Near-Shoring: Unlocking Opportunities for US Companies in Mexico
Share on facebook
Share on twitter
Share on linkedin
Share on email

In the dynamic and interconnected world of modern business, near-shoring has emerged as a strategic option for companies seeking to optimize their supply chains against global geopolitical risk. At TSOR Group, our founders have had the privilege of working with industry leaders such as Toyota, Volkswagen, and Samsung as they implemented near-shore supply chain strategies. Mexico, with its favorable trade agreements like NAFTA and its geographical proximity to the United States, has become a compelling destination for near-shoring operations. In this blog post, we will delve into the advantages of near-shoring in Mexico and explore the key considerations that US companies must take into account to harness this strategic opportunity.

Introduction: Toyota & Volkswagen in Mexico

Toyota and Volkswagen faced a crucial decision of whether to manufacture in their home countries (Japan and Germany), manufacture in the market country (the US), or opt for near-shoring by establishing production facilities in Mexico. In both cases, Toyota and Volkswagen chose the near-shoring option in Mexico, demonstrating the strategic significance and effectiveness of this approach.

Toyota operates a plant on the US border between Tijuana and Tecate, dedicated to producing the Toyota Tacoma for the US market. The facility has a dedicated shuttle trucking service that brings all the new Tacomas from the plant to a receiving facility in San Diego. From there, US-required labeling and final quality checks are conducted before loading the vehicles onto railcars for shipping throughout the United States. This approach offers several distinct advantages:

  1. Seamless Integration with US Operations: The plant’s proximity to the US allows for a more seamless integration of the facility with US operations. This means plant visits, vendor meetings, and process improvement coordination can be more easily managed.
  2. Secure Transportation: The plant utilizes a secure toll road for the shuttle trucks, reducing the risk of pilferage and theft during transportation.
  3. Smooth ” Heijunka” Flow: The plant’s control over the cross-border movement enables the maintenance of a smooth ” heijunka” flow, ensuring consistent production levels and minimizing disruptions or batching in transport.

However, the plant also faces certain disadvantages related to outbound optionality. It is not directly served by a rail carrier, which means all Tacomas must pass through the San Diego gateway before national distribution. Additionally, the plant lacks a simple means to ship vehicles out via vessels, limiting the transportation options available.

The Volkswagen plant is located in Puebla, Central Mexico, southeast of Mexico City. It produces Jetta sedans and Q3 SUVs for the US market. The vehicles are loaded onto railcars and shipped to the US, crossing the border in Texas. From there, the railcars are interchanged to the US rail carrier from the Mexican rail line and routed to a regional distribution hub for final processing and quality assurance.

While rail transportation offers an environmentally friendly means of transport, it also poses challenges in terms of security. Rail supply chains are difficult to secure, and railcars are often subject to pilferage and vandalism during transit. Additionally, the facility’s landlocked location limits the optionality to ship vehicles to the United States via ships. In comparison to the Toyota plant, the greater distance between the Volkswagen plant and the US market makes collaboration less simple and ready to achieve. However, leveraging rail transportation allows for optionality in delivery to regional distribution hubs in the US. In general, both Toyota and Volkswagen demonstrate the three key advantages of near-shore manufacturing.

Four Advantages of Near-Shoring for your Organization:

  1. Proximity and Cultural Alignment: One of the primary advantages of near-shoring to Mexico is its close proximity to the US, which offers significant benefits for businesses. The shorter supply chains result in reduced transportation costs and faster response times, allowing companies to operate more efficiently. The geographical proximity also enables easier coordination and collaboration between the US and Mexico, fostering effective communication and the establishment of strong business relationships. Additionally, the cultural alignment between the two countries enhances compatibility in work practices and business norms, further facilitating seamless collaboration and a shared understanding of goals and expectations. Overall, the proximity and cultural alignment between the US and Mexico provide a solid foundation for successful near-shoring operations.
  1. Skilled Labor and Manufacturing Expertise: Mexico is home to a highly skilled labor force with expertise in various manufacturing sectors, making it an ideal near-shoring destination for US companies. This is evidenced by the presence of other automotive and electronic manufacturers in addition to Toyota and Volkswagen, which have successfully established production facilities in Mexico. By leveraging the country’s skilled labor pool, US companies can tap into specialized expertise and drive operational efficiency. The availability of skilled workers in Mexico contributes to improved productivity, higher-quality outputs, and cost advantages compared to domestic labor markets. Furthermore, the favorable cost structures in Mexico enable US companies to optimize manufacturing costs without compromising on the quality of their products. The combination of skilled labor and favorable cost structures positions Mexico as a strategic choice for near-shoring operations, allowing US companies to benefit from the expertise and efficiency of the Mexican workforce.
  1. Cost-Effectiveness: Near-shoring to Mexico provides US companies with notable cost advantages. Labor costs in Mexico are typically lower compared to the US, resulting in significant cost savings in manufacturing operations. This allows companies to optimize their expenses while maintaining high-quality production. Additionally, operational expenses such as facility rentals and utilities tend to be more affordable in Mexico, further enhancing the cost-effectiveness of near-shoring. The cost advantages offered by near-shoring to Mexico contribute to improved competitiveness and profitability for US companies. By leveraging the favorable cost structures in Mexico, businesses can allocate their resources more efficiently, invest in innovation, and explore new growth opportunities. The cost-effectiveness of near-shoring to Mexico enables companies to achieve a strong return on investment and enhance their overall financial performance.
  2. Insulation from Global Geopolitical Upheaval: Near-shoring in Mexico offers US companies an additional layer of protection against global geopolitical upheaval. In an increasingly interconnected world, geopolitical events such as trade conflicts, economic sanctions, or political instability can disrupt global supply chains. By near-shoring production to Mexico, companies can reduce their reliance on distant manufacturing locations and diversify their supply chain risk. This localization strategy helps insulate businesses from potential disruptions caused by geopolitical tensions, providing greater stability and continuity in their operations. The close proximity to the US market and the ability to swiftly adapt to changing circumstances contribute to the resilience and flexibility of near-shoring in Mexico, making it an attractive option for companies seeking to mitigate geopolitical risks.

