Recently, nearshoring and reshoring have entered the common vernacular of supply chain professionals all across the United States. These practices have gained tremendous popularity in the last few years, and for good reasons. 

Bringing manufacturing closer to home is a more attractive alternative to the offshoring business operation model. Although offshoring provides numerous benefits — including access to a more diverse range of skills, proximity to raw materials and low labor costs — numerous supply chain crises have combined to put both suppliers and retailers at a disadvantage today.

Offshoring thrives on outsourcing supplies to technologically advanced areas such as China and the United States. However, the COVID-19-related surge in demand and restrictions caused massive delays, and most manufacturers and retailers were affected.

In the search for greener pastures, most businesses are considering nearshoring to optimize operations and supply chains. Nearshoring ensures faster speed to market and quicker transit from manufacturers to customers. On top of that, suppliers and retailers also enjoy the ease of operating in a more convenient time zone. 

“Everybody that had extended, long supply chains got clobbered during the pandemic, and one of the solutions is moving your location closer to your market,” my colleague and former Redwood Mexico president, Troy Ryley, told me recently. “The advantage of shorter lead times increases cash-to-cash cycles and provides an edge that many shipping customers cannot match.”

Nearshoring vs. Reshoring

While both nearshoring and reshoring are often used interchangeably today, they are not the same. 

Nearshoring is the practice of partnering with suppliers, manufacturers and other necessary entities within a supply chain that is located in countries near the company in question. For instance, a U.S. company might practice nearshoring by working with a supplier in Mexico instead of one in China.

Reshoring, on the other hand, is the act of bringing manufacturing and production services back to the country or region in which the company operates. For example, a company centered in North Carolina might practice reshoring by working with manufacturers in Georgia.

As global supply chains continue to face several cross-border trade challenges — particularly when importing items from Asia — many companies are adopting nearshoring, investing millions of dollars to situate plants near their target markets. For instance, many manufacturers with a main customer base residing in the United States and Canada are now establishing factories in Mexico.

Nearshoring Investments are Growing

In 2021, hundreds of foreign companies announced they were expanding or building export factories in Mexico. Notable companies include Unilever, Dana Inc., NYX LLC, Continental AG, Davico MFG, Kuka Home, Perennials and Sutherland LLC and Denso Corp.

Mattel announced https://www.reuters.com/business/retail-consumer/toymaker-mattel-expands-mexican-plant-nearshoring-push-2022-04-01/in mid-March it will spend $50 million to expand the company’s largest plant in Mexico, overtaking other hubs in China, Vietnam, and Malaysia. Additionally, U.S. companies plan to invest $40 billion in Mexico between now and 2024. 

There are many reasons for this tidal wave of relocation to Mexico. First, shippers escape the 25% tariffs levied on everything imported from China. Even Chinese companies are moving to Mexico, using this strategy as a type of back door into the United States and away from direct tariffs.

Shipping also is a lot easier when you take ocean logistics out of the picture. Costs are drastically reduced, too. The average freight costs in the last year for moving a 40-foot full container load from Shanghai to the interior of the United States often exceeded $10,000; moving a 53-foot trailer from central Mexico to the same location costs less than half of that.

In addition, by partnering with Mexican suppliers, retailers can expect to receive supplies faster. Lead times for products being shipped from Asia are typically estimated in weeks — or sometimes months. In contrast, the product can be shipped from a Mexican maquiladora to customers in the United States or Canada within several days.

Mexico Has Competitive Advantages

Mexico is one of the most attractive countries for the relocation of companies due to various competitive advantages, including its geographical location, its various free-trade agreements and its human capital. Additional benefits not widely considered or reported on include:

• Stronger protection of intellectual property rights in Mexico vs. China
• More stable free trade agreements with the USMCA
• Less-volatile currency fluctuation for foreign direct investment (the Peso has outpaced the Yuan in value and stability over the last two years)
• More efficient communication (time-zone aligned; more than 24 million people study English in Mexico)
• “Friend-shoring,” meaning greater cultural similarities; Mexico also is not a threat to militarily invade the U.S.
• Ease of travel for on-site access
• More concern on the part of Mexico over social responsibility and sustainability with carbon emission controls

Nearshoring Isn’t for Everyone

Although Mexico is a big winner in the pandemic-led nearshoring boom, nearshoring isn’t a perfect fit for everyone.  It is not a panacea. In fact, companies must consider many hurdles before pursuing a nearshoring (or reshoring) strategy. To initiate nearshoring, it’s critical to consider several aspects of your business. 

First, decide if a nearshoring or reshoring strategy is the right move for you. In all honesty, if your supply chain is functioning well with global partners, it might not make sense for you to bring your manufacturing “back home” (at least not right now). Instead, you could slowly begin to investigate some potential suppliers located closer to home, without fully cutting ties with your existing partnerships.

If you are certain that nearshoring is the right strategy for your company, however, start as soon as possible. You should be prepared to frontload a few years of hard work to get your operations up and running.

Most important, you’ll want to first develop a shortlist of nearshoring companies with which you might wish to work. Then you should consider visiting these sites in person, if that is a possibility. Doing so may help to bring you further assurance that they can deliver on what they promise.

Popular manufacturing hubs in Mexico include high-tech clusters near Guadalajara, automotive in Toluca, aerospace and white-line appliance near Queretaro. And most major industries are represented near or around Monterrey.

From there, be sure that you can legally work with your nearshoring partner. You don’t want to find out five months down the line that there are import or other restrictions that will cripple your operation. Some companies have turned to a shelter company to streamline the process and cut through some red tape. 

Other potential pitfalls to keep in mind include:

• Mexican regulations: NOMs, IMMEX, Outsourcing/Federal Labor Law, CCP & CFDI, B/C initiatives
• Investment costs: labor, logistics, service, taxes, infrastructure
• Cross-cultural adaptation and lack of empowerment
• “Us vs. them”: trust issues
• Political turmoil and insecurity

Many other considerations, of course, will be specific to your industry. 

Jordan Dewart is president of Redwood Mexico.