To enhance sourcing options for customers, I have devoted time exploring and reflecting on four significant global manufacturing regions (India, Mexico, the United States, and China) and their roles in a comprehensive supply chain diversification strategy.
Supply chain management remains an increasingly daunting task, particularly given the pressure to achieve more with less amidst growing global tensions. The current market is often referred to as “COVID junior” due to the ongoing supply chain disruptions and economic challenges that are faced daily.
Tensions between the United States, European Union, and China have created additional stress on decision-makers, coupled with shipping crises and critical elections in major countries. As a result, I am seeing more supply chain and manufacturing leaders concerned about the long-term impact of these tensions on their business strategies.
In this series examining global options for supply chain diversification, we are focusing on China, India, the United States, and Mexico. In our second installment, we will be analyzing the trends and opportunities that make Mexico an attractive choice for U.S. businesses seeking more North American production options.
The Significance of Mexico in Regionalization Strategies
As supply chain leaders look to regional diversification as a viable strategy to mitigate risk, many are turning to nearshoring. For many, this means Mexico.
According to the 2024 State of Manufacturing Report, there is an increase in nearshoring as a key supply chain strategy. In fact, when asked about regionalization plans, Mexico and Latin America were preferred geographies over Northeast Asia, Eastern Europe, and Southeast Asia.
This trend is not surprising given that Mexico is the 15th largest economy in the world. With foreign direct investment projected to reach $30 billion this year and a GDP growth rate of 2%, Mexico plays a central role in the global value chain. Additionally, its strong economic framework and solid manufacturing base indicate promising long-term economic growth.
Large multinational corporations have already taken notice, including Tesla, Nissan, Honeywell, and AT&T. In my opinion, the shift to nearshoring offers greater resilience for companies that require fast, on-demand, or just-in-time manufacturing services without compromising quality.
The History of Mexico as a Nearshore Solution
The history of nearshoring in Mexico dates back to the 1960s with the introduction of the maquiladora program. This program allowed foreign companies to set up factories in Mexico, importing raw materials without duties and exporting finished products back to their home countries. Initially, these factories focused on labor-intensive industries like textiles and electronics along the U.S.-Mexico border but have since expanded.
The North American Free Trade Agreement (NAFTA) was a significant turning point in 1994. This trilateral agreement between the United States, Canada, and Mexico revolutionized free trade zones by paving the way for production and logistics chains developed with the United States, enabling shorter production and shipping processes than from other regions of the world.
NAFTA eliminated most tariffs between the U.S., Canada, and Mexico, making Mexico an attractive destination for manufacturing due to its lower labor costs and proximity to the U.S. This period saw a surge in investment in Mexican manufacturing across various industries, including automotive, electronics, and aerospace. Companies such as General Motors, Ford, and Boeing established extensive operations in Mexico.
The United States-Mexico-Canada Agreement (USMCA) replaced NAFTA in 2020 and brought new rules aimed at modernizing trade relationships. This agreement has spurred over $68 billion in new economic activity and supported job creation, with total trade between the U.S., Mexico, and Canada reaching a record $1.78 trillion in 2022.
The USMCA also includes strong labor and environmental provisions, such as the rapid response mechanism (RRM) to address labor violations promptly and mandates higher labor standards, particularly in the automotive sector. The agreement prohibits customs duties on digital products and services, ensures cross-border data transfer, and provides strong IP enforcement mechanisms.
In conclusion, Mexico’s history as a nearshore solution has been shaped by its strategic location, trade agreements, and investment opportunities. From the maquiladora program to NAFTA and USMCA, Mexico has become an attractive destination for manufacturing due to its lower labor costs, proximity to major markets, and favorable business environment. Today, Mexico continues to be an important player in global supply chains, with a strong focus on digital trade, intellectual property protection, and sustainability.
Key Industries in Mexico
Mexico has established itself as a significant player in various key industries, including automotive, aviation, aerospace, medical devices, and custom mechanical parts.
The Automotive Industry:
Mexico is home to numerous car factories operated by major companies such as General Motors and Ford. According to the USMCA auto report, Mexico will become the fifth- largest global vehicle producer by 2025. The country’s strategic location and favorable trade agreements make it an attractive destination for automotive production.
Aviation and Aerospace:
Mexico’s aerospace industry is the seventh-largest export market for the U.S., with a strong focus on economic development goals and commercial sector priorities. This growth has been fueled by Mexico’s proximity to major markets, skilled workforce, and favorable business environment.
Custom Mechanical Parts:
Mexico’s manufacturing capabilities, skilled labor force, and strategic location have made it an important player in the production of custom mechanical parts. Industries such as automotive, aerospace, and industrial machinery rely on Mexico’s efficient production processes and competitive costs.
Medical Devices:
Mexico is the largest manufacturer of medical devices in North America, producing a wide range of products including catheters, robotic surgery tools, and other life-saving equipment. The country exports 92% of its medical devices to the U.S. and Canada.
The advantages of nearshoring to Mexico include lower labor costs, reduced shipping and landed costs, and favorable trade agreements that lead to bottom-line savings. However, the decision is not just about dollars and cents; it’s also about faster lead times, higher quality, and greater visibility into the supply chain.
Source: Forbes
