Head of Business Development and Co-CEO at The Nearshore Company.
China’s remarkable rise as a global manufacturing hub has been fueled by its large population and low labor costs. However, a number of factors are now causing some companies to consider alternative offshore manufacturing destinations.
As CEO of a company that specializes in nearshoring, this is something I am paying close attention to. I recall one recent conversation with the CEO of a Chinese-based company. He bemoaned the fact that his struggle to recruit workers at their China-based manufacturing facilities had reached a critical inflection point. He first opened a plant in Vietnam and now is looking at Mexico.
Why are some companies considering diversifying?
The combination of an aging population in China and a shortage of young workers in factories could pose challenges for the manufacturing industry in the long term. As the population ages, there is a limited supply of skilled labor, which means the competition for qualified workers could increase and drive wages higher. This upward pressure on labor costs could impact the manufacturing cost structure. To mitigate these challenges, some companies might be investigating alternative options, such as relocating to southeast Asia or nearshoring to neighboring countries such as Mexico.
This is a reversal of a longstanding trend of offshoring Mexican production to China. According to the Baker Institute, while cost savings were a driving factor in the past, with Chinese labor costs previously being lower than Mexico’s, Chinese companies are now investing in Mexican production for similar reasons as enterprises from the European Union, Korea, Taiwan and Japan did decades ago.
The Baker Institute also noted several challenges related to trade conditions, including penalty duties imposed on Chinese imports, the requirement of higher North American content for certain goods like motor vehicles, the application of most-favored-nation duties on Chinese goods and supply chain disruptions.
What are the pros and cons of nearshoring in Mexico?
For the reasons mentioned above, Mexico might be a compelling option for companies seeking to diversify their offshore manufacturing base. Bloomberg reported in June that “Mexico, particularly its northern states, is a favorite destination for companies that aim to position their own operations or link with suppliers closer to the U.S.”
1. Proximity to the U.S.: Mexico’s geographic proximity to the U.S. can provide logistical advantages and shorter supply chains. This proximity can enable companies to respond quickly to market demands and reduce transportation costs.
2. Competitive wages: Mexico can offer a favorable cost advantage, as wages in Mexico are lower than those in China.
3. Skilled labor force: While accessing skilled labor is a challenge for companies in Mexico, I’m seeing that the pool of skilled workers is growing.
4. Favorable trade agreements: Mexico has a network of free trade agreements, including the United States-Mexico-Canada Agreement, which provides access to the North American market. These agreements promote trade and facilitate the movement of goods, benefiting manufacturers operating in Mexico.
5. Improved business environment: I’ve observed that Mexico has made progress in improving its business environment to help foster a more stable investment climate for foreign companies. The government has implemented reforms to protect intellectual property and promote foreign direct investment.
Of course, entering Mexico as a foreign investor does have its challenges that manufacturers must consider as well. For example, I’ve found that it can be difficult to secure operating and tax authority permits and to work with Mexican labor unions. I’ve also seen that new entrants to Mexican manufacturing can find it difficult to compete for supplier capacity against well-established and well-heeled automotive and aerospace original equipment manufacturers.
How can you make the transition?
If you’re thinking of diversifying some of your manufacturing operations to Mexico, you can consider working with a local partner who can act as a “river guide” to help mitigate some of the logistics that make the transition slippery. I also recommend that companies do their homework. Conducting upfront research can uncover the kinds of surprises that could lead to costly delays and necessitate last-minute fixes.
It’s also important to obtain detailed information about the regulatory environment; supply chain considerations; a comparison of cost considerations, including labor, utilities and overhead; workforce availability and quality control. I believe understanding these factors is key to making an assessment of the shifting of resources.
Additionally, I encourage companies to ask the following questions to determine whether nearshoring to Mexico is their best option:
• How important is it for us to be close to the U.S. market?
• What is the volume of goods being transported?
• How critical are intellectual property issues?
• Are the cultural differences aligned with our values?
To be best prepared, you must conduct comprehensive research, carefully evaluate suitability and pay attention to cultural and regulatory nuances. By addressing these aspects and learning from common missteps, organizations can navigate this transition successfully and tap into Mexico’s growing manufacturing capabilities.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
