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WHAT IS NEARSHORING?Nearshoring is the practice of a company moving its business activities or manufacturing from a distant country to a nearby country, often very close to the destination market.2 Perhaps the largest example of nearshoring today is U.S. companies that have offshored manufacturing to China, but are bringing that manufacturing to a nearby country: Mexico.

HOW DID SO MANY COMPANIES END UP WITH MANUFACTURING OPERATIONS IN CHINA? In 1972, President Nixon improved relations between China and the U.S. with a visit to the country, which developed into more trade and educational and cultural exchanges.3 Then the path to manufacturing became even larger in 1978, when China underwent an economic reform and the government lifted restrictions against entrepreneurship, leading to the explosion of China’s manufacturing economy.4 China then soon became the location of choice for many U.S. manufacturers, with its huge population and relatively low wage rates.

However, in the recent years, Mexico has emerged as the new hot spot for manufacturing. Labor and energy costs are increasing over time and companies are under growing pressure to get goods to their consumers faster. Moving production to a nearby country is a growing trend and offers several advantages over offshoring.

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1 “BMW Group construye planta en México,” http://www.bmw.com.mx/es/topics/fascination-bmw/corporation/bmw_mexico_plant.html 2 “Strategic Manufacturing Sourcing Outlook: Promise and Challenges in Global Nearshoring,” (p. 1), http://www.alixpartners.com/en/

LinkClick.aspx?fileticket=tXnSgoLGgec%3D&tabid=635, (Aug. 2015).3 “U.S.-China Relations Since 1949,” http://afe.easia.columbia.edu/special/china_1950_us_china.htm4 Alex Harris, City of Seattle.

“The existence of numerous free trade agreements, including the NAFTA region, as well as treaties with the EU and MERCOSUR states, were key reasons for choosing the Mexican location. Other advantages are considered the availability of skilled workers in the region, the presence of a strong network of experienced suppliers as well as the existence of a well-developed infrastructure.” 1 BMW

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10 REASONS TO MOVE U.S. MANUFACTURING TO MEXICO

1. The wage advantage China once had is no longer the case; Mexico now has the edge. From 2005 to 2014, Chinese wages rose by 309%. China’s average monthly wages (converted into U.S. dollars) in 2005 were $187 compared with $381 per month for Mexico (China’s wages were 49% the size of Mexican wages). However, in 2014, China’s average monthly wages at $763 were 72.2% higher than those in Mexico ($443). 5

2. Mexico shares a border with the U.S. that is more than 1,860 miles.6 Freight costs between Mexico and the U.S. are much lower than shipping from China to the U.S. because of closer proximity between goods and market.7 Transportation and communications infrastructure were upgraded promoting freight flow over the border, reducing bottlenecks and improving logistics for U.S.-Mexico cross border trade.8

3. Time to market is much shorter.7 For example, transporting goods from Mexico to New York can take about 6 days while going from China to New York can take about 32 days; Mexico to Los Angeles, 4 days; China to Los Angeles, 18 days.9

4. Higher customer service levels.7 A survey conducted by IDC Manufacturing Insights revealed that 77% of high-tech logistics’ executives cited improved service levels as the top reason for considering nearshoring. A company can produce special configurations of their product to meet their customers’ needs much quicker and more efficiently than shipping them from overseas.10

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5 Wayne M. Morrison, “China’s Economic Rise: History, Trends Challenges, and Implications for the United States,” (p. 12), https://www.fas.org/sgp/crs/row/RL33534.pdf, (Oct. 2015).

6 ProMexico, http://www.slideshare.net/fullscreen/ProMexicoWeb/why-mexico-english/2, (p. 8)7 “Strategic Manufacturing Sourcing Outlook: Promise and Challenges in Global Nearshoring,” (p. 1), http://www.alixpartners.com/en/

LinkClick.aspx?fileticket=tXnSgoLGgec%3D&tabid=635, (Aug. 2015).8 “U.S- Mexico High Level Economic Dialogue Makes Progress,” (p. 1), http://www.naftamexico.net/wp-content/uploads/2015/04/april2015.

pdf, (Apr. 2015)9 ProMexico, http://www.slideshare.net/fullscreen/ProMexicoWeb/why-mexico-english/2, (p. 35)10 “High-Tech Firms Take a Closer Look at Nearshoring,” http://mhlnews.com/global-supply-chain/high-tech-firms-take-closer-look-

nearshoring, (Mar. 2014)

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FIGURE 1

Average Monthly Wages for China and Mexico: 2000-2014

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5. Withproductionclosertothefinaldeliverypoint,therearefewerchances for potential delays. Shortened supply chains are less susceptible to natural or man-made disruptions and transportation distances from Mexico to the U.S. are a fraction of those from China.11

