By Global Sources
This article was posted in Global Sources, a resource hub for exporters, July 21, 2021. While this is not a typical news source for us, and may not have the unbiased perspective we look for in publications, we wanted to share because it provided an interesting look at nearshoring opportunities for the U.S. vs. the often-discussed reshoring.
A manufacturing boom for the USA's southern neighbor is in progress, as Mexican manufacturing recovers from Covid-19 stoppages and foreign investors pile in.
"As global companies seek to diversify their supply chains, Mexico offers proximity to U.S. markets, modern infrastructure, access to ports for global distribution and a highly skilled, well-educated workforce," according to business attorney Adrián Cisneros Aguilar, writing earlier this month on how Mexico's FDI numbers are booming in light of the ongoing US–PRC trade war.
Mexico, Aguilar explains, is open to foreign direct investment "in the vast majority of economic sectors," while between them the United States Mexico Canada Agreement (USMCA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provide tariff-free access for Mexican goods to the United States, Canada and 10 Asia-Pacific countries.
Troy Ryley, president of Redwood Mexico at Redwood Logistics, told supply-chain news site FreightWaves that he's not surprised more factories are heading to Mexico, because companies want to be closer to their markets.
"The relocation is absolutely occurring. Everybody that had extended, long supply chains got clobbered during the pandemic, and one of the solutions is move your location closer to market; it solves a lot of ills," Ryley said. "You've got such a shorter lead time and you're closer to the market, where you can react quickly to changing conditions."
North America's Shifting Supply Chains, a report produced by David A. Gantz for Rice University’s Baker Institute for Public Policy in November 2020, found that "in many respects, North America will become the most attractive option for sourcing many parts and components for manufacturing and for supply chain management more broadly, even if the logistics and other complexities of more extensive decoupling from China require an extended period (three to five years) for manufacturers of complex products." The report found that the process had already begun of "reshoring" production to the United States or, particularly for more labor-intensive products, "nearshoring" to Mexico.
Kearney's US Reshoring Index for 2020 found that Mexico's output suffered from COVID-19 disruptions, but leading indicators suggest long-term growth in exports to the US. The authors found positive intent toward reshoring into the US itself but noted that "many of the executives we surveyed perceive nearshoring to Mexico or Canada as even more advantageous."
While Mexico's proximity to the large, wealthy US market makes the country's attractions obvious for American companies, those same trade and logistics links are drawing suppliers from all around the world too.
Chinese upholstery maker Kuka Home completed a major expansion of its upholstery factory on June 18 in Monterrey, FreightWaves reports. London-based household goods supplier Unilever announced on July 2 it will invest $275.2 million to expand the production capacity of its four manufacturing facilities in Mexico — located in Lerma, Tultitlan, Morelos and Mexico City — over the next three years.
Many Chinese companies, seeing that America's Trump-era tariffs are not going away anytime soon, have set up production facilities outside China, or are in the process of doing so, in Southeast Asia or in Mexico.
"Looking down the road two or three years, U.S. tariffs (at current levels) on Chinese-manufactured goods will likely still be in place and Chinese companies are not sitting at home hoping those tariffs will be lifted," writes Aguilar. "They're actively reconfiguring their supply chains. They're snapping up Class A industrial real estate in locations that will position them to not only realize significant savings on U.S.-bound exports, but also position themselves to access Mexico's USD1.3 trillion economy — the second-largest in Latin America — with domestically produced products."
Aguilar notes that Mexico has world-class industrial parks, which until recently were home only to North American, European, Japanese and Korean companies. But now, Chinese companies are moving in, in a big way. Consulting firm CBRE estimates that half of new investors in Mexico's industrial real estate from 2021 to 2024 will be from China.
The automotive industry in particular is showing notable growth in manufacturing for export from Mexico. Japanese company Denso, one of the world's biggest auto component suppliers, announced on July 9 that it has begun construction on a $10 million expansion project at its plant in Silao, a city that is also home to factories owned by General Motors, Volkswagen and Pirelli. US-based Dana Inc. announced on the same day that it will build a $40 million factory in Mexico to produce automotive axles and drive shafts.
Other American companies are also setting up plants in Mexico. Davico Inc., which makes catalytic converter and exhaust products, has opened a second manufacturing facility near Saltillo, while NYX Inc., a producer of automotive interior parts, announced on July 6 that it will build a $25 million factory in Arteaga. German tire maker Continental AG is nearing completion of its new $58 million factory in Aguascalientes.
Buyers targeting the US and Canada markets should pay attention to this new opportunity to shorten supply chains. Be aware that many of the bigger suppliers with facilities in Mexico are not headquartered there — so do ask about factory locations, even if the supplier you're talking to is based in China, Europe or elsewhere. Better yet, just make sure you mention your target geography: if they have a Mexican production site, they'll tell you! It's a selling point for export to the US, after all.
Buyers should also consider the possibility of exploring the Mexican market itself. As Adrián Cisneros Aguilar notes, the country has the second largest economy in Latin America and, if you are already having products made there, why not see if you can find some local customers?