Why nearshoring makes sense

April 9, 2013
Doug Donahue, Vice President, Entrada Group, Fresnillo, Mexico

China is, and will continue to be, a manufacturing powerhouse. But in terms of its appeal for offshore production, China’s competitiveness has been eroding for years. This was the topic of a recent podcast I conducted with Jason King, vice president of AlixPartners, a global business consultancy, who coauthored the company’s second annual Executives’ Perspectives on Near-Shoring survey.

As we discussed, wages, currency costs, and fuel and transportation expenses are all on the rise in China. Additionally, many U.S. companies are learning that manufacturing there comes packed with risks, such as intellectual property theft, low product quality, and unpredictable supply-chain disruptions. As a result, many companies are waking up to the harsh reality that manufacturing offshore in places like China is costlier than it initially appeared. And the global economics of manufacturing are moving in North America’s favor.

That’s why so many manufacturers, large and small, are considering a reshoring and nearshoring strategy. Nearshoring involves North American manufacturers setting up low-cost production lines in nearby countries like Mexico. Mexico is seen as a popular choice for many reasons, but largely because of proximity and the relative ease of doing business there. Many global companies, as well as Tier 1 and Tier 2 suppliers of all sizes, have been manufacturing in Mexico for years. There’s ample infrastructure and skilled labor resources, and Mexico has free-trade agreements with more countries — 44 to be exact — than any other nation.

According to AlixPartners’ survey, manufacturing in Mexico costs 5 to 15% less than in China, and the advantage will grow to about 20% in 2015

Lower transportation and warehousing costs in Mexico more than offset the country’s slightly higher labor costs vis a vis China. That said, within Mexico labor costs vary tremendously by region. In fact, in the central Zacatecas region where Entrada Group is located, total Mexican operating costs can be as low as $4.50 to $6.50per hour — on par with or lower than similar costs in China.

There are several other benefits in Mexico that can be as important to a company. The time required to transport goods improves by two to four weeks, compared with China. Cutting transportation time permits a large corresponding reduction in inventory. It also decreases supply-chain risk, letting companies trim inventory even further. This frees up working capital and lowers the odds of obsolescence and product damage — problems commonly associated with holding inventory.

Nearshoring also improves a company’s responsiveness. The closer proximity of a company’s research and development departments, program management, and manufacturing can provide more-efficient collaboration, possibly improve innovation, and certainly permit better communication. It lets firms more-quickly identify and react to changing customer preferences and even industry trends. Faster reaction time, while sometimes hard to measure, can be vital to the success of a business.

Other advantages: As Jason King rightly pointed out during our discussion, compared to many low-cost Asian countries, there’s better protection of intellectual property in Mexico. With proper controls, product quality from Mexico is close to, if not on par with, products from the U.S. And finally, the ease of management associated with the proximate time zones, as well as cultural similarities between the U.S. and Mexican markets, can be big advantages.

One topic that has certainly been in the news recently is the safety and security situation in Mexico. Despite sometimes-sensational headlines, most executives feel that safety and security conditions in Mexico are stable, if not improving, according to the AlixPartners study.

Growing North American competitiveness and rising costs overseas are putting Mexico in a strong position to attract manufacturers across many different industries, from automotive, aviation, and medical devices to appliances, electrical equipment, computers, and consumer electronics.

Entrada Group is a manufacturing shelter operator. It partners with international manufacturers seeking to enhance their competitiveness in the global market by helping them establish low-cost production facilities in Mexico to serve North American markets.

Edited by Kenneth J. Korane

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