Nearshoring’s Rapid Shift, Part I: Benefits, Progress, and Concerns
With all the upheaval in the supply chain over the past few years—as well as growing tensions between the U.S. and China—it comes as no surprise that companies are scrambling to bring things closer to home.
Although experts have been predicting this nearshoring shift for years, many are surprised about the rapid pace with which it’s taking place.
Mexico offers many perks that can benefit China-weary—and wary—U.S. companies embracing a friend-shoring approach as they seek to resettle in a North American neighborhood that’s more user-friendly for supply chain reliability, manufacturing, and trade.
But some experts wonder whether the country’s current administration is focusing on the right issues to make the most of the opportunity at hand—like dealing with regional security risks that can make getting inventory safely to and across the border a tricky thing.
What are the benefits of nearshoring?
Nearshoring offers a variety of benefits, including the ability to have better oversight and quality control of manufacturing processes—as well as fewer headaches when it comes to meeting supply chain needs.
In a recent article for SupplyChainBrain, Patrick Ward, vice president of marketing at software development consultancy Rootstrap cited some of the perks associated with nearshoring:
Better oversight and quality control: “With nearshoring, companies can more easily visit and maintain direct communication with key suppliers. …”
Improved speed to market: “By sourcing more locally, companies can reduce transit times and improve their competitiveness and profitability. …”
Reduced supply chain expense: “Many companies flocked to China in search of low wages, but the total cost of outsourcing tends to be much higher than expected, due to the complications of shipping goods over long distances. …”
Ward said those types of benefits can help companies transform some key areas by embracing a nearshoring shift, including:
Product development: “Companies can work more closely with their suppliers and collaborate more effectively on product design and development. …”
Product strategy: “Companies can benefit from more rapid response times to fluctuations in customer demand or market conditions. …”
Go-to-market strategy: “Companies can more effectively launch new products and time market entry to align with changes and trends in the marketplace. …”
The Rapid Pace of Nearshoring
Although the growing potential for nearshoring is nothing new, the global upheaval of the past few years and souring relations with China have fueled a surge in nearshoring activity that has caught some experts off guard.
According to a survey published in mid-December by Gartner-owned Capterra, “88% of small and midsize supply chain professionals have plans to switch at least some of their suppliers to ones closer to the U.S. 45% plan to switch all of them.”
The survey of 300 supply chain professionals at small to midsize businesses found that the pace of the nearshoring pivot is happening more quickly than was predicted just a few years ago.
“Most industry professionals predicted this change would happen very slowly, over five or more years,” Olivia Montgomery, an associate principal analyst at Capterra said. “But even the 2022 numbers we see in the data were stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.”
In addition to the benefits cited by Ward, Montgomery described additional nearshoring perks, including:
Financial incentives: “Mexico, Canada, and the Central American region known as The Northern Triangle are each working hard to attract U.S. businesses to establish supplier relationships. …”
Strong existing trade agreements: “The U.S. currently has several open trade agreements with nearby countries and over a dozen other agreements with countries that aren’t quite as nearby, including Australia. …”
More resilient transportation routes: “The transportation infrastructure across North America allows for less complex transportation of goods, opposed to shipping ports and the perils of sea travel. …”
Fewer cultural disparities: “Many suppliers in nearby countries have similar labor, health, and safety laws as the U.S. …”
In a recent post for Auto Service World, writer Adam Malik summarized several sessions from the recent Motor & Equipment Manufacturers Association (MEMA) Aftermarket Suppliers Global Summit and cited one supply chain expert who described the rapid uptick in nearshoring efforts.
“Tom Cook, managing director of supply chain consultancy Blue Tiger International, observed that about 20 percent of his business’ activity has involved nearshoring opportunities,” wrote Malik. “In the last year, the number of companies looking at this option has doubled.”
Cook said some aspects of the supply chain have leveled out a bit, but the “tremendous” supply chain vulnerabilities exposed by the pandemic convinced “a lot of companies to look elsewhere.”
But Some Have Concerns
Although shifting various operations from China to Mexico may have its potential benefits, some aren’t so sure.
Nathaniel Parish Flannery, who describes himself as “a Latin America focused political analyst and writer” who splits his time between New York City and Mexico City, recently wrote a post for Forbes entitled “President Lopez Obrador Is Squandering Mexico’s Economic Potential.”
“Right now, tech and manufacturing executives are optimistic about Mexico’s manufacturing potential, but Republican politicians in the U.S. are loudly calling attention to Mexico’s security problems and pointing at the record levels of violent crime in Mexico,” Flannery wrote. “Media coverage presents contrasting viewpoints on Mexico’s trajectory. There are positive news stories such as Tesla’s announcement of a $10 billion factory in the industrial hub of Monterrey, but there is also heavy news coverage in the U.S. of the recent kidnapping and murder of several American tourists who were visiting a nearby region of northern Mexico.”
Providing another paradoxical example, Flannery noted that “Mexico produced a record $106 billion worth of auto parts in 2022. Passenger vehicle exports from Mexico increased by 23% in 2022, totaling over $31 billion dollars.”
However, during that same time, “Mexico has recorded over 140,000 murders…,” Flannery wrote. “During Lopez Obrador’s time in office, the overall level of violence in Mexico has been higher than at any time in Modern Mexican history.”
To explain the paradox, he cited an interview with Ryan Berg, Americas Director at the Center for Strategic and International Studies, who said that, as a country, Mexico is not all the same.
“There’s the Mexico that has had multiple decades of incredibly tight economic integration with the United States economy [that is] one of the most important manufacturing hubs in the western hemisphere. On the other hand there’s the Mexico of 35,000 truck-jackings since the start of the Lopez Obrador administration. There’s the Mexico of 30,000 homicides per year. A country of this size is always going to be a complicated place,” Berg said, according to Flannery.
Still citing Berg, Flannery wrote that security issues—including organized crime and “urban piracy”—are big problems for foreign companies in Mexico and that “Mexico needs to have safe, reliable highway networks up to the southern border of the U.S.”
Of course, China is moving to Mexico, too
With no intention of being left out of the nearshoring fray, China has also been setting up shop within our southern neighbor’s borders.
In a recent post, experts at Holland & Knight say the semiconductor industry is likely the most promising opportunity “among the bundle of nearshoring opportunities for the North America region” and that both U.S. and Asian companies want to make sure they get a piece of the pie.
“Of the 5.09 million square feet of space in Mexican industrial parks that have been leased by foreign companies, approximately 80 percent are Chinese-based companies,” they wrote. “About 15 percent were rented by U.S.-based companies, along with 3 percent by Japanese companies and 2 percent by Korean companies. Chinese companies also have leased 4.23 million square feet of Mexican industrial park space to install production lines in the Mexican cities of Monterrey, Saltillo, Juarez, Tijuana, Queretaro and Mexico City.”
In a March 23 post for Mexico Business News, Pedro Casas Alatriste, American Chamber of Commerce of Mexico Director General, also described China’s growing presence, noting that it is “not sitting idly by.”
“Its investment levels in Mexico have grown exponentially,” he wrote. “From January to September 2022, China invested US$167 million in Mexico, one-third of it in Chihuahua, given the advantages of the industrial real estate sector in the state.”
In next week’s post, “Nearshoring’s Rapid Shift Part II,” we’ll dig more into perspectives from Alatriste and others regarding the opportunities, concerns, and impact of nearshoring for stakeholders across the supply chain.