Is Mexico the New China? Nearshoring and Reshoring Experts Weigh in
Three years ago, the way supply chains operated around the globe changed dramatically as the Covid-19 pandemic shut down factories, halted production and created shipping and logistical logjams that would persist for nearly two years.
In the time since, many of those pandemic-related issues have resolved, but geopolitical events such as the Russian invasion of Ukraine and the growing tensions between China and Taiwan have created new problems for those sourcing abroad.
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These events, coupled with other factors, have led many companies to explore reshoring their production to the United States or nearshoring to neighboring areas such as Mexico and Latin America. Deloitte estimated in November that American companies were expected to reshore 350,000 jobs in 2022. And for the apparel industry in particular, some experts believe the benefits of making such a move could far outweigh the costs of relocating production from Asia.
Driving factors
One of the biggest lessons many companies learned during the pandemic was the importance of a diversified supply chain. As Covid shutdowns in China, Vietnam and other Asian countries persisted long after the U.S. began reopening, factories supplying product to American brands fell far behind, leaving empty store shelves and panic for both manufacturers and retailers.
And once production finally ramped back up, clogged shipping lanes and ports—along with astronomical transit rate increases—further complicated the problem for importers. Now those problems have mostly abated, but a variety of other issues make Asian production—particularly in China—less attractive than in the past.
“No matter who’s president in the United States, U.S.-China relations are going to continue to deteriorate,” said John Hyatt, founding partner, The Mexico Strategic Sourcing Alliance. “And people don’t want to do business in China because of, one, IP theft. Two, if things overheat with what’s going on in Taiwan, companies are going to be up the creek without a paddle again, just like they were during the logistics crisis 18 months ago.”
Though they haven’t been as widely discussed as several years ago, the tariffs enacted by the Trump administration, which have not been rolled back by the Biden administration, continue to add to costs for U.S. companies importing from China.
“People forget that importers are still silently suffering from 25 percent tariffs if they import from China,” said Raine Mahdi, founder, global sourcing platform Zipfox. “Although rates in China are usually cheap, it’s still a large part of their cost.”
The ongoing conflict between Russia and Ukraine also has created impacts for importers in the form of fuel price increases. Sanctions on Russia, which is a major fuel exporter, rattled the global oil market at the start of the war and continue to make Russian fuel more expensive.
“There’s a new level of geopolitical instability that did not exist five years ago,” said Jag Lamba, CEO, risk compliance software company Certa.
Compliance with environmental, social and corporate governance (ESG) goals also plays a role for some companies. Particularly for cotton grown and processed in the Xinjiang region of China, questions remain as to whether that product is being produced with the use of slave or child labor. By moving the supply chain closer to home, brands can more easily monitor every point in the production process to ensure no violations to ESG policies occur.
“It’s easier to monitor and meet ESG standards in the U.S. and vicinity versus trying to manage something in a country where you don’t speak the language, you don’t understand the local customs and you don’t really understand fully how the business is done,” Lamba said. “You want to meet those goals and avoid the negative publicity if you’re found negligent on sustainability or human rights issues, which could be the standard of doing business in another country, not the standard of doing business here.”
Attractive alternatives
With this array of issues, finding alternative supply chains and production facilities has become increasingly important for many American brands. And Mexico and Latin American countries such as Peru, Colombia and Brazil have become increasingly viable alternatives, particularly since several major apparel brands already produce product south of the border.
“Apparel is already a large export category for Mexico, and brands like Levi’s, Nike, Patagonia, Adidas and more have been producing a portion of their goods there for a long time,” Mahdi said.
One of the biggest advantages Mexico and Latin America offer is simply geographic proximity. When a brand needs product quickly, be that for an introduction or restocking, sourcing from a supply chain closer to home drastically reduces lead times.
“When they can source out of Mexico or Latin America, that cuts that lead time about a third, compared to lead time from Asia,” Hyatt said. “You’re looking at a 10- to 14-day lead time as opposed to six weeks on the water from Asia.”
And while labor costs may still make it prohibitive to move production back to the U.S., Mexico and Latin America offer a more affordable alternative without many of the potential humanitarian risks.
“The average cost of labor in Mexico is less than the average cost of labor in China,” Mahdi said. “This means there is room for pay increases to lure more people into Mexico’s manufacturing labor pool.”
But Hyatt said the region works better for products that require more hands-on production.
“The more automated a manufacturing process is, the less likely it will be competitive out of Latin America,” he said. “The more labor-intensive, the more competitive. If you’re just looking for cheap automated stuff, you should just stick with Asia.”
Cultural considerations
Hyatt said that while shifting business to Latin America or Mexico can be a better longterm alternative to Asia, it’s important for American companies to understand the cultural mores before attempting to set up shop.
“Latin America has a risk-averse business culture,” he said. “If they do not know you and like you and meet you in person, they will not work with you. They are a relationship-based culture.
“Something that may take one or two onsite visits in the United States will take at least two or three in Latin America,” he continued. “Final concessions are always done in person and usually over meals.”
Hyatt said things tend to move slower, and business partners who try to accelerate the process too quickly may appear desperate.
“From a strategic standpoint, you’re going to want to draw things out from those initial meetings,” he said. “The decision-making process in Latin America is not turnkey.”
And that slower pace allows companies that ability to make thoughtful, well-vetted decisions about who to partner with and how products should be made.
“Start early to give yourself enough time to request samples,” Mahdi said. “Then start with a smaller purchase order to check quality and consistency.”
Ultimately, reshoring and nearshoring don’t mean that production will entirely leave Asia. Rather, it allows brands to avoid the mistake of keeping all their eggs in one basket, making them less vulnerable to the next supply chain disruption.
“I think clients are looking more for diversification at this time,” Jag said. “So the rough numbers that I’ve seen and heard are around shifting about 15- to 20 percent of production nearshore or reshore. Because it also does take fine-tuning when you set up a new manufacturing facility or any sort of sourcing facility.”
