What is nearshoring and why can it be a competitive advantage for Mexico? And will violence end nearshoring for Mexico?

Puerto Vallarta (PVDN) – In mid-2021, a trend that would have a greater impact in Mexico began to take hold: nearshoring. This, due to its logistical and legislative advantages compared to the rest of Latin America. But what exactly is nearshoring?

The concept of nearshoring is still somewhat unknown despite the advantages it can bring to Mexico, due to problems with supply chains caused by the Covid-19 pandemic and its proximity to the United States. And, according to some forecasts established in El Economista, nearshoring solutions could intensify over the next year.

What is nearshoring?

The meaning of nearshoring is close relocation and refers to the practice of transferring a business operation to a nearby country. Nearshoring arises as a response to offshoring, which, in order to reduce costs, looks for suppliers in other destinations much further away, typically overseas.

The objective of nearshoring is to bring outsourced production centers closer together and solve the inconveniences of long distances and time differences between continents, which often harm the supply chain.

Another term similar to nearshoring is onshoring, which, in the same world of outsourcing, fulfills the function of subcontracting the manufacture of products or parts to a less expensive facility within the same country.

Nearshoring in Mexico

The Nearshoring to the Americas study highlights that proof of the positive effects of the free trade agreement between the United States and Mexico begin to be seen with the strengthening of their relationship. An aspect that we have seen especially in 2021, with the trade war between the United States and China, Mexico has increased its participation in US imports from 13.5% to 13.9%, while China fell from 20.6% to 17.2%.

According to the same study, the trade war with China is causing relocation to the United States, but also nearshoring in Mexico. If other Latin American countries had similar advantages for investment and trade with the United States, as Mexico does, nearshoring opportunities could be expected to multiply in the years after the new trade agreement.

As the note previously shared by the El Economista website has highlighted, Mexico has a strategic location and a logistical-legislative model that allows it to have a different growth from other Latin American countries.

What is Mexico’s opportunity in the face of nearshoring? The predictions suggest that the large American importers will not leave all their supplies to China and will try to diversify their manufacturing suppliers to avoid all the problems they have had due to the Covid-19 pandemic. This will allow Mexico to take a much more important place in logistics development and in the generation of services for the North American market, mainly.

The nearshoring principle and how it is applied in Mexico

The definition of nearshoring, as we have already highlighted, suggests a practice in which a company transfers its commercial or manufacturing activities to a country close to or close to the destination market or final consumer.

Before nearshoring, offshoring was the usual practice between exporters and importers from different countries. As a context, offshoring is the process by which a company relocates part of its production process, as well as internal business aspects, to other geographical areas. All this, through outsourcing (subcontracting).

The difference between nearshoring and offshoring is quite clear and its name indicates it: closeness and distance. While offshoring seeks to outsource the manufacture of products in distant countries, such as China to the United States, nearshoring outsourcing is between closer countries, such as Mexico with the United States.

And what favors Mexico at the moment to be able to apply nearshoring services?

• The current Free Trade Agreement between Mexico, the United States, and Canada
• The proximity between Mexico with Canada and the United States
• Low labor costs in the country
• Fast and secure supply chains
• Great performance of the industries in Mexico (especially in the automotive industry)
• Lack of stability in relations between China and the United States

What are the advantages of nearshoring between Mexico and other countries?

1. Logistics and faster shipping
   It is certainly faster to move from the United States to Mexico than from the United States to China, right? Therefore, one of the benefits of nearshoring is a shorter supply chain. This, in turn, gives you other advantages such as reduced costs and fewer problems in export logistics.

When you have your manufacturing supplier closer, you can avoid delays in the shipment of your merchandise and thus maintain your level of competitiveness with your clients by delivering everything in a timely manner.

2. Less complex shipments
   Hand in hand with the previous point, the greater the distance involved, the more problems may arise. In addition, if you are aware of the crisis in the global supply chain, you will know that international shipments are becoming more complex today and there is less availability of commercial cargo. This, therefore, makes shipments much longer and they can take more regular risks.
3. Diversity in export transport
   If a country is closer to your manufacturing supplier, then it is likely that there is more than one way to transport the merchandise, products, or parts. This is another great advantage of nearshoring, since you are not limited to only having to use a single means of transport, for example, by sea. You also have options such as air and land transport.
4. Greater proximity to your client or supplier
   In business relationships, communication is very important and nearshoring makes it possible to expedite this aspect thanks to the closeness it implies. It is not the same that the person with whom you are making a deal is 18 hours away then only 2 or 3 hours away, right?

Nearshoring companies also share your same time zone, so in case of any eventuality or follow-up, you will be able to communicate in real-time and not have to find a suitable time for both parties.

Although Mexico does not have a workforce as cheap as that offered by China, today, the current situation due to the pandemic and the already well-known competitive values ​​of Mexico make it an attractive country to increase its manufacturing demand to other countries.

Fortunately, despite the panorama of uncertainty, the search for economic recovery has made foreign trade seek and find alternatives to optimize its production chains and the best way to do it today is through nearshoring.

Insecurity in Mexico threatens nearshoring hopes

Cargo transportation in Mexico faces increasing challenges in terms of road safety for merchandise transfers in some regions of the country, which threatens the expansion of nearshoring or the relocation of companies in Mexico from China and the United States.

Mexico is the key trade partner of the United States that could benefit from nearshoring with annual exports of over $35 billion dollars, according to industry estimates, however, road insecurity has worsened in some regions such as the center-west, the Bajío and the border, limiting the growth of the sector in the country.

Alejandro García, director of new projects for AI27, a private security and monitoring company, commented that, since Mexico is a coveted country for nearshoring for the arrival of new industries, leasing and cargo transportation services will increase, therefore the problem of insecurity must be addressed to avoid the flight of investments in the face of this scourge.

“To take advantage of the opportunity that nearshoring will bring to Mexico, it will be necessary to take security measures regarding cargo transportation, since thefts have been on the rise. We will need to guarantee the safety of the merchandise so that the investment is not affected,” he said in an analysis.

Last year, 3,361 vehicle thefts were registered in the country, of which 1,580 or 47 percent were heavy trucks and cargo transport, according to the National Association of Vehicle Tracking and Protection Companies (ANERPV). ) that only considers data from units that have tracking.

David Román, president of ANERPV, told El Financiero that, despite the fact that the deployment of more than 95,000 National Guard elements helped reduce cargo thefts, the arrival of new investments continues to whet the appetite of crime on the roads.

“They are seeing an increase in the accident rate of robberies in these new industrial parks, there are several parks that are opening, especially in the Bajío area, there are registered in 2022, the entities that led the theft of heavy vehicles were the State from Mexico, Puebla, Guanajuato, and Jalisco by adding almost 998 robberies together.

In addition, for the first two months of this year, heavy vehicle theft totaled 237 units, according to the latest ANERPV report.

However, if the figures from the Executive Secretariat of the National Public Security System (SESNSP) are taken into account, the robberies of carriers are higher, since it reveals that in 2022 there were 8,834 robberies, which meant an increase of 0.8 percent compared to the 8,762 registered in 2021.

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