With all signs pointing to the continuing deterioration of U.S.-China trade relations, more North American manufacturers are turning to Mexico for nearshoring opportunities. What are the advantages and challenges of diversifying your supply chain to include third parties in Mexico? How can you reduce costs while mitigating compliance risk?
Supply chain disruptions caused by the COVID-19 pandemic rendered China’s offshoring dominance uncertain almost overnight. It showed companies the dangers of overreliance on suppliers in a single country, especially one so far away, and the wisdom of supply-chain diversification.
While Covid is no longer dominating the business climate, the same can’t be said about the U.S.-China trade war. The thorn in China’s side remains America’s ban of sales of Chinese communication equipment and its severe restrictions of China’s access to tools for making 5G chip, the most advanced chip used in manufacturing smartphones and laptops.
Many companies in the U.S. and North American region are adopting a strategy called nearshoring by moving all or part of its supply chain and production resources closer to home to reduce logistical costs and risks. They are bringing outsourcing back to the region with Mexico the top choice for many businesses. General Motors and Boeing are among U.S. companies investing heavily in manufacturing plants in Mexico.
Mexico Nearshoring: Advantages
North American companies can benefit from the United States-Mexico-Canada Agreement (USMCA), which significantly reduces obstacles to doing business within the three countries.
The agreement is a boon to Mexican companies, with 83.5% of its exports sold to the U.S. in 2019. That year, U.S.-Mexico trade was worth $614.5 billion, according to S&P Global Market Intelligence.
Mexico’s low labor costs and proximity to the U.S. and Canada offer distinct nearshoring advantages. Mexico’s secretary of economy reported that foreign direct investment (FDI) in Mexico reached $35.2 billion in 2022, an 11.9% increase over 2021 figures. The growth continues this year, with a 48% increase in FDI in the first quarter of 2023, according to Bloomberg Law.
In terms of labor costs, Bloomberg Law reported that factory wages are generally lower in Mexico, averaging US$2.75 an hour to US$4.82 an hour, depending on location. Factory wages in China average US$6.50 an hour.
Mexico Nearshoring: Challenges
For all of Mexico’s advantages, companies must be aware of stumbling blocks, especially the country’s reputation for corruption. It didn’t help that Mexico had to shut down its customs authority – Administración General de Aduanas – because of corruption. A new entity, Agencia Nacional de Aduanas de México, replaced the defunct agency in 2021.
Under the Transparency International’s corruption perceptions index (CPI), a score of zero means highly corrupt while 100 means clean. Mexico’s CPI score is 31 out of 100.
On one hand, Mexico is closer to the U.S. and Canada, which means more sustainable carbon footprint for companies with net-zero policy goals. On the other hand, Mexico’s logistics services are deemed lower in quality than China’s. Businesses also have to contend with other challenges in Mexico, including inadequate and irregular power supplies and clogged road and rail networks.
Mexico’s traditionally weak protection of intellectual property rights is also a major concern for companies. Mexican cartels are actively involved in counterfeiting and piracy, according to Bloomberg Law. The country is home to one of the most dangerous black markets in the world, known as Tepito or el Barrio Bravo.
Importance of Robust Due Diligence
Companies interested in finding new suppliers in Mexico must consider not only economic factors but also social capital and ESG compliance. It’s important to choose third parties not only for efficiencies and cost savings but also for their accountability, fairness, sustainability, and principled performance.
For successful nearshoring in Mexico, it’s imperative to identify and mitigate supplier risks effectively and to continuously monitor the entire value chain for compliance.
Since there’s no such thing as a one-size-fits-all due diligence, you must choose a robust due diligence solution that will give you the right amount of intelligence based on risk level. The Ethixbase360 third-party risk management (TPRM) platform is a purpose-built solution for easy configuration to your specific third-party risks and workflows.
If you’re looking into third parties in Mexico, the platform’s Tcertification solution provides a heavily benchmarked and comprehensive due diligence review, analysis, and approval process for ensuring that a third party meets internationally accepted standards. Tcertified companies are pre-vetted business partners for multinational companies seeking compliant suppliers, agents, and consultants.
For higher-risk third parties, Ethixbase360’s Enhanced Due Diligence reports provide varying levels of depth based on your business-risk exposure level. Prepared by multilingual researchers in seven operation centers across the globe, you will have a choice of three tiers of off-the-shelf risk reports. You can also choose to configure your own report to include critical factors such as anti-bribery and anti-corruption (ABAC) and Ultimate Beneficial Ownership (UBO) liabilities.
If you’re seeking to diversify your value chain, Mexico offers many advantages. But success is by no means guaranteed. Apart from costs and logistics, there are many factors you need to include (such as ABAC and UBO) in your due diligence. Bottom line: the right TPRM platform for proportionate risk-based due diligence can help you tap into Mexico’s nearshoring opportunities.
Learn more about the pros and cons of reshoring, nearshoring, and friendshoring: read this free e-book.