Is Mexico Winning Reshoring?
As companies continue to battle supply chain challenges reshoring continues to be a trend discussed in all sorts of industries. When reshoring is mentioned, it is normally in the context of reshoring to the country of the speaker. So, here, we tend to think of reshoring back to the United States. Certainly there are recent efforts to support reshoring to the United States. For example, on May 2, the United States announced a $3.1 billion plan to encourage domestic manufacturing of batteries. As we wrote just last week, battery demand is surging. Similarly, the United States continues to try to reshore as much microchip manufacturing as possible. Such stories suggest that the United States might be winning the reshoring battle to bring as much manufacturing back home as possible.
But, as reported by NPR this week, the winner might actually be Mexico. One of the more interesting notes in NPR’s story is that wages in Mexico have been lower than in China since as far back as 2014. Think about that: for 8 years, labor costs in Mexico have been less than in China. Also lower are the relative shipping costs, the time it takes to ship materials, the number of logistical issues that need to be addressed during shipping, and pretty much everything else. China’s wage increases can potentially be traced back to China’s one-child policy. The lack of new births has led to the workforce in China dropping by 2-3 million workers every year. When these economics are combined with the last two plus years of supply chain issues, it is no surprise that Mexico is a popular location for moving manufacturing of products destined for the United States.
Statistically, some recent data supports anecdotal reports. Kearney’s 2021 Reshoring Index noted that capital goods spending is increasing. That increase appears to be tied directly to investment in manufacturing assets in the United States and Mexico. Further evidence of this shift is the fact that China’s share of United States’ manufacturing imports decreased from 66 to 55 percent since 2018. Importantly though, much of that shift was to other, now cheaper, Asian companies. Even the soft data supports advancements in reshoring. For example, 92 percent of surveyed executives held positive sentiments about reshoring. Additionally, surveyed executives stated that they felt pressure to reshore from peers, customers, and stakeholders—employees, shareholders, board members and local governments.
Given the competitive nature of Mexico as an option, the ongoing investment by the United States in manufacturing capabilities, and the supply chain disasters hitting industry on an almost daily basis, the question must be asked: If your company is not reshoring, why not? Price competition is closer than ever and limiting disruption is more important than ever to prevent lost sales up and down the supply chain. Moreover, political will exists to provide additional local incentives. Not to mention that domestic companies have the capital to invest. As Fortune reported, 2021 was a record year in profits for domestic companies. Those making these manufacturing decisions currently need to be ready to answer questions about why they failed to seize this opportunity. This is especially true as lockdowns in China continue to wreak havoc on the global supply chain.