoid and how to act depending on the situation. Besides that, unintentional involvement in corruption can be prevented with the right choice of partners. Fortunately, trade unions do not pose a major risk to companies in Mexico. Experience shows that employers and employees quickly reach an agreement. Last but not least, Mexico is much more politically stable than most countries in Latin America. After the impending presidential elections in 2024, it seems probable that the same party will continue to stay in government.
In conclusion, nearshoring to Mexico has emerged as a favorable option for companies seeking to outsource their operations. Mexico’s proximity to the United States, favorable economic climate, and skilled workforce make it an attractive destination for nearshoring. The state of Nuevo León, with its strong infrastructure and business environment, has been particularly successful in attracting foreign direct investment. The economic ties between Mexico and the United States enhance Mexico’s appeal as a manufacturing base for American companies. European companies also benefit from Mexico’s demographic advantage, skilled workforce, and large domestic market, facilitated by the USMCA agreement. When expanding to Mexico, careful workforce planning, site analysis, and collaboration with local partners and authorities are crucial for success. Overall, Mexico offers advantages and opportunities for companies looking to establish their presence and tap into its thriving market.