The potential of nearshoring in Mexico: benefits and challenges

The term nearshoring originates from offshoring, where a business or company seeks to reduce process or production costs by relocating them to a different geographical area from the point of consumption.

The objective of nearshoring is to bring outsourced production centres closer together and solve the inconveniences of long distances and time differences between continents, which often harm the supply chain.

What is the basic process for implementing Nearshoring?

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The process of implementing nearshoring can vary depending on the company and the destination country, but the general steps are described below:

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1. Research: The company should research different countries to determine the best place for nearshoring. Factors such as labour cost, availability of skilled labour, labour regulations, and economic conditions must be considered.

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2. Country selection: Once several countries have been investigated, the country that offers the best conditions for nearshoring must be selected.

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3. Acquisition of permits and licenses: It is necessary to obtain the required permits and licenses to operate in the selected country. This may include employee work permits, construction permits for facilities, and permits to import or export products.

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4. Personnel recruitment: The company must hire local personnel in the destination country. It is essential to consider cultural differences and differences in employment regulations.

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5. Adaptation of facilities: It is necessary to adapt existing facilities or build new facilities to accommodate operations in the destination country.

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6. Training: Local staff must be trained to ensure they are familiar with the company’s processes and quality standards.

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7. Monitoring and follow-up: Once nearshoring has been implemented, monitoring and following operations are essential to ensure that objectives are met and correct any problems.

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8. Continuous adjustments and improvements: Based on the results of monitoring and follow-up, continuous adjustments and modifications must be made to maximize efficiency and reduce costs.

Nearshoring in Mexico

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This phenomenon has occurred in most regions, and Central America has not been the exception. Those countries with the most significant commercial advantage and offer of incentives will be the ones that stand out as destinations. Costa Rica stands out as a destination for service companies and the medical device cluster – proof of this is the increase in exports of this sector during 2020 and 2021. In Mexico, on the other hand, we see growth in the production lines of the automotive industry.

Due to Mexico’s closeness and relationship with the United States, many companies have moved their production to the country to obtain all the benefits of nearshoring and take advantage of being in one of the largest markets in the world.

According to the president of the National Council of the Maquiladora and Export Manufacturing Industry (Index), Luis Hernández, the relocation of companies can attract investments of 11 billion dollars (add).

Within the Summit of North American Leaders framework, the industry representative said that the leaders must take the issue of promoting investment into their hands to consolidate nearshoring in 2023. Still, it must be recognized that investments should be discussed and protected.

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He explained that if the investment of 11 billion dollars is consolidated, 3 billion dollars will focus on manufacturing plants. Luis Hernández recalled that the export of manufacturing products is one of the engines of the national economy, representing 62% of our country’s trade and generating a fifth of formal employment.

Of all Mexican exports, the United States consumes 70% of it, while European countries the remaining 30%. The president of Index added that there are 36,058 companies in Mexico with investment derived from the T-MEC; 8 out of 10 export products and services remain in the region, thanks to the agreement. The FDI linked to the treaty accumulated 355 thousand 198 million dollars.

Between January and September 2022, many Chinese companies moved their manufacturing centres to Mexico to reduce maritime transport costs and be able to approach one of the largest markets in the world, the American market.

One of the industries that have chosen to move their production to Mexico the most is the automotive industry. Companies like BMW will seek to create an electric vehicle plant by investing up to 850 million dollars.

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Although everything seems encouraging for the country, we must accept that there are still many things to improve, which must be considered to meet the companies’ expectations when moving their production to Mexico.

One of the big problems that the country has is the need for more infrastructure from the government for the construction of new factories, as well as the insecurity issues that the region is going through at the moment.

The demand and occupancy of industrial buildings grew by 55% annually in the third quarter of 2022, which has caused the percentage of industrial facilities that are ready to be used to be lower, so public and private debt must focus on being able to build not only new spaces to manufacture products but also new transportation and communication routes.

Another point that must be taken into account is the provision of electricity and water that sometimes fails in the country; we saw it recently in Nuevo León, where the water began to become scarce, and not only the population but also the companies that have their production factories in the art, it is a great opportunity that Mexico. However, it must know how to take advantage of it.