Mexican Nearshoring as a Step to Reshoring
Commentary by JP McDaris
Much has been written of late about reshoring, and how US manufacturing has become a viable alternative to China. But it doesn’t make sense for all production environments, such as high-volume- and/or high-labor-content products. Thus, in many cases, Mexico offers an attractive alternative, as this IndustryWeek blog post illustrates.
At the start of this century, China was the dominant force for low-cost manufacturing, even factoring in the hassles and cost of shipping to North America. But over the past five years or so, China’s competitive cost advantage has come down considerably. In fact, when you account for Mexico’s highly productive workforce, Mexican manufacturing is now more cost effective.
When you put all the other factors into the equation as well (same time zone allowing for same-day visits, shorter shipping times, better track record for safeguarding intellectual property, etc.) it’s clear to see why Mexico has surpassed China as the dominant competitive manufacturing location for North America, South America and even Europe.
Reshoring in Phases
In 2010, Harry Moser founded The Reshoring Initiative, an industry-led effort to bring manufacturing jobs back to the US. The group works to help US manufacturers utilize local sourcing and production. As desirable as that goal may be, it just isn’t practical yet for many American companies. When Moser spoke recently at an industry conference, he identified Mexico as an appealing option for companies that are not yet in a position to reshore to the US. Mexican hourly manufacturing rates, for example, remain a fraction of what they are in the US. So for high-volume manufacturers, in particular, Mexico fits the bill nicely.
In what way does a shift of manufacturing from China to Mexico benefit the US or American workers? Mainly because when production shifts to Mexico from China, a very high percentage of the engineering/design jobs are reshored to the US (or Canada, as the case may be). Mexican manufacturing requires a greater percentage of value to be added on the US (or Canadian) side, in comparison to China. For every dollar spent on US imports from Mexico, on average 40 cents originated in the US. That US share of 40% of value with Mexico compares to 25% with Canada and just 4% with China.
For some industries, such as defense or aerospace, Mexico may be one of the only offshore manufacturing locations permissible. According to the 2013 report “Aerospace & Defense Manufacturing in Mexico,” Mexico “currently attracts 5% of the total number of licenses granted by the US State Department for the production of dual use goods and technologies.” This may not sound like a large percentage, but it is significant because Mexico is one of the few foreign countries allowed to do Defense contract work for the US government.
Mexico’s standing with the State Department equates to additional opportunities for tier one and tier two suppliers, partially explaining the incredible growth of the city and state of Querétaro, northwest of Mexico City and, importantly, that much closer to the US border compared to the Mexican capital.
So When Does Mexico Make Sense?
If full US reshoring is not cost effective, Mexico may be a good alternative (according to IndustryWeek), particularly when:
- Proximity to US/Canadian customers is important
- Product labor content is between 20-30%
- Engaging in high mix, variable products, mid-volume production
- Intellectual Property protection is important
- Faster delivery/responsiveness is needed
- Product has substantial US content
- Mexico/Latin America are key markets
- NAFTA benefits fit product mix