As the long-predicted nearshoring shift increasingly becomes reality, stakeholders across the supply chain are weighing their options as they assess the risks vs. benefits of moving operations closer to home. In our series of posts over the past several weeks, we’ve been examining some of the related dynamics.
Our first article covered the benefits of nearshoring, the progress being made, and some of the concerns being expressed about setting up shop in Mexico.
In the second article of the series, we cited several experts and business leaders with an insider view of Mexico and their perspectives about the country’s nearshoring potential.
And in this last in our series, we’ll take a look at how nearshoring may impact industries such as manufacturing, shipping, warehousing, and various types of services.
Manufacturing
In a post for Supply & Demand Chain Executive (SDCE), Jorge Gonzalez Henrichsen, CEO of The Nearshore Company noted that manufacturing in Mexico is showing “considerable growth,” which is a trend that’s predicted to continue.
Gonzalez Henrichsen says that four industries in particular have a significant presence in the country: automotive, medical, aerospace, and appliances.
Automotive
Gonzalez Henrichsen says the desire to “vertically integrate” in Mexico is a key factor for automotive manufacturers already established in the country.
“They are inviting Tier 2 and Tier 3 suppliers to be closer to their manufacturing facilities and help avoid delayed supplies,” he writes, also noting that changes in rules of origins for the United States-Mexico-Canada Agreement will impact the automotive industry in mid-2023.
The change will require “…even more regional content to qualify for beneficial tariffs (from 62.5% to 75% of total content value),” Gonzalez Henrichsen says.
He also notes that the Inflation Reduction Act provides tax benefits for the purchase of electric vehicles manufactured in North America and not just the U.S.
“Both of these factors are poised to be drivers of automotive nearshoring,” Gonzalez Henrichsen says.
Medical
Gonzalez Henrichsen refers to the medical devices industry as “the most important medical industry to nearshore manufacturing to Mexico.”
“Plastic injections, assemblies, efficient cutting and sewing, etc. remain activities for which Mexico is a much loved locale of production,” he writes, noting there’s been a shift in this sector in which companies are now moving to “low-cost centers with access to labor,” rather than prioritizing locations that are near sterilizing facilities or distribution centers.
Aerospace
In the last 20 years, Gonzalez Henrichsen says aerospace companies have “moved a significant amount of manufacturing” to Mexico.
He describes the Northwest, the Northeast, and Central Mexico as the three “important regions of production,” and notes that there are approximately 300 aerospace companies active in the country.
“OEMs, Tier 1 and Tier 2 suppliers, MRO and design centers that serve this industry are clustered around large manufacturers,” Gonzalez Henrichsen writes, noting that these suppliers manufacture both basic and complex products needed by the aerospace industry.
Appliances
Gonzalez Henrichsen says Mexico is a major exporter of appliances to the U.S.—second only to China—with industry manufacturers primarily producing “refrigerators, stoves, water heaters, air conditioning units and washing machines. …”
Manufacturing: Deloitte Perspectives
Experts from Deloitte Mexico agree that nearshoring is fueling a manufacturing boom in the country, citing key statistics in their recent report, Mexico Economic Outlook, December 2022:
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“As of August 2022, investment in machinery and equipment in Mexico was already 17.4% above levels seen in January 2020, that is, just before the pandemic hit, and 8.3% higher than in the fourth quarter of 2018, when investments reached their peak. …”
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“…construction of industrial plants and warehouses grew 12.9% between January to August 2022 compared to the same period in 2021. However, it is still 35% below the Q4 2018 levels. This implies that industrial plants and warehouses that are already installed in Mexico continue to invest further, but the expansion of plants or the installation of new ones is more limited.”
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“…Since 2021, FDI [Foreign Direct Investment] has been increasing in specific states and sectors of the economy, especially in the cities bordering the United States. …Also, employment has increased significantly in the north and center-north of the country, where most of the manufacturing is based.”
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“As of Q2 2022, manufacturing production in Baja California was almost 30% above its 5-year average (2015-2019); in Chihuahua it was 18% higher; in Sinaloa 17% higher, and in Nuevo Leon and Michoacan it was 16% higher.”
Agreeing that automotive manufacturing has a significant presence in Mexico, the Deloitte Mexico experts say that other manufacturing sectors experiencing significant growth there include electrical equipment, computer and electronic products, and plastics.
The following video from KGUN9, “’Nearshoring’ builds business in Mexico and Southern AZ,” includes the perspectives of one business leader who is “managing 35 factories in Mexico—and creates plenty of business in the U.S.”
Shipping
Certainly, if manufacturing and other operations are nearshored instead of offshored to overseas locations, the supply chain’s transportation map will face some significant changes.
In November 2022, Deloitte published the results of a survey it conducted “to better understand a freight system responding to short-term shocks and preparing for longer-term transformation.”
Participants included 305 executives at transportation and manufacturing companies in the U.S. and Europe with annual revenues of US$500 million to over US$50 billion. The firm also performed a series of executive interviews to gain perspectives “on the future of the broader industry.”
