#104 – Inside Our Industry – What American Companies Should Consider Before Nearshoring to Mexico
Posted on | Inside Our Industry
The last two weeks we have shared information about the rise in reshoring and the hurdles to moving production closer to home. We have discussed nearshoring as well. In the past, Mexico has been a valued trade partner to the U.S. What does the future hold for U.S. manufacturers? Following, in part, is a post from Forbes.
What American Companies Should Consider Before Nearshoring to Mexico
Deepak Chhugani, Forbes Councils Member, Jun 7, 2022
It’s not a good time for American companies relying on goods to be shipped from overseas. Parts of China remain in and out of lockdown, causing buyers to reevaluate their sourcing. Fuel prices are out of control, which has been a contributing factor for air and sea carriers to raise their rates by 5 to 10 times. Ports are straining to move goods through in a timely manner, largely due to labor shortages. And suppliers of low-value goods are pulling from the market, unable to make money because transportation costs are so high.
One potential bright spot, however, is Mexico. It has replaced China as a source of supplies for many American companies for several reasons: same (or similar) time zone, similar work cultures as well as lower language barriers and general proximity with the nimbleness and speed that allows. These structural factors underpin this trade relationship and could ensure that the U.S.-Mexico trade route remains strong.
Not only is moving goods between the U.S. and Mexico easier, but goods can also be moved at more competitive prices. Yes, fuel prices have led to increases in transportation costs, but the increase in over-the-road transportation is currently hovering at about 30%, versus roughly 500% for some air or ocean cargo transport. And over-the-road transport is much faster than ocean (which just last year was taking up to 75 days, factoring in port delays, which are currently longer than average).
There are also fewer geopolitical risks with Mexico. The U.S. and Mexico have long-standing agreements in place (originally NAFTA, now USMCA) that govern trade and inter-country transportation, as well as long-established border crossing procedures that are well understood on both sides. In general, the U.S. and Mexico economies depend heavily on each other, fostering a much closer collaboration ecosystem.
The residual effects of the pandemic have brought the long-ignored issue of supply chains to the forefront, as congestion and price surges cause havoc not only to the companies involved in trade but to the end consumers. Bringing manufacturers closer to users will not solve all problems, but I believe it will bring some relief. Near-shoring is attractive right now for myriad reasons. With investments flowing in and increased attention from all sides, there is also an opportunity for digitally native disruptors in this sector to help spur a new chapter for U.S.-Mexico economic integration. If that happens, it could bring massive benefits to companies and consumers on both sides of the border and beyond.