Here’s Why Nearshoring To Mexico Might Be The Right Move For Many Manufacturers

Manufacturers keeping an eye on the news may have begun weighing their reshoring options. Or, if not seriously considering making operational changes, at least anticipating the pain that a geopolitical spar with China could inflict. Our relations with the country that exported $435 billion in goods to America in 2020 have slid into tenuous territory.

But those hoping reshoring will be a panacea that single-handedly revitalizes American manufacturing may want to reset their expectations. It may not take shape the way you’d expect.

We are seeing operations come back to North America, just not necessarily the U.S. Instead, many manufacturers have set up shop within the borders of our neighbor to the south. In 2021, U.S. manufacturers bought chemicals, produce, construction materials, and other goods from six times as many Mexican suppliers as in 2020, according to data from procurement software firm Jaggaer, cited in the Wall Street Journal. That’s while procurement bids in China declined by 9 percent.

The trend shows no signs of slowing down because Mexico presents significant upside as a nearshoring option. Here’s why.

Proximity. For geographical reasons alone, manufacturers gain greater control when they move their operations from China to Mexico. For starters, goods must travel a much shorter distance to reach the United States, and imports are less likely to hit the snags they did a couple years ago when bottlenecking at several ports knocked supply chains off kilter.

Setting up operations in Mexico is also less all or nothing—and less permanent—than outsourcing to China. Chinese companies tend to own their own machinery and equipment, which creates a heavy resource burden when it comes to moving those operations elsewhere. Setting up shop in Mexico means it will be easier to bring production back home, if beneficial, to do value-add processing here in the U.S., or even to move things back and forth throughout the manufacturing process.

I talked to one company that split its manufacturing operations between Mexico and the U.S. a few years ago. Then, as they re-tooled their capabilities and improved their technology, they realized reshoring all operations to the U.S. was suddenly the most cost-effective option. Because of the proximity to home and the more western culture, the company was much more in-tune with their operations down south than they would have been in China. With that knowledge, they were able to quickly bring production back to the U.S.

Reliability and resiliency. Not only are goods geographically closer, but they’re coming from a country with which the U.S. has historically had a much cleaner relationship. With a few minor exceptions, U.S. and Mexico relations have remained steady for decades, and there’s no reason to believe that would change in the foreseeable future. Sharing a land border means Mexico has a vested interest in keeping peace.

The country may not be completely stable, but they’re unlikely to engage us in a war that would upend our entire supply chain. From a national security perspective, Mexico makes sense.

Cost and availability of talent. Finding Mexican labor proves much less challenging than in the U.S., where manufacturers have fought against a talent gap for decades. Labor costs vary, but skilled workers like machinists and welders make between $7 and $8 an hour, according to Tetakawi, a firm that helps manufacturers succeed in Mexico. That’s compared to the rapidly rising cost of talent in America, where skilled workers are regularly making upwards of $20 an hour.

There also may be cost and logistics advantages when it comes to permitting. “To build things in the United States, permits are going to be very challenging,” says Mike O’Donnell, my colleague and the vice president of operations at MAGNET. “Trying to get a permit for a smelting plant, for instance—good luck. But Mexico is a little different.”

For all of these reasons, Mexico has become a very attractive option for manufacturers looking to bring production closer to home. However, like everything, there are risks that need to be managed. Two key ones in this case.

Equipment Costs. Many American manufacturers outsource not only the labor, but also the machinery—tying themselves to the factories and equipment of contract manufacturers in China.

While similar contract arrangements may exist in Mexico, the country’s less robust manufacturing ecosystem means some American companies will have to fund the initial equipment or factory costs. There are, of course, advantages to owning your own equipment, but this means substantial up-front cost burdens—especially for smaller shops.

Protectionism. After much discussion, the U.S. effectively renewed its trade agreement with Mexico and Canada when it signed the United State-Mexico-Canada Agreement in 2020, a successor to NAFTA
FTA
. It would likely take something major for this agreement to be broken. But it’s worth saying that without free trade, Mexico would be a much less attractive nearshoring option.

We’d love to see all Chinese manufacturing come back to the U.S. Unfortunately, that’s not practical or affordable. But Mexico offers a lot to like as an alternative. Not only is it closer in proximity, but our relationship with our southern neighbor remains on solid footing, and labor costs and availability provide significant upside compared to the U.S. Manufacturers considering the move to Mexico will want to keep in mind the up-front cost of such a move and how to manage that.

But all in all, I consider nearshoring to Mexico a net positive—even if it doesn’t fulfill the American reshoring scenario of our dreams. It does get us one step closer to home, while offering the cost competitiveness that made China so attractive. We just have to remember the old adage that too much of anything is not a good thing. As we reinvent globalization, we don’t ever want to be in a situation again where we have all our eggs in anyone else’s manufacturing basket – and that includes Mexico.