In “The future of freight: Transforming the movement of goods,” the authors describe today’s transportation industry as being at “an inflection point,” with several “massive shifts” occurring at the same time:
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“Nearshoring efforts are underway across a significant number of industries as companies strive to shorten and bolster supply chains.”
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“China’s dominance in global trade is expected to wane, its trade growth dropping from 26% to 13% in the next five years…”
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“…countries in Central and Southeastern Europe, as well as Central America and Mexico, [are] picking up the slack with competitive labor and closer proximity to end-use markets.”
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“These developments on their own would constitute a seismic shift in the future of freight, but they are expected to be accompanied by revolutions in data science (IoT, analytics, and artificial intelligence), material science (electric vehicles), and engineering (autonomous vehicles),” report authors say.
Noting that its research indicates that the transportation industry is about to undergo a “significant transformation,” Deloitte says success in this context will largely be determined by “the ability to deftly navigate five major forces”:
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Onshoring and nearshoring to redraw the transportation map: “…Even if this [nearshoring] happens at half the rate our survey respondents expect, it will represent radical change, creating new opportunities for established leaders and openings for new competitors to enter the market.”
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Well-curated data is the great differentiator: “Companies with advanced, unified digital strategies are currently at a significant advantage, as an industry that still suffers from data fragmentation rushes to close the gap. …”
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New competitive dynamics abound: “As the industry reconstitutes itself, cloud services providers, megaretailers, vehicle manufacturers, and tech startups are pursuing the transportation industry and its profit streams. …”
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Restructuring will align core capabilities to a changing environment: “Transportation leaders recognize they need to change to meet this moment. …”
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New vehicles and new insights mean new competition: “The coming wave of next-generation vehicles harnessing electric power, autonomous technology, and IoT data will not only alter the capabilities, efficiency, and sustainability of the transportation system, but will also potentially precipitate a power shakeup. …”
Deloitte says leaders “should plan for rapid acceleration of these forces and configure their companies to win in a constantly evolving environment …”.
Specifically addressing how nearshoring will “redraw the transportation map,” the firm notes that survey respondents “anticipate a significant share of Asia-originating freight to move onshore or nearshore to alleviate supply chain challenges and improve competitive positioning.”
Deloitte says the transportation executives surveyed who have started preparing for a nearshoring shift anticipate that “20% of Asia-originating freight will move to closer-proximity markets by 2025, doubling to 40% of freight originations by 2030.”
The firm notes that manufacturers have similar expectations, with 62% starting this process—and that survey respondents expect supply lines related to agriculture, apparel, and consumer electronics to experience the greatest degree of reconfiguration.
“This reconfiguring of supply chains inside countries and regions could have significant consequences for transportation companies as they are forced to rethink their footprint, infrastructure, and relationships,” Deloitte says. “ …This new moment carries with it the burden of forging new, interconnected shipping networks inside countries and regions. But it also carries the promise of reduced supply risk that comes from widely distributed freight networks, along with reduced labor and transportation costs.”
For additional details and recommendations, please see the full report.
Warehousing
With all the nearshoring activity afoot, it’s not surprising that there’s a warehousing boom along the border between the U.S. and Mexico.
In an article published in early 2021, “Industrial Real Estate Booms at the U.S.-Mexico Border,” Border Now described the expansion of industrial real estate along the border, fueled by nearshoring trends that were growing even then.
A recent WSJ headline also succinctly captured the evolving trend: “Border-Town Warehouses Are Booming as More Manufacturing Moves to Mexico.”
And according to an article posted by the Reshoring Institute, the shift of manufacturing and supply chains away from Asia “is creating a surge in new manufacturing facilities in Mexico, which in turn is fueling development of new and expanded industrial space in border towns.”
As Bisnow—which refers to itself as “the world’s leading B2B platform serving the commercial real estate industry—recently noted, “Big names in industrial real estate and investment such as Prologis and Morgan Stanley are investing heavily in strategically located warehouse space close to and in Mexico as manufacturers turn their attention to facilities closer to home. …”
Services
With all the talk about nearshoring various aspects of the supply chain—it can be easy to overlook one sector that may also experience a significant impact: services.
In a recent BNamericas article, “Harnessing Mexico’s nearshoring potential in services,” the outlet notes that “Mexico could take advantage of the resurgence of nearshoring to become a technology services center for the US, benefiting from its advantages in terms of qualified human resources, time zone and culture.”
BNamericas cited Carlos López-Santibáñez, director of KPMG Technology Services Americas (KTSA), as underscoring the potential.
“I believe that the big opportunity, which has not been sufficiently exploited, is in the services industry,” he told the outlet. However, López-Santibáñez added that lack of state support for such efforts creates limitations for development—which BNamericas noted is not the case in Costa Rica.
“Unlike Mexico, Costa Rica had great support from the authorities in attracting foreign companies and it has now become a technology hub in the region,” the outlet said.
Regardless, López-Santibáñez said the technology sector offers the “biggest opportunity” for the professional services sector in Mexico.
“Large companies like IBM, Tata Consulting Services … they all already have an important footprint in Mexico,” he told BNamericas, adding that his firm sees additional opportunities in providing “back office services such as finance, debt collection or human resources.”
