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