Nearshoring From Mexico as a Way to Better Serve US Demand

The hidden pitfalls and opportunities of nearshoring

A tradition going back to more than 60 years, nearshoring for the US market has experienced a boom in recent years.1 More and more companies are nearshoring either their supplier base or production to Mexico to meet growing US consumer demand. The reasons for this move are clear: commercial tensions between the USA and China, geographic proximity, and existing Free Trade Agreements between Mexico and both the USA as well as China, to name just a few.

As a result, companies can bypass geopolitical challenges to reap a number of benefits, such as an increase in the resilience and responsiveness of their supply chains. While resilience is driven by reduced reliance on long-distance air and ocean freight, which tend to be volatile in price and/or low in on-time performance, responsiveness is boosted by the proximity to the core market of the USA. After all, any US location can be reached via truck in less than a week.

Despite these opportunities, the southern border is full of hidden pitfalls that can disrupt a company’s Mexico nearshoring plans. Such hidden pitfalls include the lack of transport capacity, which is worsening as the northbound trade lane grows by 5 to 8% per year, more frequent customs delays, and the move of manufacturing and warehousing locations further inland. All of these complicate the operations of existing and new nearshoring participants.

This article aims to outline some key trends, issues, and mitigation measures that companies should be aware of when operating or establishing a nearshoring operation in Mexico to serve the US market.

Four key trends defining the future of nearshoring for the US market

For companies looking to leverage nearshoring in Mexico to make their supply chain more efficient, knowing and understanding the key trends are essential for preparation, planning, and, ultimately, success.These are the four key trends to keep in mind for US operations:

1. Strong and unstoppable market growth
Mexico has now become the largest source of imports for the USA, recently surpassing China. This is underscored by the growth of the Mexico–USA trade lane of up to 8%, most of which is covered by road transportation. Much of this trade-lane growth is due to manufacturing output from Mexico, supplied by growing inbound-to-manufacturing (I2M) shipments coming directly from Asia.

At the end of 2023, Mexico recorded a historic figure for Foreign Direct Investment (FDI) of more than USD 36 billion. FDI has grown steadily at 5.3% CAGR over the past decade and is expected to grow by more than 10% from 2023 to 2024. The automotive sector is taking the lead capturing 75% of manufacturing FDI, particularly driven by Chinese electric vehicle companies and their suppliers.

2. Lack of northbound trucking and customs capacity
While the number of northbound shipments is growing relentlessly, the opposite holds true for southbound shipments, as Asia is taking on a larger supplier role, replacing the USA. This is exacerbating the existing imbalance between demand, as well as the shortage of northbound capacity.

A solution being considered by many companies is the use of third-party logistics providers (3PLs). These have an advantage over carriers: They can access capacity from a large pool of carriers, and some even have customs clearance teams in-house to simplify the end-to-end process, eliminating handover fees and delays. In addition, 3PLs often provide multi-modal solutions to overcome trucking issues, such as routing shipments via rail, or even air in urgent cases.

3. More complex supply chains
Manufacturing is shifting further south – from Maquiladora near the US–Mexico border to the Bajío region further inland. This shift is driven by the proximity of this region to seaports, ideal for both importing and exporting, in addition to space and labor constraints near the border, as well as rising domestic demand with a large share of the Mexican population living in and around Mexico City.

Exports to the USA are becoming more complex, however, as distances increase and the player landscape becomes more formal yet scarce. In addition, volumes are being consolidated on the northbound highway towards Monterrey and Laredo into Central Texas. This makes Laredo’s role in cross-border trade more relevant and a customs bottleneck, considering 40% of northbound goods already go through Laredo today.

4. Increased demand for value-added services
The role of Mexico in the supply chain is moving further downstream with a higher share of premium and finished goods, increasing the need in demand for value-added services to protect the shipment value. These services include tightening security requirements, such as insurance, near-real-time track and tracing capabilities, and even physical escorts, or temperature-control capabilities. Similar to the aforementioned trend, these requirements are driving shippers toward more formal carriers who are able to offer them.

Market players from manufacturing, supply chain management, and more

Despite the challenges, nearshoring in Mexico continues to be the option of choice to serve US demand for companies active in any sector, such as automotive, consumer and retail, or pharmaceuticals, just to mention a few.

