Senior Director, Logistics Practice
Mexico has become an attractive destination for companies looking to relocate their manufacturing operations closer to their markets as senior executives continue to de-risk their supply chains. This trend, known as nearshoring, offers numerous benefits, including reduced transit times, increased flexibility, and improved cost-effectiveness.
This article will discuss the opportunities and challenges that companies may face when nearshoring in Mexico and our growth expectations for 2023.
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Opportunities for nearshoring in Mexico
Mexico is the fourth largest exporter of cars in the world, making the automotive industry one of the country’s largest sectors. Assemblers are increasingly moving their operations to Mexico to take advantage of the country’s lower labor costs, proximity to the US market, and the uncertainty arising from US-China trade tensions. This trend is boosting the nearshoring strategy among manufacturers, particularly in the automotive sector.
Another sector that is experiencing growth in Mexico is food and beverage. This industry is particularly attractive to nearshoring companies due to its proximity to the US market, reducing transit times and transportation costs and offering great opportunities for private-label manufacturing. In addition, companies seeking to minimize price increases to consumers under an inflationary environment are turning to Mexico to reduce costs.
Increased demand for visibility of shipments at the part level is also driving nearshoring in Mexico as companies look to strengthen the traceability and security of their production, particularly in the automotive vertical. In addition, the evolution toward more planned production and inventory levels benefits manufacturers in Mexico as it reduces reliance on just-in-time supply chains, which can be more susceptible to disruptions.
The truth is that nearshoring is not a buzzword but a reality, with multiple companies interviewed by AMI expressing their plans to set up shop in the country in the next 24 months. This positive trend will translate into cross-border freight volumes in the US| MX corridor growing 5% in 2023, doubling the rate of global merchandise trade (1.7%) predicted by the World Trade Organization and the UN Conference on Trade (2.1%) in their most recent outlook. Based on AMI’s internal estimates, the volume of all freight moved could reach 200 mn tons for both southbound and northbound shipments in 2023.
One of the biggest challenges that companies face when nearshoring in Mexico is the all-time low warehousing space available for companies looking to store and distribute goods near the border in cities such as Ciudad Juarez, El Paso, Calexico, Tijuana, or Monterrey. Monterrey and Ciudad Juarez have particularly low availability, at 2% and 0.1%, respectively, in Q1 2023.
Another significant challenge is the high insecurity levels in some attractive locations, including Chihuahua and Monterrey. Cargo theft is on the rise, with organized crime gangs targeting products like food, fuel, construction materials, auto parts, and consumer electronics. Food and beverage products are the top categories thieves target, accounting for one-third of the cargo stolen from trucks, with approximately 40 theft incidents per day.
Shippers are implementing GPS monitoring and ensuring their freight to mitigate insecurity risks. As a result, insurance and monitor providers are expected to see double-digit revenue growth rates in Mexico. Route planning has also become a differentiator carriers offer, with the top players changing routes and schedules often to avoid predictability in their routes.
Despite the challenges, there are numerous logistics benefits to nearshoring in Mexico. Proximity is one of the most significant advantages, as a shipper can move freight from Mexico to the US by truck in 48 to 72 hours. For instance, transit times from Monterrey to Chicago using LTL services will take, on average, 3 to 4 days, employing a transloading facility in Laredo, TX.
Bonded warehouses near the border in the US for materials and replacement parts coming from Asia and then used for production in Mexico also offer significant benefits. Companies can take advantage of Foreign Trade Zones (FTZ) and avoid paying duties until the goods leave the zone, reducing costs.
Intermodal services also provide significant benefits to shippers. For example, shippers have access to intermodal asset-based providers that can supply containers to facilitate logistics planning and reduce their carbon footprint.
In conclusion, nearshoring in Mexico offers numerous opportunities and challenges for companies seeking to relocate their manufacturing operations closer to their markets. While challenges such as low warehousing space availability and high insecurity levels exist, there are numerous logistics benefits to nearshoring in Mexico, including proximity and FTZ.
We hope that insightful piece will help you discover opportunities and mitigate risk—and of course, our market intelligence services and over 30 years of experience can offer further resources to achieve those goals and others.