6. Mexico has maquiladoras. Maquiladoras are production facilities that can import materials for duty-free in-bond storage, assembly and ultimately re-export in a final product. Materials, assembly components, and production equipment used in maquiladoras are allowed to enter Mexico duty-free. Products made can be exported into the U.S. at lower tariffs than those from other countries, so it would be cheaper for tax purposes to manufacture in Mexico than an overseas country.12 Mexico also has free-trade agreements with 46 countries, making it a very flexible location to import or export products.13

7. Manufacturing in Mexico can help with language communication barriers. As more Americans speak Spanish as a 2nd language than an Asian language they are able to communicate more easily throughout the supply chain.

8. More control over property and quality. U.S. companies can easily travel between the U.S. and Mexico rather than U.S. and China and thus keep a closer eye on production and maintaining quality.

9. MexicoisonthesametimezonesastheU.S.(Pacific,Mountainand Central). China can have an 8 to 11 hour time difference from the U.S. making it very difficult to communicate real time and make critical, timely business decisions.14

10. 90,000 engineers graduate annually from Mexican universities – a rate three times the number in the U.S.15 With these engineers in Mexico’s workforce, companies will not have issues finding qualified personnel to hire to implement their operations south of the border. This educated workforce possesses the expertise to manufacture high tech products, such as appliances, medical devices, automobiles, computers and aerospace products.

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11 Menlo Logistics, (Jul. 2015). 12 “What is a Maquiladora in Mexico?” http://manufacturinginmexico.org/maquiladora-in-mexico.html13 ProMexico, http://www.slideshare.net/fullscreen/ProMexicoWeb/why-mexico-english/2, (p. 34)14 City of Seattle. 15 “On the Rise as Businesses See Greater Opportunities in Keeping Manufacturing Closer to Home,” (p. 10) http://www.purolatorinternational.

com/UploadData/WhitepaperPdf/pur.03.13-ebook2014-nearshoring-082014-1340.pdf, (2014).16 “Danesa Lego construirá planta en México”, http://www.cnnexpansion.com/negocios/2008/09/03/lego-se-la-juega-en-mexico, (Sep. 2008).17 Nissan (2012).

Lego Group was seeking to expand its global production capacity and the state of Nuevo Leon gave us excellent investment conditions, in addition to its talented workforce and strategic development plans,” 16

said COO of Lego in Mexico, Pablo Salazar.

“Mexico is a key engine for Nissan’s growth in the Americas.”

“…this new manufacturing facility in Aguascalientes is an important pillar in our strategy to ensure that Nissan has the capacity it needs to increase sales volume and market share across the Americas.” 17

Carlos Ghosn, chairman and chief executive officer, Nissan Motor Co, Ltd.

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Major Companies 2008-2014

THESE MAJOR COMPANIES HAVE INVESTED IN MEXICO BETWEEN 2010 AND 2014 To learn more about Mexico’s Foreign Direct Investment, read our white paper on this topic here.

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18 ProMexico, http://www.slideshare.net/fullscreen/ProMexicoWeb/why-mexico-english/2, (p. 156)

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ANOTHER MEXICAN ADVANTAGE ON THE HORIZONOn September 29, 2015, Mexican President, Enrique Peña Nieto, introduced a federal draft law to Congress to create three Special Economic Zones (Zonas Económicas Especiales – ZEE, in Spanish) to promote development in the southeast Mexico. The three zones will have beneficial tax exemptions and will be located in Port of Lazaro Cardenas, covering neighboring municipalities of Michoacán and Guerrero; another will be located in the Interoceanic Corridor of Tehuantepec, to include Coatzacoalcos, Veracruz, and Salina Cruz, Chiapas.19 The plan for these special economic zones is to help these lower advantaged states initiate industrialization and attract foreign direct investment, creating jobs and generating export revenue.20 The companies investing in the designated areas would be eligible for tax incentives in the zones, along with trade facilities, duty-free customs benefits and streamlined regulatory processes.21

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19 “Presentan iniciativa para Zonas Económicas Especiales,” http://www.idconline.com.mx/fiscal/2015/09/29/presentan-iniciatica-para-zonas-econmicas-especiales, (Oct. 2015).

20 “Mexico to Create Economic Zones to Develop Poor Southern States,” http://www.wsj.com/articles/mexico-to-create-special-economic-zones-to-develop-poor-southern-states-1443568912

21 Anthony Harrup, “Mexico to Create Economic Zones to Develop Poor Southern States,” http://www.wsj.com/articles/mexico-to-create-special-economic-zones-to-develop-poor-southern-states-1443568912?alg=y, (Sep. 2015).

