Nearshoring

Nearshoring

Globalization has been an engine for the expansion of supply chains, largely derived from economic, political and social changes that have led companies to opt for increasingly comprehensive strategies, while optimizing costs and achieving better risk management in the supply of goods.
Nearshoring or relocation is a term used to describe the practice of moving production operations to a closer country. This phenomenon is the counterpart of offshoring or offshoring, a process by which a company relocates part of its production process, as well as internal aspects of the company, to other geographical areas. All this through outsourcing.
Mexico is one of the countries most benefited by this change in practices. According to the “Zoom Nearshoring” report, the country could make profits of close to 168 billion dollars in exports over the next five years due to this trend.

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Factors that influence

Mexico has several key factors that make it an attractive destination for nearshoring. Some of these factors are:

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⦁ Strategic geographical location. Mexico is in a privileged geographical position, making it a bridge between North America and Latin America. This location provides easy access to U.S. and Canadian markets, which is especially beneficial for companies that want to expand into the North American market. In addition, maritime routes to Asia and Europe make Mexico, and the construction of the Transisthmic Train, as an alternative to the Panama Canal, enhances the country's capacity to attract investments of this type.

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⦁ Favorable trade agreements: Mexico has a wide network of trade agreements: 12 Free Trade Agreements signed with 46 countries, 32 Agreements for the promotion and reciprocal protection of investments with 33 countries, 9 Limited Scope Agreements within the framework of the Latin American Integration Association (ALADI) and is a member of the Trans-Pacific Partnership Treaty. Of these, the one that stands out is the Agreement between Mexico, the United States and Canada (T-MEC), which replaced the North American Free Trade Agreement (NAFTA). These agreements provide tariff advantages and facilitate trade between Mexico and other countries, making it more attractive for companies to establish nearshoring operations in the country.

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⦁ Trade conflicts between other countries or geographical commercial regions. In more recent years, trade conflicts between China and the United States, as well as the Russia-Ukraine war, due to protectionist policies between the two nations, have affected the commercial performance of companies in those countries, as well as the availability of raw materials or specific technology for their operations, so that companies in those countries, in order to have the availability of products, technology and services, are looking for countries or geographical regions with policies that favor their operations with respect to their business plans.

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⦁ Competitive costs: Mexico offers lower labor costs compared to other developed countries, such as the United States, Canada and Europe. This allows companies to reduce their production costs without compromising quality. In addition, infrastructure and logistics costs are also often lower in Mexico, contributing to the country's competitiveness as a nearshoring destination.
⦁ Qualified workforce: Mexico has a broad base of talent and qualified labor in key sectors such as manufacturing, technology and services. The country has invested in education and training programs to develop technical and professional skills in its workforce, making it attractive to companies seeking qualified human resources.

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⦁ Logistics. Logistics is a determining factor for the success of nearshoring in Mexico, since the country's ability to attract and maintain manufacturing and other services depends to a large extent on its logistics efficiency: Having an efficient and well-developed infrastructure allows for the rapid and smooth transfer of goods and products between Mexico and nearby countries. This reduces transportation costs and shortens delivery times, which in turn makes nearshoring more attractive to foreign companies. In addition, a strong logistics infrastructure also facilitates supply chain management and improves overall operational efficiency.

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Trends for the short to medium term

Nearshoring trends in Mexico are evolving rapidly and can be summarized in several key points:
⦁ Expansion of industrial parks. New industrial parks are expected to open, which is an indication of growing investment and interest in manufacturing and other services in Mexico. The Mexican Association of Private Industrial Parks (AMPIP) plans to open 47 new parks, demonstrating a significant commitment to the growth of nearshoring.

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⦁ Increase in credits for the construction of factories. “55% of banks indicated that in the last 12 months they have seen an increase in the demand for credit from large companies due to factors related to relocation,” the Bank of Mexico (Banxico) revealed. Based on nearshoring, 88% of banks indicated that they expect an increase in demand for financing in the next 5 years.

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⦁ Diversification of sectors. Nearshoring isn't limited to traditional manufacturing; it's expanding to other sectors. Mexico is seeing diversification in the industries that participate in nearshoring, including technology, automotive, aerospace and medical devices.

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⦁ Investment and financing: There is an increase in investment from companies seeking to relocate or expand their operations near the United States. Mexico has captured a significant portion of this investment, suggesting growing confidence in its economy and political stability.

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⦁ Resilient supply chains: Companies are looking to build more resilient supply chains and reduce dependencies on distant suppliers. This is due to the risks associated with geopolitical disruptions and pandemics, where Mexico offers a closer and safer alternative.

