For several years now, companies around the world have become increasingly focused on analyzing their supply chains and sourcing strategies, reassessing traditional models of thinking and best practices, and searching for ways to make these more resilient, integrated, and diversified. Though many Asian Low-Cost Countries or LCCs have benefitted from a growing reshoring trend stemming from this, Mexico has begun to emerge as one of the most advantageous options.
Several geopolitical factors are contributing to this, including changing global trade policies, new trade agreements (such as the USMCA which entered into effect on July 1), and the COVID-19 pandemic, as well as practical factors that make it easier to do business, such as similar cultures and shared time zones. It has been specifically attractive for US manufacturers to start up business in Mexico as it requires less investment in retraining labor forces and building out new infrastructure compared to other LCCs.
Clear proof of this is the international consulting firm, Kearney, adding a new index to its 2019 US Reshoring Index.
“New to our 2019 Reshoring Index report is the Kearney near-to-far trade ratio (NTFR) which tracks the movement of US imports toward nearshore production from Mexico. The NTFR is calculated as a ratio of annual total USD value of Mexican manufactured imports to the US, divided by the USD value of manufactured imports from the Asian LCC countries.” —Kearney
Data from the recently-released report shows a substantial shift away from Asian LCCs, with Mexico manufacturing playing an important role in strategic sourcing.
The NTFR climbed 400 basis points in 2019. Manufacturing imports from Mexico to the US increased by 14% between 2017 and 2019, growing from US$278 billion to US$320 billion, with the NTFR climbing from 38 to 42% in just the last year.
Having benefitted from several decades of growth—especially since 2016 with an influx of US companies moving manufacturing operations to the country specifically to serve the US market—Mexico industry has become robust and mature, making the country poised to continue this strong upward trend. Its proximity to the US, as well as favorable exchange rates, and an ample, highly-skilled and cost competitive labor force, have allowed companies in a variety of sectors, including the automotive industry Mexico and the aerospace industry in Mexico, to form strong relationships with contract manufacturers and third party logistics providers. In several industries harmonizing plant technology is in place, and the country’s infrastructure and trade ecosystems are constantly expanding to support more complex supply chains.
In addition to significantly lower shipping costs compared to China, Mexico’s geographic location and cultural context also allows companies to mitigate risk in a number of other ways. By having easy access to suppliers, they can foster strong relationships with these to become familiar with their processes and react quickly to changes. In addition, international companies in Mexico can more easily categorize suppliers not only by spend, but also revenue impact in the event of unforeseen disruptions, have more control over inventory, and quickly and efficiently ship products to end consumers in the United States.
As businesses continue to quantify risks and weigh these against the benefit of lower cost manufacturing countries, now is the perfect time to look into how using shelter services in Mexico can help your company become more resilient and adaptable, ensuring you remain competitive in the face of ongoing interruptions and emerging challenges. For more information, you can read the Kearney’s full report here.