Images of ships laden with containers filled with Chinese-made products waiting hours, days, or weeks to unload at California ports is one of the many haunting memories of the COVID-19 pandemic. Those global supply chain disruptions, rising tariffs, and the growing hostilities between the US and China are leading American executives to rethink outsourcing so much of their business to foreign companies an ocean away. A growing number are considering a new supply chain approach: nearshoring in Mexico.
Nearshoring means sourcing products closer to home. In particular, it refers to manufacturing in neighboring countries.
For U.S. companies, that means Mexico. The Latin American country benefits from its geographic proximity to the U.S., its well-established export-oriented industrial sector, and its inclusion in the US-Canada-Mexico North America free trade agreement, notes Forbes.
The move to Mexico is happening fast. When software consulting firm Capterra polled 300 supply chain professionals at businesses with 1,000 or fewer employees and annual revenue of $500 million or less, a whopping 88 percent reported that they plan to move at least some of their Asian supply relationships to companies closer to the U.S.; 45% plan to switch all of them. While the shift has been happening for several years now, it accelerated last year.
Those small and mid-size businesses join private sector behemoths such as Walmart, Apple, and automotive giants General Motors and Tesla that are already well on the way to bringing manufacturing closer to home.
Before you jump on the nearshoring bandwagon, we asked Klaus-Juergen Wolf, who has spent 15 years as a C-suite interim executive, much of that time working in Mexico, to share some insights and the questions you should ask, concerns you should address, and the possible problems you will face if you nearshore production in Mexico.
1. Will I Find Skilled Labor in Mexico?
This, Wolf says, can be a challenge. One company that relocated to Mexico built the factory in a rural area rather than an urban area closer to Mexico City. The company chose that site to be close to the manufacturing plant it would serve. The company spent 9 months training the Mexican workers in Germany on the automation process.
Everything went well — until they needed to expand. They needed twice as many workers and no one with those skills was available in the nearby rural area.
The company was forced to go to the major urban areas to recruit new employees. That meant the firm had to 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 the workers.
“Being 45 minutes closer to the client does not matter as logistics in Mexico is an absolute no-brainer and being 45 minutes farther away from the client did not matter at all,” he says. “But being 30 to 45 minutes by car closer to a much bigger city with enough skilled worker potential would have saved us a lot of costs and headaches.”
2. Do You Have the Local Knowledge You Need?
That rural plant had another downside: it was built at an 8,000-foot elevation. That caused two problems: about 25 percent less air pressure and chilly temperatures at night. High-tech manufacturing under those conditions lead to product non-conformities. The company was forced to heat the plant, another unexpected expense, Wolf says.
The solution: Bring in an interim chief operating officer like Wolf who has experience working in Mexico, and understands the culture and the operational challenges.
“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,” he says. “It’s like rehearsing, rehearsing, rehearsing because every mistake you can avoid saves a lot of money later on.”
And, he notes, the extra expense wasn’t the only problem. They also ran out of time. While they were recruiting and transporting workers and figuring out how to heat the plant, they weren’t delivering product to the client.
“Our client was asking for the material and we weren’t able to supply it in the right specification. If you’re out of specs, they don’t take it and you sit on your goods,” he says.
3. What Are the Upsides of Moving Production to Mexico?
The most important upsides are proximity. Being so close to the U.S. means that transportation costs are lower and the logistics are easier. Plus, there is no 12-hour time difference like there is when the factory is located in Asia.
Shipping a container full of goods to the United States from Chinese providers generally requires a month — without the disruptions of the pandemic. When you order from North American trading partners, the goods can be onsite in less than two weeks.
4. What Are the Downsides of Nearshoring in Mexico?
Foreign direct investment in Mexico increased 12% in 2022 to just under $35.3 billion USD, according to the Economy Ministry, up from $31.54 billion in 2021.
But, Forbes notes, the Mexican government poses important challenges for potential investors.” Mexican President Andres Manuel Lopez Obrador is an erratic populist who demonstrates little interest in discussing or promoting Mexico’s competitiveness or its manufacturing hubs.”
Still, when the Mexican president hosted US President Joe Biden and Canadian Prime Minister Justin Trudeau in Mexico City in January for the North American Leaders’ Summit, the regional supply chain was a key point of discussion.
The three leaders announced plans for a trilateral semiconductor industry forum, another step toward increasing the nearshoring potential of the U.S.-Mexico partnership.