According to the Office of the United States Trade Representative, goods and services trading between the U.S. and Mexico totalled an estimated $855.1 billion in 2022. But this multibillion-dollar industry could very well become a trillion-dollar industry in just a short few years. Why’s that? Simple: nearshoring.
Oxford defines nearshoring as “the practice of transferring a business operation to a nearby country, especially in preference to a more distant one”. In other terms, nearshoring is when you bring a particular part of your business to a nearby country, a “near-shore”. This can include any part of your business – customer services, manufacturing, marketing, software development, and so much more.
One of the most common and significant examples of this, especially in recent years, is the United States and Mexico. Many American companies have begun bringing their business operations a little further south. But why? What is nearshoring actually doing for us?
Know The Difference.
We defined what nearshoring is, but nearshoring sounds a lot like offshoring. And both sound like synonyms for outsourcing. So, what’s the difference? Is one better than the other?
Well, for starters, outsourcing involves hiring a third-party company/individual to perform certain tasks. You can outsource locally (within your home country), offshore (internationally, at a distance), or nearshore (internationally, nearby). All three of these options enable businesses to shorten their supply chain and increase overall business growth.
However outsourcing, while being a $92 billion industry, comes with its fair share of cons and limitations. For one, outsourcing means you relinquish a level of process control and monitoring for convenience. Additionally, having work pass through multiple hands and systems can pose a greater security risk than keeping it internal. These are things that need to be considered when determining the best model for your business operations.
Offshoring is another option. Offshoring involves moving a particular process or department to another, distant country. The move, while international, is still internal, and everything remains within the same company. Even though they moved their R&D team from Portugal to Malaysia, Business A is still Business A.
The pros of offshoring are simple: it provides an opportunity for companies to reduce the costs of business operations. However, this comes with its own disadvantages. For example, operating across different time zones, resulting in awkward and disruptive communications with your team. Language barriers can also interfere with work, since offshoring usually entails hiring local talent that might not be fluent in your home country’s native language. Not to mention you can’t exactly keep a close eye on your business operations from halfway across the world.
Why Nearshoring?
Nearshoring, as we mentioned, involves bringing your business practices to a nearby country. For instance, a US company moving their software development team to neighboring Mexico.
Nearshoring can often be seen as the sweet spot between offshoring and remaining domestic. On one hand, the international operations still allow for cost reduction and more efficient supply chains. However, you get the added perk of working not too far from homebase. This means that time zones are much less of a hindrance for business and communication. Plus, you’ll still be close enough to monitor and manage the quality of your operations. When necessary, flying from San Francisco to Mexico City is considerably easier than flying to New Delhi.
Dynamic Duo: U.S. & Mexico
Nearshoring is not a new development. In fact, businesses have been reaping the benefits of nearshoring for decades: cost savings, speed to market, and quality control. However, recent years have seen a significant boom. Why is that?
Arguably, the biggest reason would be the pandemic. As a result of the financial and economic strain that plagued the globe with the rise of COVID, many companies shifted to concentrate their efforts on strengthening supply chains. The pandemic made these companies realize just how fundamental a role their supply chains (and their efficiency) play in their survival, recovery, and adaptation in both the short and long term. To achieve this, American businesses started migrating their operations.
The impact of this is pretty significant. New business means both an increase in job opportunities and trade, resulting in a noticeable boost for both economies. This has proven to be especially true in the manufacturing, finance, and IT industries. Plus, nearshoring between the U.S. and Mexico has become vital to our businesses’ ongoing success and supply chain growth. It’s enabled supply chains to be shortened and streamlined in a way we’ve never been able to achieve before. At Solvento, we’ve directly seen its impact, transforming the logistics sector with cutting-edge technology to streamline and enhance financial processes. We’ve completely unlocked the flow of money in this space, and as a result, companies are seeing lower costs, decreased lead times, and increased efficiency across the board.
Take a look at Walmart who, earlier this year, announced the opening of a fulfillment center in Mexicali to serve customers in the Southern U.S. better, resulting in faster deliveries and lower shipping costs. These kinds of decisions not only prove the power of nearshoring but also strengthen it. A path is being paved for more and more businesses to follow.
Ultimately, it’s clear that nearshoring is defining the future of Mexican-American trade relations. Whether it’s a 100-person company, or a superpower like Walmart, the pros of doing business with our neighbors are undeniable and seemingly irreplaceable. The only question left is, who’s the next U.S. and Mexico?
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Photo by Andrew Schultz on Unsplash
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- Source: https://logisticsmatter.com/nearshoring-the-silent-leader-in-mexican-american-trade-relations/
