Pros and Cons Behind the ‘Nearshore’ Move to Mexico

Cross Border, Inbound Manufacturing Product Flow, Supply Chain
June 12, 2015

Mexico NearshoringAfter almost two decades of offshoring manufacturing across the Pacific, some automotive, technology, aeronautics and consumer electronics companies have decided to “reshore” their operations closer to home. For many, Mexico has become the near-shore destination of choice.

The reasons are clear: a strengthening U.S. economy and the trade benefits of NAFTA make Mexico an ideal sourcing partner. Lower labor and shipping costs and proximity to facilities create a compelling case for keeping manufacturing, production and assembly a drive or short flight away.

Yet, any move to Mexico isn’t without its pitfalls. From scarce talent and facilities, to weak infrastructure and persistent security concerns, the Mexican market has both benefits and drawbacks.

Reshoring is gaining favor among manufacturers. Some 49% of manufacturing companies would consider reshoring at least part of their operations by 2020, according to a survey from Deloitte and The Manufacturing Institute. Among the reasons cited are favorable logistics and supply chains in the U.S., the diminishing cost structure differential, and increases in domestic demand.

Another study found that about a third of high-tech companies are near-shoring to place production closer to the consumer, and about 40% of those surveyed plan to return sourcing to the U.S. or Mexico.

Among the reasons companies cite for relocating operations to Mexico include the opportunity to:

  • Quickly dispatch technical resources to the region. Beyond the benefits of working in the same or proximate time zones, companies that source to Mexico can quickly send managers, operations or support teams to the region. This also allows the outsourcer to maintain the organization’s cultural “look and feel” across its operations.
  • Capitalize on truck and rail. No longer reliant on trans-Pacific shipments, facilities can be reached quickly and easily.
  • Tap low-cost labor and a rising manufacturing sector. Today, Mexico labor costs reportedly are 20% lower than those in China; back in 2000, they were almost 60% higher.

While some have reshored operations, the recession and various factors leave others cautious about a move. Among the concerns:

  • Lack of skilled personnel and technical resources. Mexico has a young, relatively unskilled population. Organizations often experience challenges sourcing a suitable workforce, and must invest in training to improve their skills.
  • Weak infrastructure and government improvements. The lack of suitable roads, telecommunications and other infrastructure in rural or less developed areas beyond the border or more established sourcing communities, remains a challenge.
  • Inherent shortcomings, from security, to drought to falling oil prices. While some regions face fewer challenges than others, the first step prior to any move into Mexico should be research of on-the-ground conditions.

Considering reshoring or expanding your Mexico manufacturing, production or assembly operations? Do your homework and explore the country. From border towns to big cities to the interior, operations and workplace cultures vary by market. There’s no substitute for spending time with partners in-country to signal your interest in shared success.

 

Authored by Darcee Scavone

Darcee Scavone is Vice President and General Manager, Automotive, Aerospace and Industrial Supply Chain Operations with Ryder System, Inc.

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