Nearshoring in Mexico

Mexico has been the quintessential nearshoring destination for American businesses for almost half a century. This economic relationship has had many ups-and-downs over the years. With the rise of China as a cheap manufacturing hub in the 2000s, some American corporations had to choose between nearshoring in Mexico and offshoring in Asia.

In more recent memory, nearshoring came under threat from Donald Trump’s “trade war” against its southern neighbor.

Fortunately, however, the punishments imposed by the Trump administration on some American businesses outsourcing their operations to Mexico never amounted to a full-scale trade war and a new trade agreement was signed between the US, Mexico, and Canada in 2020.

As of 2022, nearshoring is still very much alive, accounting for up to 25% of Mexico’s service economy and manufacturing sector.

Let us take a step back for a second, however, to examine the economic incentives encouraging American companies to outsource some of their operations to Mexico in 2022.

In plain words, Mexico is a far more affordable place than the US or Canada, but many parts of the country enjoy nearly the same technological advancements and industrial infrastructure found in the rest of North America. The maintenance of offices, R&D labs, and production lines is considerably more cost-effective in Mexico than in the US.

Outsourcing in its simplest sense has been criticized by many in Mexico in recent years, including the country’s senate. The mere outsourcing of labor is seen to be beneath Mexico, whereas the outsourcing of services and projects is welcomed. In this new framework, Mexican subcontractors are keen to accept a project from an international corporation and see through its execution with a say in how it is implemented.

It used to be the case that only manufacturing operations were outsourced to Mexican subcontractors, but in recent years, IT services, R&D, and financial services are increasingly entrusted with Mexican firms. “Our three key lines of services right now are Global Entity Management, Accounting and Tax, and HR & Payroll,” said Mónica Vera, Managing Director of TMF Group to TBY.

The nearshoring of finance, IT, design, and similar services to Mexican firms has become possible, largely thanks to the country’s sizable semi-skilled and skilled workforce. Neither production lines nor international offices are likely to suffer from a shortage of human resources in Mexico these days. Mexican universities and colleges, for example, train 110,000 engineers every year, with educational standards which are not that different from those maintained by American universities.

The wages of the aforementioned engineers, on the other hand, are on average 30% lower than the US rates, which can be a big draw for American businesses on the lookout for skilled manpower near the US. Roughly 5.6 million members of Mexico’s active workforce in 2019 were working for a subcontractor, according to the Labor Bureau of Mexico.

Automobile manufacturing, as a quintessentially American industry, can perfectly capture the scale of nearshoring operations in Mexico.

The manufacturing of light vehicles in Mexico saw a threefold growth between 1994 and 2016, rising to 3.5 million units. Quite unsurprisingly, almost every single one of those vehicles were sold under an American automaker’s brand name.

All this does not mean that the US is the sole client of Mexican contractors. Canada, as a signatory to the revised North American trade agreement, is increasingly investing in Mexico. “Canada is the third-largest investor in Mexico, and 40% of Canadian investment is concentrated in the mining industry. There are still many opportunities to diversify the type of Canadian companies present in Mexico,” according to Enrique Zorrilla, president of the Canadian Chamber of Commerce in Mexico, who talked to TBY.

Mexico has seen investment from across the Atlantic, as well. Mauricio Kuri, governor of the Mexican state of Querétaro told TBY that his state is keen on attracting investment from Europe, adding “We recently completed a successful tour in Europe, visiting Germany, Italy, the UK, and France.” The tour has led to finalizing deals with European aerospace giants such as Airbus.

It is not difficult to see that Mexico’s nearshoring market has gone through a paradigm shifts. It is no longer an overseas market for cheap labor, especially because the number of skilled workers has increased greatly. It is no longer serving just US business, although the US is a strategic partner. And, above all, Mexican contractors now prefer to execute the projects they accept in innovative ways which they have developed locally.

In this new era of Mexico-US cooperations, nearshoring is also becoming truly sustainable. Some 90% of Mexico’s exports to the US are transported on-land across the border, eliminating the need for maritime logistics. This makes nearshoring in Mexico far greener than offshoring to faraway places across the Pacific. What is more, Mexico, as an ally of the US is more committed to the rule of law, financial compliance, and labor regulations than its competitors.