22 “Grupo Ferrero inaugura primera planta en México,” http://revistafortuna.com.mx/contenido/2013/06/18/grupo-ferrero-inaugura-primera-planta-en-mexico/, (June 2013).

Lázaro Cárdenas

Salina CruzPuerto Chiapas

Campeche

Quintana Roo

YucatánVeracruz

Oaxaca

Guerrero

Coatzacoalcos

“The decision to invest in Mexico is confidence in the country offering support infrastructure and industrial activity becoming an attractive investment in the world” 22 Giusseppe D’Angelo, executive vice president of Ferrero Anglo America and CIS.

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23 Adrienne Selko, “What to Consider When Nearshoring in Mexico,” http://www.industryweek.com/articles/what_to_consider_when_nearshoring_in_mexico_26845.aspx, (Mar. 2012).

WHAT CONSIDERATIONS SHOULD COMPANIES TAKE BEFORE NEARSHORING? The decision as to where to source manufacturing should be like any other major decision for a company, clear and without question. Many factors should be weighed before reshoring, such as these:

Product, Labor, Resources and Quality: Depending on what your company produces, whether it be textiles or cell phones, be sure that quality standards can still be met. Ensure the area you’re considering offers the necessary resources, suppliers and workforce capability. Labor laws could be different, along with requirements regarding hours worked, overtime, holidays and sick leave among others.23

Infrastructure and logistics: Inspect local and national access to roads, rail, ports, and third-party services to see if the correct infrastructure is in place to get materials to meet production demands and to ship out finished product. Research to see if there will be enough utilities to run production, such as electricity and water.

Capital costs and interest rates: It is good to research the costs and rates it would take for the land, building, construction and equipment needed to start a manufacturing plant. Areas of low-cost labor often face higher capital costs. This would be good for suppliers to look into as well. Such is the case with the automotive boom in Mexico. Many suppliers to the automotive industry also moved their operations to Mexico to be closer to the finished vehicle plants they are supporting.

Local Laws, Customs and Currency: Every country or region has its own set of unique laws. Laws around types of companies, such as limited liability companies or joint ventures, will most likely differ from the current manufacturing company. Research currency exchange rates and trends and if there are any currency exchange control regulations.

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Nearshoring is not for every company, but for some it could be a huge positive impact on their global business model. Mexico has some great attributes, it is home to a large pool of young, highly-skilled people, it is a highly valued global logistics hub and has one of the largest economies in the world. Mexico’s recent improvements to the manufacturing sector has led to the creation of several important clusters in the Automotive, Aerospace and Medical Devices Industries.24 In addition to Mexico’s growth in manufacturing, the country has also passed some laws to promote its energy sector and to decrease corruption and monopolies. The Energy Reform is opening up Mexico’s previously government controlled energy reserves to private investors; the Anti-Corruption reform is designed to strengthen the existing anticorruption legislation in Mexico and to further empower the federal government to investigate, prosecute, and sanction corrupt activity in Mexico;25 while the Telecom Reform to end monopolies in the telecommunications sector.26 Mexico also ranked 38 out of 189 countries on the ‘Ease of Doing Business’ list conducted by the World Bank Group.27 While there have been many investing in Mexico success stories, the decision to nearshore should not be taken lightly, each company needs to conduct its own research to see if it is a successful avenue to pursue.

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24 “Industry Clusters in Mexico,” https://www.tecma.com/industry-clusters-in-mexico/, (Apr. 2014).25 “President Peña Nieto Signs Anticorruption Reform Law in Mexico,” https://www.morganlewis.com/pubs/president-pena-nieto-signs-

anticorruption-reform-law-in-mexico, (Jun. 2015).26 “Telecommunications Reform in Mexico: What is it?,” http://www.theyucatantimes.com/2014/09/telecommunications-reform-in-mexico-

what-is-it/ (Sep. 2014).27 “Doing Business, Measuring Business Regulations,” http://www.doingbusiness.org/data/exploreeconomies/mexico, (2015).28 “Promueven nuevos sectores de inversión,” http://www.informador.com.mx/economia/2011/347874/6/promueven-nuevos-sectores-de-

inversion.htm, (Dec. 2011).

“The geographical location of the country and the launch of the Free Trade Agreement (NAFTA) America is an excellent platform to sell from Mexico to the world’s largest market, and estimates for 2015 indicate that the size market in the region will reach at least 21 thousand 420 million dollars, which represent 25% of gross domestic product (GDP) overall.” 28

CarlosGuzmánBofill, CEO of ProMéxico.

For more information, please contact Kansas City Southern’s Market Research Team: marketresearch@kcsouthern.com

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