By: Adrian Lopez Casab
Nearshoring is a practice whereby companies transfer, either by themselves or through third parties, the totality or a part of their production or supply chains to either the country that will be their final market or to a third country close to it. nearshoring Nearshoring is a practice whereby companies transfer, either by themselves or through third parties, the totality or a part of their production or supply chains to either the country that will be their final market or to a third country close to it.
The trend of nearshoring stems from the effects on logistics and supply chains that occurred as a result of the COVID-19 pandemic in companies that had their production chain located in countries other than their main center of operation, and/or their final consumer market, and is aimed to reduce its production costs and access to their final market. This trend has developed mainly in those companies that had their production in Asian countries (offshoring), which suspended their production processes at the beginning of the pandemic, generating a crisis in the supply chains, with all the economic, productive and commercial implications it entails.
This practice has already been (and we assume it will continue to be) highly beneficial for Mexico, mainly due to its privileged geographical location adjacent to the United States of America (“USA”), which is one of the most important markets in the world, together with the fact that Mexico is part of free trade agreements with 46 countries, including the T-MEC that facilitates the commercial and trade relationship between Mexico, USA and Canada, in which encompass certain tax incentives or benefits that come along with the execution of said treaties. Furthermore, Mexico has an important base of young labor, which, although it is not as cheap as that one offered by the Asian market, brings major attractives in terms of specialization and training, and is therefore highly valued by investors. The above detailed factors have led in recent years to many companies, standing out those in the home appliance manufacturing and automotive sectors, to relocate all or part of their production chain to Mexico, with the end market being mainly the USA, Canada and Mexico, the foregoing without ignoring the rest of the Latin American market.
The main benefits of nearshoring for these companies are the time and cost reduction in moving their products to the destination market and controlling the risks of a suspension of their production and/or supply chains. However, in Mexico this practice has implied new challenges for these companies as they faced new factors and indirect costs to be considered, especially the safety costs and risks that exist both in the production facilities and in ground transportation in Mexico. Moreover, the increase in the establishment of these new production chains in Mexico poses a challenge for the Mexican government to guarantee these investing companies the constant providing of supplies such as water and electricity, without depriving the general population of these resources, or reducing access to them.
For Mexico, nearshoring is generating a large number of jobs and a greater degree of specialization and competitiveness in its labor force; additionally, the establishment of more or new industries brings along at the time the establishment of other foreign companies that provide them with services or are their suppliers in Mexico, or else, the national market begins to create local companies that can provide services, spare parts and inputs for these new industries.
Undoubtedly, other markets that have benefited from nearshoring are the real estate and transportation. Large industrial building developers, real estate investment trusts (REITs) and smaller industrial real estate companies have experienced occupancy rates close to 100% in their existing industrial land, which, in response to the increased demand, has generated the development of new and better industrial plants with highly sophisticated services and technology. Clear examples of this are the increase and improvement in the development of industrial buildings in cities in the north and center of the country, such as Saltillo, Reynosa, Ciudad Juárez, Monterrey, Querétaro, Mexico City, Toluca and Puebla. On the other hand, Mexican land, air and maritime transportation companies have registered also a considerable increase due to the new demand for transportation services of new products manufactured in Mexico.
Another sector that has seen significant drive due to nearshoring in Mexico is the one of mergers and acquisitions, as some of the companies that have relocated to Mexico acquired or merged into existing Mexican companies to simplify the entry of their production chains into Mexican territory.
The nearshoring practice has been and will continue to be highly beneficial both for Mexico and the companies relocating here. To continue with this trend and take full advantage of the economic growth that it may bring, the country must focus on guaranteeing investors the best possible legal (rule of law), fiscal, trade, supply of inputs, provision of specialized labor and security conditions, among others, that will strengthen Mexico as an attractive market for investors in a complex global economic scenario.