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⦁ Technological development and digitalization: Companies in Mexico are investing in technology to improve operational efficiency and integration with global supply chains. Digitalization is key to maintaining competitiveness in nearshoring.

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⦁ Training and Labor Force: Emphasis is being placed on the training and development of the workforce to meet the demands of the industries that are coming to Mexico. This is crucial to maintain the country's competitiveness and attractiveness as a nearshoring destination.

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These trends reflect a positive picture for nearshoring in Mexico, where the country is positioning itself as a key destination for companies seeking to bring their production closer to the T-MEC region and take advantage of the advantages it offers in terms of costs, geographical location and available talent.

The most attractive states for Nearshoring in Mexico

According to the report mentioned in y, northern Mexico is one of the regions most economically benefited by the change in trade paradigms.
Figure 2 shows some of the companies that announced investments in the automotive sector in 2022 and as of March 2023.

The ten states with the greatest potential for the development of nearshoring are shown in Figure 3.

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Nearshoring Challenges in Mexico

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Although new companies have arrived in Mexican industrial parks, and new projects are on the way, there are factors that may affect foreign investment projects, such as:
⦁ Availability of clean energy at competitive prices - When we talk about clean energy and at competitive prices, we refer to renewable energy sources, such as solar, wind or hydroelectric power, that do not produce greenhouse gas emissions and are increasingly economical compared to fossil fuels. These energy sources are sustainable and can help reduce dependence on fossil fuels, which in turn can help reduce pollution and climate change. The states facing this situation are Chihuahua, Coahuila, Baja California, Nuevo León, Jalisco and the State of Mexico. Mainly in Guanajuato and Querétaro.
⦁ Drainage and water services - Services related to the supply of drinking water and the management of drainage in company facilities. These services may include the continuous supply of drinking water, the installation and maintenance of efficient drainage systems, the proper management of wastewater, and the implementation of measures to conserve and responsibly use water resources. The states that face such situations are Chihuahua, Coahuila, Baja California, Nuevo León, Guanajuato, Jalisco, Querétaro and the State of Mexico
⦁ Public Safety — Safety is essential to ensure a safe work environment and protect companies' investment and business operations. Insecurity can negatively affect investor perception of the country, which can dissuade companies from establishing themselves in Mexico. On the other hand, a safe and quiet environment can encourage investment and economic growth. Road insecurity in some regions, such as the Center-West, the Bajío and the Northern Border, has limited the growth of nearshoring and has raised concerns in the industry. In addition, according to a survey conducted by the American Chamber Mexico (AmCham), nearly 40% of companies consider their operation to be unsafe in terms of crime in Mexico.
⦁ Efficient procedures before government bodies — The Mexican government has implemented measures to streamline procedures and reduce bureaucracy in setting up companies, including simplifying processes, implementing one-stop shops and digitizing procedures.

In addition, there are special programs and tax benefits to attract investment in the nearshoring sector, which can further streamline procedures and offer additional incentives to companies.
In general, these initiatives seek to facilitate and accelerate administrative processes, providing a more favorable environment for nearshoring companies in Mexico. However, it is important to keep in mind that there are still challenges in the efficiency of government procedures in some cases, such as in
Jalisco and the State of Mexico.

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Conclusions

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Nearshoring in Mexico has experienced significant growth due to several key factors. The country's strategic geographical location, its wide network of favorable trade agreements, and trade conflicts between other regions have driven the preference for establishing closer production operations. Mexico offers competitive costs, a qualified workforce, and a solid logistics infrastructure. Short- and medium-term trends include the expansion of industrial parks, increased credits for factory construction, diversification of sectors, investment and financing, building resilient supply chains, technological development and workforce training. However, there are challenges such as the availability of clean energy and at competitive prices that could affect foreign investment projects in the country. In general, Mexico is positioned as an attractive destination for nearshoring due to its advantages in terms of costs, location and available talent, but in addition to the development of nearshoring, Mexico needs to modernize and streamline its infrastructure in order to retain nearshoring investments and develop economic regions for sectors or industries integrated into its supply chains.

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About Apollocom

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At Apollocom, we understand the unique challenges faced by nearshoring companies in Mexico. With more than a decade of experience and a team of highly trained specialists, we offer customized solutions in Telecommunications, Automation and Control, Telemetry enabled with Industrial Cybersecurity. Our approach is focused on improving the productivity, efficiency and safety of your operations, taking advantage of the IIoT and continuous innovation. We are committed to the success of your company, providing tools and systems that ensure uninterrupted and protected operations, essential in the dynamic nearshoring environment. We enable your business with Technology Connected with Intelligence®.

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