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Thanks to global supply chain disruptions, growing hostilities between the US and China, and rising import tariffs, U.S. companies are reconsidering a business plan that calls for them to outsource so much of their production to foreign companies in Asia. Instead, they are pivoting to onshoring back in the US, and “nearshoring” production in Mexico.
This new supply chain approach calls for sourcing products closer to home. For U.S. companies, that means setting up suppliers in Latin America — specifically, Mexico.
Mexico benefits from its geographic proximity to the U.S., its well-established export-oriented industrial sector, a labor force that values manufacturing jobs, and its inclusion in the US-Canada-Mexico North America free trade agreement, notes Forbes.
The move to Mexico is happening fast. Axios reports that the number of companies making moves to nearshore their production nearly tripled last year — to 42 percent of the companies polled, versus 17 percent in 2022 and just 11 percent in 2021.
Those companies join behemoths such as Walmart and automotive giants General Motors and Tesla that are already well on the way to bringing manufacturing closer to home.
With so many companies jumping on the nearshoring bandwagon, we asked two executives with experience working in Mexico for their advice. Klaus-Juergen Wolf, who has spent 15 years as a C-suite interim executive, and Jay Winkler, whose consulting company, Brave Lion Group, works with manufacturing firms, shared the following insights and suggested questions you should ask, concerns you should address, and the possible problems you could face if you nearshore production in Mexico.
1. Will I Find Skilled Labor in Mexico?
Yes, says Winkler. Central Mexico, in particular, is teeming with young, skilled workers who see manufacturing as a great job — versus U.S. workers “who see it as an OK job.” And, he says, the fact that high-tech companies such as medical device manufacturers and aerospace companies have located in Mexico means the workers have experience with automation and tech skills.
But, Wolf says, it’s important to choose the right location for your new plant. One company he worked with built its factory in a sparsely populated rural area of Mexico rather than locating closer to the Mexico City metro area with its 22 million residents offering a steady supply of workers.
When the company needed more workers, it had to recruit them from longer distances, then arrange daily transportation for three shifts of workers from their city to the factory. And it had to offer incentives to attract the higher caliber labor force it needed.
Both transportation and labor costs increased. Neither would have been necessary if the factory had been built closer to a population center, Wolf says.
2. Do You Have the Local Knowledge You Need?
There are four ways to expand into a foreign country, Winkler says. “You can do it on your own. You can buy someone. You can partner or joint venture with someone. And then Mexico allows an interesting fourth option: a shelter organization. That’s a Mexican national company that helps your organization set up and continue running. It’s an all-encompassing process.”
He chose to work with a shelter company on his first Mexican venture. It allowed him to learn a lot about operating in Mexico. The shelter company was able to “push folks to get our plant fitted up, deal with our import-export, set up all of our codes, and make sure that we were getting the right duties and tax benefits. Mexico is very friendly in terms of duty-free and free trade agreements, but the flip side of that is that they’re very strict on your paperwork,” he says. “Getting it wrong is a real problem.”
Another approach is to bring in an interim chief operating officer like Wolf who has experience working in Mexico. He understands the culture and the operational challenges, including knowing, as he did on one occasion, that sometimes using a shelter organization is the wrong approach. In his case, it was because the shelter company had taken on too many projects and lacked the bandwidth for taking on one more.
“It is very important that you have the expertise in the planning phase, at least in the fine-tuning phase. You can set up the project, but then you should get an expert to go through every detail and play it through,” Wolf says. “It’s like rehearsing, rehearsing, rehearsing because every mistake you can avoid saves a lot of money later on.”
3. What Are the Upsides of Moving Production to Mexico?
The most important upside is the shared U.S.-Mexico land border. That proximity means transportation costs are lower and logistics are easier. Plus, communications are easier — there is no 12-hour time difference like there is when the supplier is located in Shanghai.
Shipping a container full of goods to the United States from Chinese providers generally requires a month — and, as we learned, can be much, much longer in a pandemic. When you order from North American trading partners, the goods can be onsite in less than two weeks with no worries about backups at the ports.
And, Wolf and Winkler noted, while COVID-level disruptions might be rare, they aren’t the only thing that could impact the supply chain. Geopolitical disruptions such as the war in Ukraine or Yemen-based Houthis firing missiles at container ships passing through the Red Sea can impact the world far beyond Europe.
“Businesses that aren’t thinking about major disruptions and how to offset those are probably not planning enough,” Winkler says.
Relocating suppliers closer to home also is a way to resume control of those suppliers, he says.
“In many cases, companies have lost the understanding of what it takes to make that part. They may not own the designs any longer. They may not know what equipment it’s being manufactured on. Or they may have relied on a contract manufacturer to do everything.”
Moving production to Mexico, he says, is a way to “unbuckle everything and bring it back.”
4. What Are the Downsides of Nearshoring in Mexico?
Foreign direct investment in Mexico exceeded $36 billion in 2023, with almost 40% of the investment coming from the United States and half the money going to the manufacturing sector, according to Mexico’s Economic Ministry.
Investment slowed in the second half of the year, but should rise in coming years thanks to the more than $100 billion in planned nearshoring investments companies announced in 2023, mostly planned for the states of Nuevo León, Coahuila, Yucatán, and Chihuahua. That includes Tesla’s planned “gigafactory” in Nuevo León.
The biggest challenges are related to the country’s infrastructure, particularly an unreliable electric grid and water scarcity in the arid northern regions of Mexico. Tesla agreed to invest in water treatment as part of its planned factory in the state of Monterrey.
And then there is the Mexican government. Former President Andres Manuel Lopez Obrador was an erratic populist who demonstrated little interest in discussing or promoting Mexico’s competitiveness or its manufacturing hubs. His six-year term has ended and his successor, Claudia Sheinbaum, is committed to his legacy.
President Sheinbaum has a huge challenge.
“Mexico’s weak rule of law hampers foreign investment, limiting potential job creation as companies grapple with the risk of dealing with disruptions to their operations from criminal activity or facing corruption in governmental procedures,” writes Mexico Business Analyst Sebastian Checo.
5. Who Can Help Me Succeed at Nearshoring in Mexico?
Success, Winkler says, requires asking three things: How can my decision reduce my risk? How can it reduce my cost? How can it increase my revenue?
The answers depend on planning, Wolf says.
“Planning has never been so valuable as it is now, because you have to make decisions for the next five to ten years, if not further. Deglobalization is taking place, and then maybe a reglobalization in ten years. You have to make absolutely new decisions. How are you setting up your company and your strategy?”
That kind of strategic planning, the need to understand Mexican business culture, and the ability to wade through government red tape requires the expertise of someone who has been there and done that.
An experienced RED Team interim executive who has worked in Mexico and set up nearshoring operations is the answer. Reach out to us today to talk about the experience you need. We can identify the right executive and have someone onsite in as little as 48 hours.
InterimExecs RED Team is an elite group of CEOs, CFOs, COOs, and CIOs expert in industries ranging from manufacturing to technology. Ready to fill leadership gaps or tackle a project whether that is expansion into new markets, optimizing operations, to upgrading an ERP, expert leadership is on hand. Call +1 (847) 849-2800 or request a confidential conversation about how we can help you here.
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