Addressing the Risk of Security Concerns:

Supply chain security is a critical aspect to consider when near-shoring to Mexico. While Mexico offers numerous advantages for US companies, it’s essential to address security concerns and ensure the integrity of the supply chain. Implementing robust security measures throughout the supply chain helps mitigate risks, safeguard assets, and maintain smooth operations.

One key aspect of supply chain security is physical security. Companies can implement advanced surveillance systems, access controls, and secure facility designs to protect their manufacturing facilities, warehouses, and distribution centers. By securing the physical infrastructure, businesses can minimize the risk of unauthorized access, pilferage, and other security breaches.

In addition to physical security, data security and cybersecurity are paramount in today’s interconnected world. US companies should implement strong data protection measures, including encryption, firewalls, and secure network infrastructure, to safeguard sensitive information and intellectual property. Regular cybersecurity assessments and employee training programs can also enhance the overall security posture and prevent potential cyber threats.

Collaboration with local law enforcement authorities and private security firms is crucial for establishing a strong security network. Engaging in partnerships with trusted security providers can offer valuable insights, intelligence, and resources to address specific security challenges in the region. This collaborative approach ensures a coordinated response to potential security incidents and facilitates proactive risk management.

Supply chain transparency and traceability are essential components of supply chain security. Implementing technologies like track-and-trace systems, barcoding, and RFID tagging enables real-time monitoring of products throughout the supply chain. This not only helps prevent counterfeiting and unauthorized product diversions but also enhances visibility and enables rapid identification of any security breaches or anomalies.

By proactively addressing supply chain security concerns, US companies can establish a resilient and secure near-shoring operation in Mexico. This includes a comprehensive approach encompassing physical security, data security, collaboration with local authorities, supply chain transparency, and employee awareness. By ensuring the integrity of the supply chain, US companies can more confidently leverage the advantages of near-shoring in Mexico while maintaining the highest standards of security and risk management.

Evaluating Near-Shore Manufacturing for Your Organization:

Near-shoring to Mexico presents significant opportunities for US companies seeking to optimize their supply chains and enhance their competitiveness. The advantages of proximity, skilled labor, and cost-effectiveness make Mexico an attractive near-shoring destination. By addressing security concerns, leveraging trade agreements like NAFTA, and exploring transportation options, companies can unlock the benefits of near-shoring in Mexico.

To fully capitalize on the near-shoring opportunity, it is crucial for US companies to examine a multitude of factors and operating assumptions and build them into a financial model that is stress-tested to deliver the best financial outcome. This includes considering factors such as proximity, cultural alignment, skilled labor, cost-effectiveness, and supply chain security. By creating optionality, resilience, and sustainability in their near-shoring strategies, companies can position themselves for long-term success and deliver a strong financial return on investment.

The case studies of Toyota and Volkswagen highlight successful near-shoring strategies in Mexico, showcasing the positive impact of near-shoring on supply chain optimization and market reach. As more US companies explore near-shoring opportunities, understanding the advantages and considerations of near-shoring in Mexico is crucial for making informed decisions and driving business growth. By adopting a strategic and comprehensive approach to near-shoring in Mexico, US companies can unlock the transformative potential of this business strategy and achieve sustainable growth in the global marketplace.

Related Insights

Get TSOR to your inbox.

Stay up to date with all things TSOR delivered to your inbox.