By Francisco Méndez, SPHRi, Manager, Client Solutions, GoGlobal
In the rapidly evolving international business landscape, the concept of nearshoring continues to gain traction as a strategic imperative for companies seeking to optimize their operations and navigate complex, evolving supply chain dynamics.
Nearshoring involves relocating processes, services or functions to countries closer in proximity, offering a plethora of benefits including cost savings, reduced logistical complexities and enhanced market responsiveness. In recent years, Mexico in particular has emerged as a premier destination for U.S. and Canadian companies embracing nearshoring solutions, presenting a compelling case for businesses looking to expand their operations while maintaining proximity to the North American market.
In this blog post, we look at the rising significance of Mexico as a nearshoring hub amid a shifting geopolitical landscape. We also uncover 10 advantages nearshoring to Mexico can bring to your organization. At the end, we introduce Employer of Record (EOR) hiring as a pivotal solution for success in nearshoring.
The great shift to nearshoring
The rise of nearshoring is unfolding against a backdrop of shifting geopolitical dynamics and global economic challenges. It is a response to a sequence of events that have reshaped the landscape of international trade.
It began with the ongoing U.S.-China Trade War, which has ignited tensions and prompted companies to reassess their reliance on distant manufacturing hubs. As trade relations strained and tariffs escalated, businesses confronted mounting uncertainties in their supply chains.
The onset of the COVID-19 pandemic then amplified these challenges, sending shockwaves through global supply chains. Lockdowns, travel restrictions and disruptions in production and transportation underscored the vulnerabilities of lengthy and complex supply chains.
Amid this upheaval, geopolitical tensions continue to simmer. The Russia-Ukraine War has added another layer of complexity, further unsettling global trade dynamics. Businesses faced heightened risks and uncertainties, compelling them to seek alternatives to mitigate geopolitical risks and ensure continuity of operations.
The current Red Sea Crisis, with its implications for maritime trade routes and global shipping, has only exacerbated existing challenges.
In the context of supply chain disruptions and shipping container shortages, the escalation of shipping costs has exacerbated the challenges faced by businesses reliant on global trade. This has prompted a widespread reevaluation of sourcing and shipping strategies.
In this environment of uncertainty and volatility, nearshoring has emerged as a strategic imperative for businesses seeking to enhance resilience and agility in their operations. This approach not only enables companies to mitigate risks linked to geopolitical instability but also reduces transportation costs and enhances responsiveness to evolving market dynamics. Additionally, nearshoring facilitates improved customer service and faster response times, extending its advantages beyond logistics to optimize overall operations.
Mexico: a prime destination for nearshoring
Among the countries benefiting from the nearshoring trend, Mexico stands out as a compelling choice for U.S. and Canadian companies. Several key factors contribute to Mexico’s attractiveness for nearshoring:
Geographic Proximity and Timezone Syncing
Mexico’s proximity to the U.S. and Canada allows for easier collaboration, reduced transportation costs and alignment of business hours, facilitating smoother operations.
Reduced Transportation Costs
Nearshoring to Mexico allows companies from the U.S. and Canada to significantly reduce transportation expenses due to the country’s proximity. With shorter distances to travel, companies can save on fuel costs, shipping fees and other logistical expenses associated with long-distance transportation.
Improved Response Times and Customer Service
Proximity to Mexico enables companies to achieve faster response times to customer demands, market changes and supply chain disruptions. Shorter lead times for transportation and logistics facilitate quicker turnaround times for production, distribution and delivery. This agility in responsiveness allows companies to stay competitive in dynamic markets and better meet the needs of their customers
Risk Diversification
Diversifying sourcing and production locations is essential for mitigating risks associated with geopolitical instability, supply chain disruptions and other external factors. By nearshoring some operations to Mexico, companies can reduce their reliance on a single geographic region, thus spreading their risk across multiple locations. This diversification strategy ensures business continuity and resilience in the face of unforeseen challenges, such as what has been observed in Asia, the Middle East and in Ukraine.
Skilled Talent
Mexico offers a continuous stream of talent across various industries, including engineering, manufacturing, IT and customer service. With a strong emphasis on education and training, Mexico produces skilled professionals who are well-equipped to meet the needs of businesses.
Cost-Effective Labor
Labor costs in Mexico are generally lower compared to those in the U.S. and Canada. This cost advantage allows companies to achieve significant savings without compromising on the quality of work. By leveraging Mexico’s cost-effective labor market, businesses can enhance their competitiveness and improve their bottom line.
Government Backing and Incentives
The Mexican government has implemented incentives to attract foreign investment, including tax incentives for companies engaged in nearshoring activities. These incentives aim to promote economic growth, innovation and competitiveness.
Cultural Compatibility
Mexico shares cultural similarities with the U.S. and Canada, making it easier for companies to establish rapport and collaboration with local teams. Shared cultural values, communication styles and business practices facilitate smoother interactions and foster a cohesive working environment.
Modern Infrastructure
Mexico boasts modern infrastructure and connectivity, including robust transportation networks, secure data centers, and reliable telecommunications, supporting seamless business operations.
Intellectual Property Protection
Mexico provides a strong legal framework and regulations to protect intellectual property (IP) rights, offering assurance to companies concerned about safeguarding their innovations and proprietary information.
Outlook for nearshoring in Mexico
Indications of Mexico’s burgeoning status as a nearshoring powerhouse are already apparent and projected to resonate further across the global marketplace.
For example, surveys conducted by Banxico, Mexico’s Central Bank, indicate a growing interest in nearshoring activities, with projections for significant economic impact throughout 2024 and beyond. A recent report from Deloitte shed light on how geopolitical global events are strengthening Mexico’s role as an “international logistics hub.”
On October 11th, 2023, the Mexican Official Federal Gazette published a decree granting tax incentives to companies in key sectors of the exporting industry that establish operations in Mexico. These incentives aim to promote competition, investment and economic growth while strengthening Mexico’s international standing and technological innovation.
Talent acquisition is key
With the numerous advantages offered by nearshoring to Mexico becoming increasingly evident, more U.S. and Canadian companies are likely to consider the country for operations and hiring. Access to top local talent is essential for realizing the full potential of nearshoring initiatives.
It’s necessary to recognize that navigating Mexico’s unique business environment and regulatory compliance landscape can pose challenges, particularly for those unfamiliar with the complexities and employment risks involved.
In light of this, partnering with an effective cross-border HR services provider is critical. Such partnerships can provide companies with solutions that help them overcome regulatory hurdles, ensure compliance and effectively manage end-to-end HR functions – from recruitment to hiring, onboarding, administering benefits, processing payroll all the way to terminating an employment agreement.
One such example of an HR solution is the use of Employer of Record (EOR) services, which allow companies to circumvent the requirements for setting up a legal entity in Mexico.
EOR services streamline HR processing and provide comprehensive support for hiring and managing local talent, enabling businesses to focus on their core operations while accessing the benefits of nearshoring in Mexico.
By tapping into the knowledge and proficiency of a seasoned HR partner, organizations can confidently maneuver through the intricacies of cross-border operations and capitalize on new business opportunities in Mexico.
Check out our ‘What is an EOR?‘ guide or contact us to talk with an international HR expert about how cross-border HR solutions can bolster your supply chain strategy.