In 2022, 65% of Mexico’s industrial space construction was concentrated in just four cities — Mexico City (20%), Monterrey (19%), Ciudad Juárez (16%), and Tijuana (10%), Mexico City being the online one that does not border the U.S.
Amid the supply chain disruptions triggered by the COVID-19 pandemic and the ongoing trade tensions between the United States and China, companies are seeking to diversify their supply chains. Many firms are turning to nearshoring with the aim of minimizing potential disruptions, and reducing production and logistics costs.
Mexico has positioned itself as an ideal destination for companies seeking to take advantage of the growing trend towards nearshoring. With its favorable geographic location, free trade agreements, and low operational costs, Mexico is attracting a range of international companies to its shores. For instance, Tesla is investing more than $5 billion in a new factory in Nuevo Leon and BMW is investing 800 million euros in their San Luis Potosi plant for electric car assembly.
The Rise of Nearshoring Amid the Pandemic and Geopolitical Tensions
Nearshoring is the name given to the resources strategy, whereby companies move part of their production to be closer to the final destination in order to minimize risk and, as with offshoring, to reduce costs as much as possible. Although the relocation of companies to Mexico has been going on for several years, the practice of nearshoring massively increased in response to the disruption caused by the pandemic.
Geopolitical tensions between the U.S. and China have also accelerated the shift toward regional markets and given new life to nearshoring. In 2018, the U.S. imposed tariffs of up to 25 percent on imports from China, making it more costly and time-consuming for American firms to obtain goods from their Chinese suppliers. Consequently, U.S. companies are increasingly turning to Mexico as a viable alternative. Meanwhile, many Chinese firms are relocating their manufacturing operations to Mexico in order to gain better access to the U.S. market.
Mexico’s Advantages for Nearshoring
Most experts agree that Mexico has unmatched nearshoring potential for companies wishing to access the U.S. market. It has an integrated border with the U.S., a competitive labor force, established logistics chains, and free trade agreements – all of which contribute to its suitability.
Geographical Advantages
One of Mexico’s biggest advantages for nearshoring is its proximity to the biggest market in the world: the United States. Right now the country is the second largest trade partner with the U.S., after China, and its strategic location has allowed it to capitalize on about 80 percent of global nearshoring opportunities. Thanks to its proximity to the U.S., it is cheaper and faster to ship goods from Mexico than China. Another advantage is that there is a lower risk of delays as less time is spent moving goods.
The U.S.–Mexico border, which is approximately 1,951 miles long, is one of the longest and busiest borders in the world. It is also one of the most economically active. Mexico has a vast network infrastructure for performing supply chain operations with more than 72,577 miles of paved roadways, more than 100 commercial ports, and 70 airports,
This border and its history of migration across it has created a unique cultural and economic bond between the two nations. Mexican people and companies are familiar with U.S. products and services, and U.S. businesses typically find it easy to market their production in Mexico. Both countries are familiar with the business practices of one another, and they share time zones, making it easier to conduct business.
Free Trade Agreements
Mexico is one of the most competitive and open markets in the world, having signed 13 free trade agreements that cover 50 countries. These agreements, particularly the modernized United States-Mexico-Canada Agreement (USMCA), have reduced trade barriers and created a more predictable and transparent trading and investment environment, making Mexico an attractive destination for companies looking to relocate operations.
In July 2020, the USMCA replaced the North American Free Trade Agreement (NAFTA), creating one of the world’s largest free trade zones, spanning roughly 500 million people and totalling over $26 trillion USD in GDP. The USMCA has facilitated the flow of products between Canada, Mexico, and the U.S., creating a more balanced and reciprocal trade environment. Under the USMCA, there are almost no import tariffs on Mexican goods to the U.S., and goods that are still subject to tariffs enjoy reduced rates, making these goods cheaper to import from Mexico than many other countries.
At a recent summit, North American leaders agreed to strengthen regional supply chains and promote investment in the region, stressing the importance of obtaining goods from providers located in North America. This initiative is expected to relocate 25 percent of Asian imports to North America, adding up to 2 percent of GDP growth to Mexico.
The USMCA has driven interest among U.S. companies seeking to reduce costs by bringing production closer to home. However, many Asian companies have also seen an opportunity in Mexico, viewing the country as a gateway to the U.S. market. Chinese investment in Mexico is rapidly growing. In 2022, China had the highest investment in relocation projects in Mexico, with approximately 80 percent of leased space in Mexican industrial parks occupied by Chinese-based companies.
In addition, several Spanish, Swiss, and German companies that operate in the Asian region have also relocated or expanded their manufacturing in Mexico to sell in the U.S. market.
Low Operational Costs
The skilled labor force and average wage of Mexico’s population make it an ideal destination for the movement of multinational corporations seeking to move part of their production out of Asia. Mexico has a young and rapidly growing population, with over 130 million people and a median age of 29 years old. The country’s labor force participation rate is approximately 59 percent. It is a diverse workforce, ranging from production labor to highly skilled professionals, including a vast pool of engineers, scientists, and technicians with extensive training and experience in the manufacturing industry.
Furthermore, Mexico’s labor costs are highly competitive, with one of the lowest minimum wages in the Organization for Economic Cooperation and Development (OECD), currently at around $7 USD. The national minimum wage in China in 2022 was $376 USD per month compared to Mexico’s $236 USD per month, making Mexico a significant cost-saving measure for businesses looking to expand their operations.
A Promising Future for Nearshoring in Mexico
Mexico’s nearshoring industry is booming as more and more companies from various sectors are flocking to the country. The manufacturing, automotive, technology, semiconductors and electronics industries are among the top sectors that are seeing a surge in investment. According to data from the Mexican Association of Private Industrial Parks (AMPIP), 47 new industrial parks were built in the country in the last year alone, and estimates suggest that nearshoring will generate$30 billion USD in Mexico by 2023.The Mexican government reported that, in 2022, foreign direct investment in Mexico increased by 12 percent year on year.
Nearshoring presents a significant opportunity for companies to diversify their supply chains, reduce their dependence on China, and improve product quality while reducing lead times. As Mexico continues to attract foreign investment, it has the potential to create jobs and boost its economy while providing sustainable benefits to its citizens. Overall, nearshoring to Mexico is proving to be a wise investment for companies looking to expand their reach in the North American market.