The popularity of nearshoring continues to rise among companies in the United States as it offers many benefits, such as lower costs, decreased lead times, and increased efficiency. As a result, Mexico, particularly its northern states, stands to benefit greatly from this shift. This is due to its highly skilled and cost-competitive workforce, trade agreements with more than 50 countries, The United States-Mexico-Canada Agreement (USMCA), and its border with U.S. which is one of the busiest land crossings in the world with economic trading surpassing U.S. $150 million per hour.

“Nearshoring has quickly become a buzzword within the manufacturing industry,” says Alberto Villarreal, Managing Director of advisory firm Nepanoa. “While the strategy of outsourcing business processes to nearby countries has gained popularity in recent years, it is not a new concept. Several companies started their local journey long ago and are now benefitting by expanding to countries like Mexico which have now emerged as a top destination.”

Nearshoring: Explained

Nearshoring is an emerging trend amongst food companies where all or part of the production process is moved closer to the final consumer and away from China. With recent supply chain challenges continuing as a result of the COVID-19 pandemic, more companies have turned to nearshoring as a means to reduce costs and steer clear of any logistical complications that may arise.

Additionally, the proximity to markets is a primary benefit of nearshoring for manufacturers of food and beverage products. Food companies can readily reach new markets and customers by shifting their operations to a nearby nation without incurring transportation or logistics-related costs. Food companies that depend on perishable goods and need to maintain the quality and freshness of their products may find this to be of significant benefit.

What’s Driving Nearshoring to Mexico?

There are several factors that have triggered nearshoring:

U.S tariffs on China. In 2018, a trade war started between the U.S. and China. The tariffs that were imposed by the U.S. have resulted in heighted costs leading some businesses to search for alternative markets.

NAFTA vs. USMCA (2020). Producers have additional motive to make moves in their production processes due to the United States-Mexico-Canada Agreement (USMCA), which substituted the North America Free Trade Agreement (NAFTA). USMCA provides a favorable legal and regulatory environment for foreign operations in Mexico, protecting investments and intellectual property.

The COVID-19 Pandemic. As the world shut down due to the COVID-19 pandemic, supplying goods became increasingly difficult while demands continued to rise. There was also a significant delay in product delivery times while borders were closed.

Disruptions to Logistics. In recent years, transportation costs have increased drastically, and availability of shipping materials is becoming harder to come by.

The Russia-Ukraine War. When the war began in Ukraine, raw materials provided by the country were no longer available. This forced businesses across the globe to begin searching for alternate suppliers.

Best Practices in Nearshoring

According to Villarreal, there are five main lessons to be gained from the companies that have invested successfully in Mexico:

1. Remain Agile: The business climate in Mexico may be tumultuous and unpredictable sometimes disrupting operations. As a result, companies investing in Mexico must remain proactive and capable of quickly pivoting in order to adapt to changing conditions.
   
   
2. Understand the Regulatory Environment: Companies interested in investing in Mexico should become familiar with the country’s regulatory system. This includes fully understanding the tax system, labor laws, and other regulations that may have an influence on business operations.
   
   
3. Build Strong Relationships: Developing solid relationships with important and strategic players in Mexico such as local government officials, suppliers, and customers allows businesses to seamlessly confront the specific obstacles and maximize the numerous opportunities that come with conducting business in another country.
   
   
4. Embrace Cultural Differences: Mexico has a unique cultural identity and businesses interested in investing need to be prepared to adapt to these differences. Understanding local customs, traditions, and language as well as tailoring marketing and commercial techniques to better resonate with the local market are all integral elements of a successful venture.
   
   
5. Mitigate Risks: Investing in Mexico, like any other investment, has inherent liabilities. Companies can take precautions to reduce these risks such as carrying out extensive due diligence on potential partners and suppliers, establishing robust security measures, and having a sound contingency plan in place to respond to any unforeseen events or obstacles.

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