The Rise of Nearshoring: Why More US Businesses are Choosing Mexico as Their Hub.

While the opening up of the global economy has allowed companies to move their operations almost anywhere in the world, some businesses are now finding that the best partnerships are actually found closest to home. In a practice called “nearshoring,” it’s becoming increasingly popular to move business operations to neighboring countries that have similar geopolitical views, cultural practices, and time zones.

Nearshoring is becoming increasingly popular

Nearshoring gives businesses all the benefits of ‘offshoring’ while keeping their operations close to their home base and key markets. This allows them to avoid many of the risks associated with outsourcing to far away countries or regions.

Among the many examples of countries with productive nearshoring relationships, the United States (US) and Mexico make a particularly strong case. The geographical closeness, friendly political relations, and favorable trade agreements in place between the two countries make Mexico an ideal nearshoring destination for US companies.

The move to Mexico is only becoming more desirable as political relations with China – the current top contender for US outsourcing – deteriorate. Add to this increased regulations and rising costs involved with offshoring to China, and it’s likely that nearshoring will continue its upward trend.

In this blog, we will explore the best reasons to consider nearshoring and the industries that may derive the most benefit.

From “Home On The Range” to “Viva Mexico”: The Potential Benefits of Nearshoring

There are a number of reasons that nearshoring your US operations to Mexico makes good business sense, including favorable trade conditions, lower labor costs, and the geographic closeness.

Favorable Trade Conditions

Trade between Mexico and the United States has a long and profitable history, driven by favorable trade agreements between the two countries like the United States-Mexico-Canada Agreement (USMCA). This agreement lays out the terms for the trading of goods and services, intellectual property as well as labor between these two countries. It tends to be favorable to Mexican manufacturers, making it advantageous for US companies to contract with manufacturers in Mexico.

The USMCA also enables Americans and Mexicans to access the consumer bases in each others’ countries. This is a huge opportunity for the US, as Mexico’s large and growing consumer market is projected to become the 5th largest economy by 2050 and has a rapidly growing middle class.

Lower Labor Costs

Lower labor costs available in Mexico allow US companies to save significantly on production costs, especially in labor-intensive industries like manufacturing. Low costs combined with Mexico’s large and skilled bilingual workforce make it a no-brainer for companies to outsource at least some of their operations.

Geographical Proximity

The benefits of nearshoring to a neighboring country like Mexico include:

• Lower shipping costs
• Faster shipping times
• Fewer supply chain disruptions
• Less travel time for executives
• Real-time communication in the same time zone

These are key considerations for companies that ship goods often or need to respond quickly to customer questions and demands. It also makes it easier to monitor operations and attend important meetings or emergencies in person.

It’s Not Just Language They Have In Common…

An added benefit of the frequent cultural exchange and tourism that takes place between the US and Mexico is the growing mutual cultural understanding and even integration between the two countries. Having things like food, music, and art in common reduces the cultural barriers that so often add unnecessary challenges to offshoring operations in distant and more foreign countries.

While there are clear advantages for US companies to nearshore their operations to Mexico, there are some industries that are better suited than others.

Eeny Meeny Miny Moe – Which Are The Best Industries To Go?

The following operations can gain clear competitive advantages by nearshoring to Mexico:

• Manufacturing: Mexico has a well-developed manufacturing industry, particularly in the automotive, aerospace, and electronics sectors.
• Information technology (IT) services: Mexico’s growing technology sector offers a skilled workforce in IT-related services including software development and data analytics.
• Call centers: The large and growing English-speaking population makes Mexico an attractive draw for those companies that wish to move customer service operations to a less expensive location.

The industries that could benefit less from nearshoring to Mexico include:

• Highly regulated industries: Industries such as healthcare, pharmaceuticals, and financial services are highly regulated in Mexico and foreign companies would be subject to regulatory hurdles and significant compliance costs.
• Specialized industries: The skilled labor force in Mexico is primarily concentrated in manufacturing and technology, and other industries like agriculture or scientific sectors may require specific skills that are less readily available in Mexico.
• Industries with complex supply chains: While Mexico has made significant investments in its infrastructure, challenges do remain for industries that involve complex supply chains such as automotive or electronics manufacturing.

Like Guacamole and Chips…

There are many aspects of the US-Mexico relationship that make the country an attractive option for businesses that are looking to reduce costs while increasing their efficiency. Whether it is the growing consumer market, skilled workforce at a lower cost, favorable trade agreements, or the geographic proximity, it is worth exploring whether nearshoring to Mexico makes sense for your business.