Ed Juline knows well the priorities of U.S. companies looking to build products in Mexico. Juline started Mexico Representation, a manufacturer’s representative company that helps clients shift production from China to Mexico.
Companies prompted by their own financial, quality or logistical concerns are now regularly sourcing suppliers within Mexico. Once a client, a barbecue grill company, wanted to move manufacturing to Mexico after decades in China because of rising labor and freight costs; another, a furniture maker, was experiencing quality and delivery problems with shipments from China. A high-end kitchen and bath products business wanted to get to market faster, without having large inventories in transit for weeks, according to Juline.
These manufacturers are part of a movement that many consider a growing “nearshoring” trend – a multi-industry shift of outsourced operations from Asia to the Americas, where U.S. companies can work with factories, data services vendors or call center operators much closer to domestic markets and headquarters.
While Asia isn’t hurting for business, many companies are turning to such countries as Mexico, Nicaragua, Panama, Costa Rica, Colombia or Brazil rather than, or in addition to, China, Indonesia, Malaysia, Vietnam or India as they seek shorter shipping times, lower transportation costs, more nimble supply chains and vendors in similar time zones. Natural disasters that disrupted supply chains from Asia in recent years also may be playing a role in company moves.
“The nearshore market is very large and growing, particularly in manufacturing, information technology and business process outsourcing services,” said Victoria Prussen Spears, co-founder and CEO of Global Outsourcing Information Inc., which produces Outsourcing Destinations guides that provide insight into nearshore locations.
“Major U.S. businesses are rethinking their overseas manufacturing positions because the offshore advantage of labor arbitrage is evaporating,” said Spears, who expects the nearshore trend to grow.
She attributes that change to several factors, including: increasing wages in India and China; the cost and time to ship goods to the United States and for U.S. executives to travel to overseas providers; a “lack of cultural affinity” between the U.S. and Canada and other more distant outsourcing destinations; as well as the time zone disparity.
Nearshoring appears to be gaining traction globally as well.
Some 87 percent of supply chain and logistics executives surveyed last year indicated their companies were considering or had started to move production closer to end markets, according to freight logistics provider BDP International and Temple University’s Fox School of Business, which queried more than 200 manufacturers around the world.
BDP spokesman Arnie Bornstein noted that emerging nations are starting to trade with each other. Growing middle classes in Asia, Latin America and the Middle East are driving demand for consumer goods, and shorter supply chains make both operational and economic sense.
“That’s why North American companies are looking to Mexico and Latin America, … European Union (EU) companies are looking to Eastern Europe and Turkey, and Asian companies want to sell more of their production to Asian consumers as more than a hedge against sluggish export markets in the West,” Bornstein said.
Casabella, the kitchen gadget company that Juline worked with, continues to source from China, but received its first shipment from Mexico in fall 2012. President Robert Moser cited rising labor, currency and compliance costs in China and Mexico’s shorter lead and delivery time.
“Landed cost of product from Mexico into our warehouse in New York became very competitive to landed costs from China,” he said. Most of Casabella’s purchasing remains China-based, as change takes time, but the company will continue to develop a vendor base in Mexico, Moser said.
Spears said Mexico is “booming” due in part to favorable trade agreements, including the North American Free Trade Agreement (NAFTA), with 44 countries.
The long-established, growing Mexican auto industry produced 2.6 million cars in 2011, exporting 2.1 million of them, and that same year, Nissan, Mazda, Volkswagen, Chrysler, Honda and General Motors announced investments to increase production capabilities in the country, she said.
“Similarly, the growth in the aerospace industry has been nothing short of phenomenal in recent years. The aerospace industry in Mexico overall attracted over $1 billion in investments in 2010, a 25 percent increase from the prior year,” she added. Major players in the city of Queretaro include Canada’s Bombardier Aerospace, General Electric and French conglomerate Safran, she noted.
“Mexico has a stable and growing economy, well-qualified and highly productive workers, wages that are in some areas lower than wages in China, and shipping times for goods to reach North American destinations that are measured in days rather than months,” said Spears.
Mike Rosales, director at Manufacturing Marvel, a one-stop toy design, engineering and manufacturing company based in California, started sourcing out of Mexico about six years ago, while working for a large U.S. toy company, although he also sources components and certain raw materials from China.
“The advantages of manufacturing in Mexico are numerous,” Rosales said. “No longer do I have to wait until late in the evening or early in the morning to talk to our plant contacts. No longer
do I have to wait a day at minimum to get a response on urgent matters.”
“Most of the factories I deal with are two to three hours away, whether by car or by plane. I can feasibly plan a day trip to see the production lines or be there to get the first run samples. Trips to visit China factories always took a minimum of three days at best, but you always planned on being gone a minimum of a week. The cost savings alone on trips to the factory are a huge savings,” Rosales said.
Trucks from Mexican factories can be across the border the same day they leave the plant or, at most, three days, while containers from China take at least 14 to 17 days for the West Coast
and 30 to 45 days for the East Coast, Rosales said.
In addition, the minimum order quantities (MOQ) that Chinese factories are requiring “have drastically increased” in recent years, he said, while Mexican factories are willing to work on smaller MOQs because they have greater flexibility due to smaller overhead. “This makes it extremely cost effective to run smaller orders more frequently if need be and this helps companies plan their cash flow better.”
Unosquare, a four-year-old software engineering firm based in Portland, Oregon, provides technology development and testing services from Guadalajara for various major U.S. customers. Its CEO and co-founder, Mike Barrett, vice chair of the Nearshore Executive Alliance, said Mexico also appeals to some U.S. firms because of intellectual property (IP) protections, since NAFTA allows legal recourse in the case of IP theft.
This isn’t to say that Mexico or other nearshore locations are always preferable. While Chinese factories may not be as flexible about producing smaller quantities, for example, they can make more sense for bulk products. Juline cited a large-volume manufacturer that explored taking production to Mexico and found prices in China were much better. “A lot of these bulk products are probably going to stay in China for a very long time,” he said.
Meanwhile, Unosquare’s Barrett expects to see another, related trend: onshoring to low-cost, rural U.S. areas. “It’s starting to happen,” he said, citing a leading-edge IT outsourcing company, Rural Sourcing Inc.
“Like everyone else, we are all on the lookout for the next major shift,” Manufacturing Marvel’s Rosales said. “I would love to be able to move all my production to the U.S. someday.”