Introduction: Understanding Mexico’s Stance on Nearshoring
Small and medium-sized businesses can unlock competitive advantage in Mexico. Here are three strategies for successful nearshoring in Mexico. (co-published with North America Strategic Planning)
More international investors with factories in China have been calling me about nearshoring to Mexico. It’s clear that they are looking for the same kind of “all clear, safe to proceed” signals that they used to get in places like Shenzhen. In China, the government creates policies, builds infrastructure, and executes plans. Specifically, SMEs leaving China want to know that they are not giving up their main competitive advantage – access to a deep supply chain. In China, bottlenecks and shortages that threatened supply chain optimization were dealt with through regulation, party pressure on State Champions, or pressure on foreign businesses. When China decides it wants to enter an industry, the Party plans, the government builds or regulates, and the businesses arrive. International investors waiting for Mexico to display similar impulses should reconsider. Mexico isn’t changing its standard operating procedure for your investment.
Mexico is not changing for foreign investors.
International businesses that can find a competitive advantage in Mexico’s unchanging business landscape are going to win the nearshoring game. Don’t expect the federal government of Mexico to welcome nearshoring companies with incentives and grand promises. AMLO todserates you because your jobs and investments are popular – and he’s a populist. Xi Jinping says you are welcome, but you’re really not. AMLO says you’re not welcome, and you’re really not. Sorry.
But, there’s the distance, the border, the low/no-duty status, and the cost savings. Everything is so cheap and easy, and that US market is sitting RIGHT THERE.
Strategy 1: Warehouse Your Asian Output for Cost Advantage
Nearshoring to Mexico isn’t an all-or-nothing proposition. One of the big outcomes of the shipping crisis of 2021 was the switch from Just-In-Time inventory management to Just-In-Case risk management. Warehousing emergency stock on this side of the Pacific is now a standard part of supply chain optimization for the US market, and it’s a logical and cost-effective way of launching your nearshoring strategies.
There are other incremental steps you can take to gradually add Mexico to your North America strategy. Even if you are a hi-tech producer with supply chains in Shenzhen, you can still take advantage of Mexico’s low costs and market access to boost your operation.
While Mexico is a clear alternative to China in many ways, it can also be considered a complement to an Asian production strategy. In this marketing environment, Mexico’s ability to manage risk and lower costs is a competitive advantage.
Strategy 2: Splitting the Supply Chain for Different Markets
The big MNCs are already doing this. The reason you haven’t been reading much about the Fortune 500’s push into Mexico is that they have been quiet and straightforward about it. There isn’t much drama in Mexican business, and all the negotiations about USMCA (or T-MEC down here) are finished. The production-oriented international industries like autos, aerospace, medical devices, and electronics are already well-represented here – and have been for a long time. Industrial occupancy levels have been driven down to 0 in some border cities.
Are giant MNCs shutting down their China operations? No. No, they really aren’t. I’ve read the headline stories about Apple and a handful of others – but all the stories are about one or two companies. The typical MNC strategy is to leave the China capacity in place to serve China and other non-sanctioning nations. Their enlarged Mexican facilities are going to serve the US, Europe, and other sanctioning markets.
Do you have the wherewithal to pull off the same level of supply chain optimization for two completely different markets? It may be more workable than you think, depending on your product and process. Even if you can’t segregate your supply chains 100%, there may still be ways to benefit from a limited or hybrid nearshoring strategy.
Strategy 3: Implementing the North American Advantage
Another potential competitive advantage that nearshoring companies can achieve is an integrated North American strategy. People talk about reshoring to the US vs. nearshoring to Mexico, but it’s not an either-or question. The US is the global leader in most types of technology and management. Brands targeting the US market can base their management, design, and tech skills in the US and set up a Mexican operation for production, quality control, and logistics.
US and Mexican operations, given their proximity, similar business cultures, and overlapping time zones, integrate together readily, unlike China where cultural, language, and time zone differences make integration a challenge.
Conclusion: Maximizing Competitive Advantage through Nearshoring in Mexico
Nearshoring strategies that move beyond China-style infrastructure and sourcing networks are going to be successful in Mexico, while those looking for the “New Shenzhen” should be prepared for trouble. Don’t expect significant changes in the Mexican government’s ambivalent approach to international business. That shouldn’t disqualify Mexico as a potential site location, but it means you need to develop nearshoring strategies that are appropriate for the Mexican business environment. The states and municipalities may love you, but the Mexican government will merely tolerate you.
Build your nearshoring strategy in Mexico based on the pieces that are already on the board, and don’t wait for new programs or incentives.