When ‘Nearshoring’ To Mexico Will Have To Be Enough

When American manufacturing CEOs talk about reshoring operations, often they don’t exactly mean bringing jobs back to the good ol’ U.S. of A. — per se. They’re actually considering “nearshoring” operations to Mexico, an increasingly popular destination for factory jobs that are being relocated to North America from further-flung locations in Asia and elsewhere.

Mexico makes a strong case. For one thing, there’s the long history of the North American Free Trade Agreement, which has been succeeded by a strong U.S.-Mexico-Canada pact.

“You’re talking about being able to load goods in Mexico and head them straight for Kansas City, Chicago and elsewhere by rail, and they’re getting through in a day or a day and a half versus four weeks on the water and then sitting at [ports of] Long Beach or Savannah,” said Foster Finley, a managing director of AlixPartners consultants.

Mexican labor rates now are competitive with China’s. “If it requires manual assembly, like screwing a chassis together and doing testing, Mexico becomes a very viable location,” said Misha Govshteyn, CEO of MacroFab, operator of a digital platform for electronics manufacturing in North America.

In part because of decades of ongoing integration with the U.S. economy, the technical capabilities in Mexican manufacturing, even including cutting-edge automation, are strong. “Mexico turns out a tremendous number of engineers,” said Ambrose Conroy, CEO of Seraph management consulting. “There’s a lot of good capability down there to deliver manufacturing engineering and make products.”

Here are some pointers for manufacturing chiefs who are considering nearshoring to Mexico:

• Take baby steps. If a U.S. company lines up a prospective manufacturer in Mexico, Raine Mahdi, founder of factory matchmaker Zipfox, advised “starting with a small test order. Request samples. Do an inspection. It’s a lot easier to fix a problem at the factory than at the warehouse.”

• Hire an experienced hand. Navigating south of the border requires “an experienced Mexican national or a resident gringo expat who really knows how to maneuver within the culture and politics and norms,” said Greg Owens, CEO of Sherrill Manufacturing, a tableware maker in Sherrill, New York, and a former top executive of a multinational in Mexico. “Most American companies send someone down there for two years, but it takes that long just to figure things out.”

• Ensure quality. “It’s really a matter of communications and double-checking things to make sure they’re right,” Madhi said. “As long as you adhere to specs, your communications are clear and you take steps to do inspections before the goods leave their factory,” quality can be ensured.

• Expect wrinkles. There’s upward pressure on wage rates in Mexico now, just as there is everywhere else, as workers struggle with inflation. And labor “isn’t readily available in some places,” Conroy said. “Some clients are busing people in at least an hour to get them to work.”

Owens said American companies also must watch out for drug-cartel violence and keep an eye on Mexican President Andres Manuel Lopez Obrador, “who isn’t a friend of business. So trying to run a company down there can be Robin Hood economics: Anyone with money, they’re going to go after them.”

Spy the competition. Many Chinese companies also are setting up operations in Mexico to supply the U.S. market and to qualify under the USMCA. “Some U.S. companies already have worked with these folks with longer supply chains and over the years became comfortable with them in terms of quality, training and communications,” said Patrick Van den Bossche, global advanced analytics practice leader at Kearney consultants. “Now [the Chinese] are setting up shop in their own backyard.”