As supply chain disruption persists, the case for nearshoring grows

Recently, AlixPartners published a comprehensive report on the trend toward revisiting Mexico’s potential to represent an increasingly critical link in a frayed global supply chain. Trade wars, concerns about resilience, and pandemic-related disruptions were clearly leading executives to focus more attention south of the U.S. border.

Significant events are raising the need to freshly evaluate the potential breadth and scope of a nearshoring strategy at the midpoint of 2022 including:

  • Further supply chain disruptions caused by the conflict in Ukraine, affecting availability of goods, costs, and turnaround time.
  • Emerging concerns about how the U.S.’s support for Taiwan could affect commercial and political ties with China and activities in the region.
  • Inflation is at a 40-year high. That trend, combined with the tariff imposed on China, is driving increasingly higher commodity prices in the U.S.

China has been aggressive in courting manufacturing business from North America, while Mexico is still more focused on travel, hospitality, and other sectors that attract U.S. tourism dollars.

Still, Mexico is increasingly well positioned for value-added manufacturing and services, and the truck and train routes make shipping relatively easier than seaports, which have been bogged down by labor shortages. Contractors are also consistently getting better. But immediate action is required. Turnaround time on a newly planned project has doubled over the past year, and currently requires a two-year window.

A key factor creating urgency is the real estate market. Prices overall are rising while availability shrinks. This supply-demand imbalance may stabilize. However, the pace of nearshoring could continue to influence the market if companies continue to build or buy production capacity in Mexico. In addition, permitting is getting bogged down by an influx of requests and a shortage of resources to process them.

Why Mexico?

A major shift has taken place in the pace and scope of globalization, forcing business leaders to reevaluate a wide range of supply chain considerations. Wages, the geographic distance between production and end markets, tariffs and taxes, geopolitics, and infrastructure all play a role in decision making.

Consider the amount of change the world has seen over the past 30 months. The pandemic exposed the volatility of supply chains throughout the world. Organizations are forced today to consider redundant supply sources and need to design production strategies predicated on a long list of challenges – both real and imagined.

There is not a one-size-fits-all solution, but Mexico is emerging as a winner amid this shift. Its access to both the U.S. and other markets positions it well to offer an agile and resilient supply chain.  

Historically, China and other Asian countries offered low wage rates and an attractive import/export tariff structure, making the region an attractive manufacturing destination. This weakened the case for nearshoring.

Recently, however, the activation of the USMCA created new incentives for businesses to take advantage of Mexico’s manufacturing ecosystem. Mexico has long offered lower working capital requirements via reduced freight costs, faster time-to-market for products, and lower inventory requirements. In addition, a business operation in Mexico gains access to numerous markets that Mexico has free trade agreements with.

At the same time, companies are employing a “China+ strategy” to drive lower dependency on China by adding more sourcing options, including new LCCs or partnerships. Among the biggest movers among industries implementing nearshoring strategies are metal parts and products, food and beverage, chemicals and allied industries, footwear and headgear, and automotive and transportation parts.  COVID-19 and trade wars accelerated this trend.

Figure 2: Global imports and trends in trade shift

In Revisiting Mexico, again, we break down specific details that anyone considering nearshoring should consider. Click here for more.