DHL Consulting has defined three specific customer groups for nearshoring:

Businesses that are already established in Mexico and are facing supply chain inefficiencies when it comes to their US-bound inventory and shipments

As a company already in Mexico and harnessing the opportunities of nearshoring, you will want to focus to find answers to the following considerations:

• Do your Mexican plant and inventory locations reflect supply and demand flows?
• Do you have sufficient capacity to grow?
• Do you have the right warehousing locations in the USA to account for demand fluctuation, border delays, and trucking capacity constraints?
• Do you have the right number of logistics partners, and is their performance best-in-class? Where do today’s processes create waste?
• What parts of the transport and nearshoring process can you outsource, from the actual operation over to planning and orchestration?
• How much do you spend today per production unit, and how does that compare to competitors?
• What is a high-level savings target that you can actually achieve?

The Supply Chain Health Check by DHL Consulting is ideal in such cases, allowing you to:

• Determine key locations, activities, policies, and priorities
• Define initial change hypotheses
• Benchmark your performance against peers and competitors
• Prioritize improvement opportunities

Businesses that have decided to establish themselves in Mexico and need support to draw up an actionable implementation plan

The decision to harness nearshoring for your company’s operations is a step that involves a clear plan of action. DHL Consulting supports you with this through a network design study, guiding you with answers the following questions:

• Where should the finished goods be stored?
• Should you use the expansion into Mexico to also improve domestic service in Mexico, or regional service in Central and South America?
• How does production in Mexico impact the amount of cycle and safety stock required in the USA?
• How much transportation capacity will you need?
• What mode of transportation should you use?
• Should you consolidate shipments to the USA or ship directly to multiple destinations?
• What could an implementation timeline look like?
• Which supply chain partners can help you on this journey?

This is where a definition of the network design and process in collaboration with DHL Consulting is essential to:

• Recognize opportunities to improve the current setup through defined improvement levers
• Define the most suitable distribution network, warehousing capacity, and transportation modes
• Understand best-fit transportation modes and provider selection criteria
• Determine the ideal supply chain replenishment strategy
• Outline and review the impact on US customer fulfillment
• Identify potential partners in applicable locations/regions

Businesses that are considering establishing operations in Mexico and require guidance on whether to pursue this plan

The move to nearshoring in Mexico is one that should not be taken lightly. There is a whole checklist of questions that you need answers to in advance – here are just a few:

• What activities should be performed out of Mexico?
• What locations are best-fit for the services in the specific sector?
• What is the high-level “size of the prize”, and how does that compare to the current cost and service levels?
• What would you have to consider in order to make a decision (e.g. establishment of location, timeframe, process adjustments)?
• What setup are your competitors operating under or moving toward?

A qualitative and quantitative assessment from DHL Consulting provides guidance on your ideal strategic supply chain network for Mexico nearshoring prior to embarking on your transformation:

• Identify potential locations across Mexico and select the top two to three locations for a deep-dive analysis
• Estimate the end-to-end supply chain cost and service level for multiple Mexico nearshoring scenarios, based on a baseline volume and cost model for your existing supply chain setup
• Assess the nearshoring scenarios from a qualitative perspective against the status quo (e.g. complexity, change management)
• Review impact of changes to freight rates and supplier locations through a sensitivity analysis

Conclusion

Whether a business is looking to boost efficiency in their long-established Mexico nearshoring operations or to embark on their first voyage into the nearshoring realm to fulfill their US demand, having expert guidance on this undoubtedly complex journey is essential. Neutral expert guidance can help market players to understand and define best-in-class processes and the ideal setup in Mexico for their business.

DHL Consulting as a reliable and neutral partner

As experts for nearshoring, we look forward to converting our expertise into value for our clients. Backed by long-standing local experience and consulting competence, we cater to both small- and medium-sized enterprises as well as multinational corporations on both sides of the border and across all sectors. Our unique access to data and experts from DHL, who is a leading logistics provider and operator of warehousing, road transportation, air transportation, and customs from/to Mexico and the USA, ensures you benefit from neutral, market-leading, and expert guidance.