Mitigating Supply Chain Risks by Nearshoring

Nearshoring, as opposed to offshoring, has emerged as an increasingly popular strategic approach for organizations seeking to relocate parts of their supply chain closer to home. Primarily driven by the need to reduce costs, increase efficiency, and improve responsiveness to market changes by being closer to primary markets, this regional approach can provide a more agile and resilient supply chain, something that has become essential in today's rapidly evolving business landscape.  

U.S. organizations nearshoring production to Mexico

China has been the single biggest offshoring destination for U.S.‐based firms. However, a significant shift has occurred, and American organizations have been prompted to reassess their supply chains.

A growing number of American businesses are nearshoring to Mexico, particularly within the manufacturing industry. This trend is largely driven by the need to mitigate supply chain disruptions and vulnerabilities that were starkly exposed during the COVID-19 pandemic, in addition to the desire to reduce the elevated transportation costs that arose during the same period.

Despite a reduction in freight costs from their peak during the pandemic, U.S. firms continue to grapple with the uncertainties of fluctuating tariffs and the strain of trade tensions with international partners, notably China, as a result of evolving regulations.

Mexico, however, offers the U.S. a stable alternative with the added benefits of shorter transportation routes and times.

Advantages of nearshoring in Mexico for U.S. businesses

Changes in policies such as the United States-Mexico-Canada Agreement (USMCA) in July 2020 that replaced NAFTA have made nearshoring an even more appealing option by establishing favorable trading conditions for North American businesses.

“Recently the Mexican federal government published an agreement to promote nearshoring investments through tax incentives, which opens a great opportunity for companies that see Mexico as a cost-effective alternative,” said Hector Esparza, Pinkerton Director for Northern Mexico. “While more policies are needed, this is a good first step. Mexico is becoming a key player in the region, with a strong emphasis on manufacturing, skilled labor, and advanced technology and facilities.”

This approach has gained traction as Mexico's growth in trade with the U.S. has led to reduced costs, and enhanced quality. For these reasons alone, organizations see nearshoring as a highly competitive, and sometimes even superior, alternative to offshoring.

Economic impact of U.S. nearshoring in Mexico

Traditionally, the U.S. is Mexico’s largest source of foreign direct investment (FDI), reflective of the deeply interconnected trade partnership between the two nations. In 2022, U.S. organizations invested $15 billion in Mexico's economy. 

Data from the Mexican government and various trade organizations indicate a steady increase in organizations choosing Mexico for establishing factories, especially in states bordering the U.S. such as Baja California and Chihuahua. Additionally, evidence can be observed in Mexico's rising FDI from U.S. nearshoring:

• Mexico’s economy could grow 3.7% per year, after only growing 2.6% annually in the last two decades.
• Exports are projected to increase from $578 billion in 2022 to $1.1 trillion in 2030, going from 39% to 49% of GDP.
• Foreign investment could grow to $87,000 billion by 2030, going from 2.5% to 3.8% of GDP.

Manufacturing outputs, especially in the automotive, aerospace, and electronics sectors, show an increase in the production of goods destined for American markets.

According to one survey conducted by the Mexican Association of Private Industrial Parks (AMPIP), 495 new businesses are expected to arrive in Mexican industrial hubs in the next two years, generating close to one million new formal jobs each year.

“States such as Nuevo León, Tamaulipas, and Baja California have been the primary locations for new plants in Mexico, especially following an announcement by a large American automotive and clean energy company that plans to invest in Mexico,” said Hector.

Yael Trejo, Pinkerton Director for Southern Region, based in Mexico City, said, “In addition to the growth observed in the country's northern region, the central and southern areas, like the states surrounding Mexico City, have also experienced a significant increase in organizations seeking consolidation. Executive transfers to cities like Mexico City have become more frequent. Unfortunately, many travelers do not consider the risks and conditions associated with relocating to these areas, often jeopardizing their physical integrity.”

