Growth – A Leading Reason for Nearshoring to Mexico
Commentary by John Paul McDaris
I recently came across an interesting article in Inbound Logistics that explored the top reasons that companies are near-shoring (i.e., returning operations to nearby countries).
As Entrada Group’s experience and specialization is in Mexico, I considered this list vis a vis that country. And it struck me that one key reason manufacturers are contemplating Mexico – topline growth – was conspicuously missing from the list.
First, here is the pared-down list as published by Inbound Logistics. I encourage you to visit their site for specifics on each point:
- More stable wages for labor
- Better quality control
- Access to facilities
- Shorter transport/transit times
- Tighter inventory control
- Real-time communication
- Reduced energy costs*
- Better political and environmental stability
- Currency valuations
* Note: lower energy costs pertains to savings on shipping and freight. However, utilities costs in Mexico are far higher than in the US, by as much as double.
All the reasons above certainly apply to Mexican manufacturing. These are all straightforward, though still important, factors that weigh heavily in the favor of Mexico as a nearshore destination for operations.
At the same time, this list excludes what I believe are the two greatest factors favoring Mexican manufacturing: reduction in operating costs and topline growth opportunity, thanks to Mexico’s status as an open trading partner.
Reduction in Operating Costs
Generally speaking, when a manufacturer from US, Canada or Europe confers with Entrada about manufacturing in Mexico, cost reduction is top of mind. That’s not surprising either, as clients in our manufacturing park in Zacatecas, Mexico may realize cost savings between 20-50% (depending on how labor intensive processes are and the uniformity of finished product for export) compared to their facilities elsewhere in the developed world. Lower costs, for direct labor and most indirect labor, are a large driver of those cost reductions.
And while it’s typical for our clients to focus on cost savings at first, it’s also standard operating procedure for those same clients to realize new business growth by virtue of their presence in Mexico. Having established operations in the country opens them up to new contracts and OEM relationships they would never have had otherwise, before they engaged in Mexico.
Free Trade Powerhouse
Mexico’s status as arguably the most open trading partner in the world – their free trade agreements with 44 countries is tops worldwide – means that Mexico can be the ideal manufacturing hub for distribution to North America, South America and Europe as well.
In fact, it is quite common for Entrada clients to start their relationship with us, only to see their overall manufacturing footprint and headcount grow as they successfully use Mexico to leverage new business opportunities.
Source: Inbound Logistics