Nearshoring: A new market of opportunities
By Prof Sergio Guerrero Rosas, Guerrero y Santana, S.C.
The Covid-19 pandemic, the invasion of Ukraine in 2022, and other new global tensions have brought to the fore the fragility of value chains in our hyper- globalised economy. The total closure of trade routes in Asia was the trigger that drove the new de-globalising era we are currently experiencing, and from which nearshoring has emerged.
But what is nearshoring? Nearshoring is the mechanism by which a company partially transfers one or some of its business or technology processes to one or more third parties located in countries close to the country where the company is based. The purpose of nearshoring is to reduce costs for the contracting company and to make its production processes more efficient. Geographical proximity, a similar or identical time zone, and cultural and language similarities between those involved are the benefits of this practice.
Mexico is in a particularly advantageous geographical position to benefit from this new movement. Not only because we are neighbours of the world's largest economy, but also because we currently have very favourable trade agreements with the United States, the European Union, and the most prosperous economies in Asia. This accumulation of factors, including primarily Mexico's relationship with the US, positions Mexico to greatly benefit from nearshoring agreements.
Historically, the US and Mexican economies have been highly interconnected, mainly due to sharing one of the largest international land borders in the world. The United States represents two trading situations for Mexico: the US is the country to which Mexico sends the most exports, and it is the country from which the most imports are made. For the United States, Mexico is second place in exports and imports, only behind Canada in these categories. Additionally, our economies are complementary, as the American economy is one of abundant capital with a labour force that is beginning to decline, while the Mexican economy lacks the same amount of capital but has a robust labour force and is experiencing a demographic boom.
New opportunities for doing business in Mexico – specifically, nearshoring – require the restructuring of the supply chain built in the past, and the development of a more logical, practical, and economical chain.
For the US entrepreneur and, in general, for the foreign entrepreneur, the situation in Mexico is a very attractive proposition. Low labour costs are the greatest attraction for the foreign entrepreneur. Labour in Mexico is significantly cheaper when compared to wages received in the US, Canada, or any of the EU nations. Wages in Mexico are on par with wages received in China and India, nations known to be the destination of investments in cheap labour.
Additionally, Mexico’s national supply chains are usually efficient and reliable, as well as fast and secure, since Mexico's geographic position allows for trade movement through both the Pacific and Atlantic Oceans. The manufacturing industry, executive assistants, marketing coordinators, social media managers, graphic designers, technical support, customer service, and the automotive industry are just some of the lines of work that could benefit from the implementation of nearshoring.
One issue to consider is the cost of material. Small vendors have little leverage to negotiate prices, deliveries, and attention from raw material suppliers. Economies of scale affect the final price on products where raw materials represent a very significant portion of the total costs of manufacturing; this leads to a non-competitive position.
Another less considered factor is the government. Regulations, laws, and conditions that facilitate the process during the supplier’s development and during the commercial relationship are extremely important.
To guarantee the best possible impact, it isessential that the Mexican government take the necessary actions to attract investment to our country. Among other items, a critical priority is Investing in infrastructure: improving roads, ports, and airports to facilitate the transport and distribution of goods.
Finally, it only remains to say that nearshoring is a commercial practice in its first stages that will redefine the way in which businesses and multinationals operate in a hyper-globalised world that seeks to take a path in a more regionalised direction, and from which Mexico is in a privileged position to benefit.
Prof Sergio Guerrero RosasGGI member firm
Guerrero y Santana, S.C. Advisory, Auditing & Accounting, Corporate Finance, Law Firm Services, Tax
Tijuana, Baja California, Mexico
T: +52 333 120 05 38
Guerrero y Santana, S.C. provides its clients with a wide range of tax, legal, and consulting services. The firm has been helping clients – from individuals and small local businesses to major corporations and multinationals – to achieve their smallest aims and grandest ambitions. They are committed to providing specialised, personalised services to all those seeking reliable and up-to-date tax, legal, and business support.
Prof Sergio Guerrero Rosas, Managing Director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, as well as individuals, on tax and estate planning. He is also Global Vice Chairperson of the Trust and Estate Planning Practice Group and Latin American Chairperson of the GGI International Taxation Practice Group (ITPG).
Published: Global Mobility Solutions Newsletter, No. 03, Spring 2023 l Photo: Alex Wolf - stock.adobe.com