Benefits vs. risks and threats: The ROI of nearshoring in Mexico

Nearshoring in Mexico offers U.S. firms a strategic advantage by balancing cost-effectiveness with operational efficiency. This proximity allows businesses to leverage cultural similarities and integrated trade agreements to optimize their supply chain and workforce management. Below are some key benefits to U.S. organizations nearshoring to Mexico:

• Cost Savings: Nearshoring to Mexico allows U.S. organizations to reduce labor costs while still maintaining high levels of productivity and quality.
• Proximity to the U.S. market: A shorter supply chain and reduced shipping times lead to an organization's ability to respond quickly to U.S. market demands, while also lowering inventory costs.
• Skilled workforce: Mexico's investment in education and training has cultivated a growing base of highly skilled workers across various industries.
• Trade agreements: The United States-Mexico-Canada Agreement (USMCA) provides favorable tariff conditions — no or low tariffs — encouraging cross-border trade and helping to reduce operational costs.
• Cultural compatibility: The shared cultural values and business practices between Mexico and the U.S. facilitate smoother communication and management, leading to more efficient business operations.
• Time zone alignment: Overlapping work hours between Mexico and the U.S. improves coordination and timely correspondence, streamlining project management and decision-making processes.

Despite the benefits, American organizations nearshoring operations to Mexico can also be exposed to various security risks. Here are some of the potential security risks and threats associated with nearshoring in Mexico:

• Security concerns: Parts of Mexico face challenges related to crime and security, which can pose risks to personnel and operations. Organizations establish stringent security processes to ensure the safety of their employees and protect their physical assets, including manufacturing facilities, equipment, and inventory.
• Intellectual property theft: American organizations often hold proprietary technologies and trade secrets that could be targeted by industrial espionage. Despite strides in improving intellectual property laws in Mexico, enforcement can be uneven, potentially increasing the risk of IP theft.
• Data Security and Cyber Threats: As organizations increasingly rely on digital infrastructure, cyberattacks become a major concern. When nearshoring IT services or any operations involving sensitive data, organizations should adhere to enterprise-wide cybersecurity standards to protect against breaches.
• Legal and Regulatory Compliance: American organizations operating in Mexico must navigate to Mexican laws, which can differ significantly from U.S. regulations and may require additional legal support and due diligence. Failing to comply with these laws can lead to legal risks and potential financial penalties.
• Supply Chain Disruptions: Although proximity can offer supply chain advantages, nearshored operations in Mexico are not immune to disruptions caused by local labor disputes, transportation issues, natural disasters, or border security measures, which can delay deliveries and increase costs.
• Political and Economic Stability: Changes in government policies could affect the stability and predictability of the business environment and pose a risk to American investments.
• Quality Control: Ensuring consistent product quality can be challenging when operations are outsourced. U.S. organizations should implement stringent quality control measures and regularly audit nearshored facilities to maintain standards.
• Reputation and Brand Risk: If a security incident occurs — such as a breach of worker rights or environmental standards — it could have negative repercussions on the organization's brand and reputation, especially if it becomes widely publicized.

“For all new companies, it is important to consider implementing a comprehensive security strategy to ensure that companies taking advantage of the economic conditions do not experience disruptions in their supply chain and can guarantee the physical integrity of their facilities and employees,” said Alfredo Guevara, Mexico Country Director. “With our clients who have a presence in Mexico, we develop strategies that include risk analysis, executive protection for their personnel, investigations into criminal incidents, and regular intelligence reports. These measures enable them to prevent the risks present in Mexico proactively.”

“We have noticed a significant increase in the number of new companies requesting Risk Assessments, particularly in border areas,” added Hector.  

The trend for nearshoring to Mexico shows no sign of abating, especially as global supply chains continue to evolve and the demands for agility and cost-effectiveness increase. The proximity to the U.S. market, coupled with the USMCA benefits, positions Mexico as an attractive nearshoring destination for American organizations seeking to optimize their operations while maintaining quality and efficiency. Many of the American organizations that have already established new operations in Mexico have reported a positive ROI from their nearshoring initiatives — especially those that have effective risk mitigation strategies in place and are building strong relationships with local communities, authorities, and business partners in Mexico.

If you plan to visit your facilities or establish operations in Mexico, download our Safety Recommendations for Operating in Mexico checklist to protect your traveling executives and key personnel!