Mexico’s nearshoring resurgence – what you need to know
With its proximity to the USA, robust manufacturing capabilities, skilled workforce, cost-efficiency, supply chain resilience and comprehensive trade agreements, Mexico is leading the charge in new nearshoring (the practice of establishing or moving outsourced business operations close to domestic markets) investments. However, there are some complexities for companies to navigate when moving outsourced operations to the country.
For a variety of economic and geopolitical reasons, the seemingly unstoppable trend towards outsourcing manufacturing and other business activities to Asia – especially China – has slowed considerably over recent years. At the same time, the growth in trade between Mexico and the USA has reduced costs, improved quality and made the practice of nearshoring in Mexico a highly attractive, often superior, option for many companies – including many based in Asia.
According to a July 2022 study from the Inter-American Development Bank (IDB), nearshoring could add an annual US$78bn in additional exports of goods and services in Latin America and the Caribbean in the near and medium term. Mexico would be by far the biggest beneficiary, with a predicted additional US$35.3bn in annual exports of goods alone.
There are five key factors that put Mexico in pole position when it comes to attracting new nearshoring investment:
Mexico's geographic proximity to the USA, one of the world's largest consumer markets, is an obvious attraction for nearshoring companies. Shorter supply chains result in reduced transportation costs, quicker turnaround times, and improved operational efficiency. As a member of the United States-Mexico-Canada Agreement (USMCA), Mexico provides businesses with tariff-free access to the US and Canadian markets, enhancing competitiveness and enabling cost savings.
Mexico boasts a large and skilled labour force, particularly in manufacturing and engineering. The country has a strong tradition of technical education, with universities and vocational schools producing graduates well-suited to high-value manufacturing, especially in the automotive, aerospace, electronics and medical devices sectors. The availability of a bilingual workforce is another advantage, facilitating seamless communication and collaboration with counterparts north of the border.
Nearshoring to Mexico offers cost advantages over Asian outsourcing destinations. While wages may be higher in Mexico than in some Asian countries, they remain significantly lower than those in the USA. Combined with lower transportation costs, nearshoring to Mexico can result in substantial savings. Mexico also offers affordable real estate and utilities (although there are some doubts about how the country will meet the growing demand for new facilities and energy in the short term).
The Covid-19 pandemic and the outbreak of war in Ukraine have exposed vulnerabilities in global supply chains, prompting businesses to reassess their sourcing strategies. For companies with significant North American markets, Mexico provides a resilient alternative to more distant sourcing locations – reducing risks associated with disruptions in transportation, trade barriers, or geopolitical instability. Nearshoring to Mexico allows companies to establish more agile and responsive supply chains, enabling faster delivery of products, lower inventory costs, and improved customer satisfaction.
Mexico has established capabilities in several high-value sectors – including automotive, electronics, aerospace, and medical devices – that make it an attractive nearshoring destination for companies in these industries. In addition, information technology and business process outsourcing (BPO) are growing rapidly in the country, driven by a highly educated workforce, and the increasing demands for software development, customer support, and back-office services. Mexico's creative industry, including film production, animation, and digital media, also represent exciting opportunities for nearshoring, leveraging the country's cultural diversity and artistic talent.
For all its advantages as a nearshoring destination, Mexico presents some significant challenges in terms of the complexity of its business environment. The country ranks fourth in TMF Group’s 2023 Global Business Complexity Index, making it one of the world’s most complex jurisdictions to do business in.
The main reason for Mexico’s high complexity ranking is its high level of mandated processes. There are still a lot of face-to-face requirements in place, for example, which present challenges for international businesses with senior directors who live outside the country. Knowing which officials to talk to and when, can be unclear.
There are also a lot of seemingly “unwritten” rules of doing business in Mexico, with legislation that is sometimes either unclear or open to interpretation. A recent example is the update to Mexico’s Ultimate Beneficial Owner (UBO) rules introduced in 2022. When the new law was passed, there was a lack of clarity around what documentation was needed for businesses to incorporate. However, notaries who approve businesses without the correct documentation are subject to hefty fines and sanctions. This means they often take a risk-averse approach to signing off required documents, making incorporation a challenge for many companies.
As businesses seek to optimise their global operations through nearshoring, Mexico offers excellent opportunities across various sectors, positioning itself as a strategic partner for companies looking to enhance competitiveness and profitability. However, its highly complex business environment means companies need to take extra care when establishing and operating in the country.
Part two of this article series examines how companies looking to nearshore their outsourced operations to Mexico can benefit from third-party compliance expertise.
How can TMF Group help?
To learn more about how TMF Group can provide tailored compliance services for overseas companies setting up and operating in Mexico, please contact us today.