While some believe there are infrastructure obstacles that need to be resolved before nearshoring can grow dramatically south of the U.S. border, Jorge Gonzalez Henrichsen, co-CEO of The Nearshore Co., an outsourcing firm that helps firms transfer their manufacturing operations into Mexico, discusses where he sees the future of nearshoring headed.
Sourcing Journal: An S&P Global Ratings report from its chief economist for emerging markets, Elijah Oliveros-Rosen, said that nearshoring is progressing slowly in Mexico due to infrastructure obstacles that include a supply of clean energy, water and specialized labor. That said, it appears that the primary area for production capacity is in the north and center/Bajo regions of the country. What is your experience with clients on the ground there and where do you see investment growth?
Jorge Gonzalez Henrichsen: The North and Bajo areas are the most demanded and, therefore, experiencing more growth. Infrastructure is in place, a three generation manufacturing culture exists, deep “clusters” around specific industries have been created, and distance to the U.S.—if the company’s products are to be delivered in the U.S.—are the main reasons for these regions to become more sought after.
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There used to be a very strong textile manufacturing industry in the North and center of Mexico (Puebla), but as the country has focused on more value-added activities and industries, such as aerospace, automotive, electronics and medical devices, textiles has left for other countries with a more affordable labor cost, in regions like the Caribbean and Central America.
SJ: Tell me about Mexico’s strategic position for nearshoring for U.S. firms? What about the current infrastructure and supply chain network? Aren’t crime and complicated labor laws some of the key obstacles to nearshoring?
JGH: All of these are obstacles need to be overcome if we want nearshoring to transform the country and reach its highest potential…. Mexico was not expecting this trend to pick up so fast and [therefore prepare for] when these are things that take years to build: think airports, highways, ports, etc. The Federal Government’s “non-pro-business” ideology has led to lower investment by local and foreign investors. That said, Mexico was transformed into a manufacturing country from an oil-dependent one in the 80’s, which has been paying off for years and will continue to do so for many decades.
SJ: Brands such as Fruit of the Loom and Nike do some of their manufacturing in Mexico. Can you tell me how fashion companies can benefit from manufacturing in Mexico? What about the availability of specialized labor for the fashion sector? Are there certain apparel product lines that will do better than others?
JGH: Having such a close proximity to the end market is very valuable in fashion-oriented markets, where time-to-market is critical, and being able to remove product that did not sell in a particular season quickly, gives you a head start.
Mexico has many [free trade agreements] signed, so it can import many products with lower tariffs, and then [the United States-Mexico-Canada Agreement] gives it the best access any country can dream of to sell into the U.S. market.
Mexico has a long tradition of working with leather in the Bajio, and that skill level is also used to make products for aerospace and automotive, like in the case of car seats, interiors in general, steering wheels, etc.
SJ: You believe that when it comes to Mexican manufacturing, it won’t matter who becomes the next U.S. president, whether that’s Donald Trump or Joe Biden? Why not? And what about the potential impact on trade policies?
JGH: No matter who becomes President, the long-term destiny of Mexico is to join a North America agenda with the U.S. and Canada. The road will be bumpy, and slightly different with each candidate, but the forces at play here are just too strong to resist any specific politician.
SJ: Any thoughts on nearshoring and U.S. trade ties and how all that might change should Claudia Sheinbaum, Mexico’s leading presidential candidate, win the June presidential election?
JGH: Claudia should be positive for nearshoring. She is an engineer by training, who seems to understand the potential for Mexico that nearshoring poses. Even though she is left leaning, I hope that she understands that to distribute wealth, first you have to create it.
SJ: For Mexican nearshoring to grow, what else needs to be done? Is it foreign investment to build infrastructure? Training?
JGH: Many things need to happen. The question is not whether it will grow, but rather “how much” it will grow. The more—and better—infrastructure, education, energy, rule of law, etc., that Mexico can deliver, the more companies are going to look to the country to manufacture their products destined to for the U.S. market.