Many companies come to us using the terms “offshoring” and “nearshoring” interchangeably, if they refer to “nearshoring” at all. Usually, they’re simply asking, “Is it cheaper to do business in Mexico than China or Europe?”
Usually, the answer is yes.
In most cases, nearshoring, or outsourcing your manufacturing operations to a nearby country, is more cost-effective than offshoring, which is outsourcing operations to another country in an entirely different part of the world. For most U.S. companies, offshoring would mean setting up a manufacturing facility in China or India, while nearshoring would mean setting up that facility in Mexico or another country in Latin America.
Here are some of the key differences between nearshoring and offshoring:
For years, the labor costs in Asia were so cheap, it offset other costs associated with offshoring. Now, wages in those countries have risen, while wages in Mexico have remained relatively stable. In 2013, average wages for manufacturing workers in China started to earn more than those in Mexico, and wages for China are still trending upward (source). Other production costs, like energy and other utilities, have risen in China as well.
Mexico’s maquiladora program also lowers costs. Maquiladora licenses allow foreign companies to operate in Mexico and offers favorable tax benefits—namely, you wouldn’t have to pay corporate taxes for the first four years of operation, and you can export products to the U.S. at a lower tariff.
Imagine planning a team visit to a production facility in China. Flights from the US could take between 12-20 hours, depending on your location. The team will be jet-lagged during the visit, the flights may cost thousands of dollars, and even a brief visit will likely take at least two or three full days.
Now, imagine planning that visit to a facility in Mexico. Flights are cheaper, there are most likely more flight options, and in many cases, the team can fly in the morning, meet with the plant manager, tour the facility, or do whatever is needed, and fly home that evening. If you’re located close to the border, you could just drive over, saving even more on transportation costs.
And for basic day-to-day communication, you’d be at most three hours ahead or behind your production facility—so you don’t have to jump on middle-of-the-night conference calls or worry about coordinating differing time schedules. In addition, it’s easier for team members in the U.S. or Mexico to address any issues as soon as they arise.
Is it important that your products reach your customers quickly? We have clients who are able to produce, package, and export products in one day. In the worst case, goods produced on Mexico’s West Coast would take approximately five days to reach the U.S. East Coast. By contrast, it would take a product from China at least 20 days to reach its destination.
There are also fewer language and cultural barriers when operating in Mexico. It’s a western culture, and many workers are bilingual, so communication tends to be smoother. Many of the workers you’d hire in Mexico would have experience working for U.S. companies, so they’d already be familiar with U.S. business practices and company culture.
You’re probably very aware of NAFTA and how it makes manufacturing in Mexico a favorable option for U.S. companies—but NAFTA is just one of 10 free trade agreements Mexico has with 45 different countries. Mexico is one of the most open countries for international trade, with 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). It’s also a member of TPP.
This means you’ll see significant benefits on savings both when you import raw materials into Mexico and when you export the finished goods—no matter where in the world they’re going.
If you’re using proprietary processes or developing state-of-the-art products, you want to protect that information. China historically doesn’t have a great reputation when it comes to protecting the intellectual property of foreign companies. Although the country is improving and implementing new protections and rights, China’s courts have been slow to enforce these.
By contrast, Mexico has more protections in place, and as part of NAFTA and other trade agreements, it’s required to protect data copyright, trademarks, patents, industrial designs and more. We’ve found that companies with valuable intellectual property feel more comfortable operating in Mexico.
While every business is different, nearshoring is the better option for more and more businesses. Mexico is the first choice for many companies in the automotive, aerospace, electronics, medical device, and IT industries for its lower costs and relative ease of doing business, compared to offshoring to countries like China.
With a trusted partner like IVEMSA, you’ll get the full picture of exactly what nearshoring will cost—not just in labor and production, but all the other “hidden costs” you don’t realize come with offshoring. We’ll make sure you get the full picture of costs and benefits so you can make the best decision for your operations.
Contact us today to learn how we can help make your nearshoring operations successful.
Companies have long known the benefits of manufacturing in Mexico, but over the past decade, the advantages have grown more compelling. Mexico offers a strategic advantage for those that want to reduce production costs while maintaining quality. It boasts low labor rates and a skilled workforce, plus a pro-business environment and participation in multiple international trade agreements, including the USMCA.
Meanwhile, Mexico invests heavily in its manufacturing industries, with programs designed to entice U.S. and other foreign businesses (IMMEX/maquiladora) and to educate and train its workforce in engineering disciplines and technical trades. And through the country’s unique shelter manufacturing program, IVEMSA can help companies maximize cost savings of manufacturing in Mexico while reducing their legal risk and liability.
Throughout the years, Mexico manufacturing has increasingly become the favored trade partner over China due to incomparable benefits such as better logistics, closer proximity to the North American market, lower costs, greater labor availability, and multiple free trade agreements.
Each of these competitive advantages, in addition to advancements in technology and supply chain has increased the amount of foreign direct investment into Mexico and the level of growth achieved by today’s leading global manufacturers.
Mexico’s established infrastructure has instilled confidence in U.S. and other foreign manufacturers, remaining largely operable and intact even during economic downturns, including the COVID-19 pandemic.
