What American Companies Should Consider Before Nearshoring To Mexico
It’s not a good time for American companies relying on goods to be shipped from overseas. Parts of China remain in and out of lockdown, causing buyers to reevaluate their sourcing. Fuel prices are out of control, which has been a contributing factor for air and sea carriers to raise their rates by 5 to 10 times. Ports are straining to move goods through in a timely manner, largely due to labor shortages. And suppliers of low-value goods are pulling from the market, unable to make money because transportation costs are so high.
One potential bright spot, however, is Mexico. It has replaced China as a source of supplies for many American companies for several reasons: same (or similar) time zone, similar work cultures as well as lower language barriers and general proximity with the nimbleness and speed that allows. These structural factors underpin this trade relationship and could ensure that the U.S.-Mexico trade route remains strong.
Not only is moving goods between the U.S. and Mexico easier, but goods can also be moved at more competitive prices. Yes, fuel prices have led to increases in transportation costs, but the increase in over-the-road transportation is currently hovering at about 30%, versus roughly 500% for some air or ocean cargo transport. And over-the-road transport is much faster than ocean (which just last year was taking up to 75 days, factoring in port delays, which are currently longer than average).
There are also fewer geopolitical risks with Mexico. The U.S. and Mexico have long-standing agreements in place (originally NAFTA, now USMCA) that govern trade and inter-country transportation, as well as long-established border crossing procedures that are well understood on both sides. In general, the U.S. and Mexico economies depend heavily on each other, fostering a much closer collaboration ecosystem.
On top of that, there are three important trends that are likely to strengthen this trade route even further:
• Standardizing and digitizing trade data: Today, most cross-border trade communications happen the old-fashioned way by phone and paper. While digitization has begun, going one step further to structure and standardize data would help make data exchange easier. Mexico’s Customs Technology Integration Project (PITA), launched in 2021, was the first step toward complete digitization. PITA leverages QR codes to clear trucks in/out of Mexico in a paperless environment.
• Regulations such as Complemento Carta Porte:Otherwise known as the Bill of Lading Supplement, this new tax regulation imposes new record-keeping requirements: Paperwork verifying origin and ownership must accompany each shipment. Its aim is to reduce contraband and smuggling, in addition to taxing cargo properly. While it may be initially onerous to shippers and carriers (enforcement has begun, but fines are waived until September 2022), it has forced market participants to clean up their record-keeping, and many are using it as an opportunity to digitize their records, which will ultimately speed up cross-border trade.
• Focus from startups and venture capitalists: A whole Latin American startup ecosystem has emerged, and it’s growing quickly. In 2021, venture capitalists poured $19.5 billion into Latin American startups, and it’s helping spur innovation in the region. These investments are leading to real change in the pivotal U.S.-Mexico trade corridor, enabling much-needed digitization that will lead to a more seamless and cohesive experience for all parties involved.
Although favorable trends abound and opportunity is undeniable, there are a few things business leaders should keep in mind when looking to move supply chains to Mexico:
• Partner or hire for local expertise. When it comes to cross-border trade, local expertise is key. Logistics comes with a number of hurdles. With new regulations or legal constraints changing often, plus any infrastructure, security or logistic mishaps, it can be hard to keep up and be on top of everything that is happening. Shipping partners or hires with local expertise can keep an eye on all these factors, while helping you keep compliant and build up your reputation. (Full disclosure: My company offers this type of partnership, as do others.)
• Leverage technology to gain logistics transparency. Technology is key to making cross-border trade as seamless and transparent as possible. Digitization allows for greater visibility and control and makes operations more efficient. With changing regulations, this is particularly important in order to create more systematic processes and ensure compliance.
• Build a strong carrier network to manage capacity shortages. In Mexico, shipping capacity is tight; it’s unlikely you’ll find one carrier that can meet all your needs. Consider vetting and working with multiple shipping partners, both large and small. This gives businesses flexibility and the upper hand on risk management around shipping placement and keeping the supply chain moving.
The residual effects of the pandemic have brought the long-ignored issue of supply chains to the forefront, as congestion and price surges cause havoc not only to the companies involved in trade but to the end consumers. Bringing manufacturers closer to users will not solve all problems, but I believe it will bring some relief. Near-shoring is attractive right now for myriad reasons. With investments flowing in and increased attention from all sides, there is also an opportunity for digitally native disruptors in this sector to help spur a new chapter for U.S.-Mexico economic integration. If that happens, it could bring massive benefits to companies and consumers on both sides of the border and beyond.
Originally published in Forbes.
