NEARSHORING IN MEXICO: BENEFITS AND RISKS

Horacio ROCHA Partner

www.tgs-rocha.com

After a considerable period when companies set up operations in remote countries to reduce their manufacturing costs or operative expenses (offshoring), they are now considering a different approach, known as nearshoring.

Using lowcost labor in China, Pakistan, or India, or setting up operations for a tax or commercial benefit in another country, are examples of the offshoring trend that has been popular since the 1990’s.

After the covid pandemic affected manufacturing supply chains around the world, companies started to consider different strategies to depend less on sourcing from remote countries. The concept of nearshoring still considers outsourcing the workforce or raw material, but in closer countries that share similar time zones. The logic is that, even if they do not have the smallest cost available on the planet, companies will have more control in the sourcing of raw materials and workforce while reducing the risk of a major disruption, due to a geopolitical or health crisis, or any other reason.

Nearshoring in Mexico

The outsourcing of goods and labor can be done with independent entities or by setting up a company, considered a related party. In both cases, Mexico has become a natural nearshoring target for companies operating in the USA or with big economic ties to that country.

The USA is one of the most important markets in the world, with strong commercial ties to Mexico. Having such a neighbor, Mexico seems attractive for companies to set up and service that market in the north. Mexico is also connected to Central America and linked culturally to South America, having access to important markets of goods and services in countries such as Brazil, Colombia, and Argentina.

As a nearshoring option, Mexico presents additional benefits: it has good manufacturing experience with an important labor force; it has abundant natural resources, access to two oceans; its highway infrastructure is considerable, the weather allows work to remain undisturbed throughout the year and it has one of the biggest numbers of approved commercial and tax treaties in the world.

Risk

However, there are some factors that need to be addressed and that companies must consider when making such an important decision.

Legal Certainty

The political atmosphere in Mexico is currently like others created by leftist governments around the world. Strategic plans are short term (6 years) and short sighted. Government funds are directed towards populist projects, disregarding productive ones such as the improvement of Mexico’s ports or its railway infrastructure. Laws are amended every year addressing consequences instead of fixing bad policies from the root. The Mexican government has not shown welcoming measures for foreign investment. These issues, among others, deter companies from making important investments.

Insecurity

Mexico has struggled to reduce the insecurity throughout the country, mainly against drug cartels, which have entered other illicit activities such as robbery of goods transported in highways, blackmailing, or kidnapping. This is based on high levels of impunity and corruption. These problems represent harsh risks for business operations in Mexico.

Slow processes

Incorporating a company in Mexico can be a painstaking and lengthy process. While the tax authority has improved its processes, it still requires excessive information and may delay the tax registry for insignificant reasons. Then come the Mexican banks, distrustful of new clients and able to keep them waiting: there are less than 35 first-tier banks operating in Mexico, facing very little competition.

All the above should be considered by foreign entities that are planning to operate in Mexico. The benefits surely outweigh the obstacles, but knowing these in advance will help them avoid surprises and will result in a smoother ride.