The close proximity between the U.S. and Mexico makes it easier for manufacturers to reach their North American audiences faster and more conveniently compared to Asia.
Industrial leaders benefit from reduced costs on labor, transportation, and building leases when manufacturing in Mexico without compromising operational capabilities, production quality, or delivery time.
Mexico has avoided the industrial labor shortage experienced by the U.S., China, and other trade countries and continues to support a robust, highly skilled workforce.
The enactment of the USMCA further incentivizes trade among the U.S., Mexico, and Canada due to favorable provisions regarding original automotive content and intellectual property
A $35 million dollar investment has Silicon Valley paying attention to the potential of Mexico’s tech industry. Kueski, the recipient of the mega influx, is a Guadalajara based online lending startup. Kueski co-founder and CEO Adalberto Flores said, “This is the biggest capital infusion any Mexican fin-tech startup has ever received.” Sources say that investment amount could jump, climbing as high as $100 million.
“There is a new breed of young, aggressive people who have traveled the world and now want to launch startups in Mexico,” Flores continued.
Dan Restrepo, who spent six years as the principal advisor to President Barack Obama on issues related to Latin America, the Caribbean, and Canada holds vast on how industry within the country operates said, “Mexico is starting to make that transition from just being a place that people build things to a place where people design and build things.”
Restrepo underscored the importance of the shift by adding, “That’s the move that South Korea pulled off. That’s the move that Japan pulled off. That’s the move of the economies that have truly emerged — that is what they do. They go from just being a platform for people to come do stuff more cheaply to a place where there is also significant intellectual value added.”
According to the Washington Post, there are nearly 300 start-ups in Guadalajara alone and much of the $120 million invested has come from venture capital in the United States. Mexico’s innovation ministry reported that Jalisco has several thousand start-ups and nationally recognized companies alike. Exporting nearly $21 billion in tech products and services annually, those companies include Intel, IBM, Oracle, HP, Dell, and many more.
“All the products made in Jalisco can be delivered anywhere in the U.S. in less than 24 hours,” says Jalisco’s governor, Aristóteles Sandoval.
“We have a port two hours away; the time zone is almost the same.” In Sandoval’s opinion this makes Mexico more cost-effective than India, what, for decades, has been know as the “go-to” for IT outsourcing.
Sitting atop a hill on 25 acres overlooking Jalisco, is Intel’s $220 million 220,000 square foot headquarters. Jesus Palmomino, the general manager of the company’s only research lab in Latin America, proudly reports, “Twenty five patents made here in 12 months! This is where the future is being built.”
Palomino, originally from Puebla, arrived in Guadalajara 26 years ago to spearhead a project between IBM and the Mexican government to set up a PC design center.
What has emerged, he says, is a result of the groundwork that partnership helped lay.
“Doing business here is almost like doing business in the U.S.,” says Anurag Kumar, chief executive and co-founder of iTexico, a Texas software development company with more than 100 of its 121 employees based in Guadalajara.
At $5 million a year in revenue, iTexico was named one of Inc’s fastest-growing companies in 2015 and received an entrepreneurship award from the Mexican government. The company’s roster has more than 100 global players including McDonalds and IBM and partnerships with Microsoft and Appcelerator.
“I’ve seen this movie before, I know how it ends,” Kumar says. “I saw it in Delhi, in Bangalore. There’s no reason there can’t be larger companies in Mexico. Mexico has advantages we haven’t found anywhere else. You don’t get the feeling of optimism in India that you find here. I see it in Mexico. I really do.”
Sergio Tagliapietra CEO, IVEMSA
The cost increases in labor, transportation and inventory management over the last several years have meant that offshoring manufacturing to Asia is no longer the default option. Today the trend is “Right- Shoring” which takes into account the cost/benefit of one, or a combination of, offshoring, nearshoring and reshoring to best achieve corporate goals.
In addition to reducing transportation costs, which is not insignificant with today’s cost of oil, right-shoring is about maximizing efficiency of the supply chain through closer proximity to demand. It allows for not only greater flexibility and a shortened timeline to design and fabrication changes, but follows through with a whole host of benefits:
While there certainly are companies for whom offshoring is still a good option, right-shoring is by far the better option for a great many industries. Products that benefit the most have one or a combination of the following characteristics: complexity, short lead times, variable demand, large product size/weight, and concerns about protection of intellectual property.
Another important factor is the total landed cost calculation. In addition to labor rates, transportation and customs duties, total landed cost takes into consideration indirect influences such as regional issues, product quality concerns, people and talent, logistics visibility, inventory costs, border-crossing complexities and more. All of these need to be considered in the total cost of operations.
Finally, there is a one-time cost involved with cost/benefit and risk analysis. This is the due diligence, including visits to potential locations, that will cost upfront, but save money in the long run.
Having been involved in helping companies conduct successful right-shore/nearshore manufacturing operations in Mexico for over 30 years, we at IVEMSA are intimately familiar with all of the details outlined above. If we can assist with a cost/benefit analysis, please contact us any time.