Over the past several years, numerous US firms have been reshoring to Mexico, undoing two decades of offshoring. US firms are coming back home for several reasons, as it becomes more economically sensible to partner with contract manufacturers and shelter companies south of the border.
Reshoring the New Norm
At one point, the clear trend was to relocate manufacturing operations in Asia to take advantage of lower labor costs. However, labor costs in Asia – particularly in China – are rising. In the past few years, Chinese labor costs have spiked. Meanwhile, transportation costs have also steadily risen, making it less feasible to transport goods across the Pacific. It is no longer a substantial cost savings to offshore overseas. Unpredictable weather and currency fluctuations only exacerbate the problem.
Many US producers have begun recalling their manufacturing operations back across the ocean. But instead of setting up shop in the US, they’re partnering with Mexican manufacturers. Some firms are setting up their own maquiladora plants south of the border, while others are developing relationships with contract manufacturers based in Mexico. Their output is generally less expensive than that of US-based manufacturing plants. These US firms are finding that there are several reasons reshoring to Mexico just makes good business sense.
Benefits of Reshoring to Mexico
The benefits of reshoring to Mexico are numerous. And fortunately, American firms don’t necessarily have to set up a Mexican location to take advantage of them. By working with contract manufacturers and shelter services in the Latin American country, US companies are able to lower costs and boost efficiency. Some of the competitive advantages nearshoring to Mexico has over offshoring include:
- Supply Chain Reduced
Contract manufacturers and shelter companies in Mexico capitalize on shorter supply lines. Their inputs and outputs flow freely across the US border, significantly reducing travel time and transportation costs.
- Import/Export Duties Minimized
Because of the North American Free Trade Agreement (NAFTA) most tariffs between the US and Mexico have been eliminated. Likewise, US firms can take advantage of Mexico’s other 40+ free-trade agreements to conduct business globally.
- Productivity Increased
Not only have Chinese labor costs increased vis a vis Mexican labor, but inexpensive Mexican labor productivity has simultaneously increased. Mexican labor costs are now on par with or equal to Chinese, while Mexican productivity is far greater.
- Time to Market Reduced
Most of what is produced by US firms is intended for US markets. So production in North America provides the ideal time to market, whereas manufacturing in China adds weeks to reach US markets. US firms producing for US markets are finding Mexico is just as suitable as manufacturing in the US with times to market typically measured in hours.
- US Jobs Increase
It is often perceived that reshoring to Mexico takes US jobs away. Yet Mexican manufacturing relies heavily on US inputs. The result is that four out of every ten dollars spent in Mexican plants are used to pay US workers supplying them with materials.
- Superior Intellectual Property Protection
An often-overlooked benefit is that Mexico has strictly codified IP. China falls far short on this front. Products manufactured in Mexico are protected by superior intellectual property laws that are strictly enforced.
- Convenience Benefits
There are various convenience benefits for reshoring to Mexico. US firms working with contract manufacturers and shelter operations south of the border can often work within the same or similar time zones. Travel to the plant is a short plane ride.
The numerous benefits of doing business in Mexico are changing the way US firms handle manufacturing. Manufacturing is coming home to North America, as US producers take advantage of greater convenience, closer proximity, and reduced costs to offer less expensive products to their consumers.