In recent years, the business landscape has seen a significant shift towards nearshoring, with Latin America, particularly Mexico, emerging as a prime destination. But what’s driving this trend, and how is it impacting the economies of the region?
Understanding Nearshoring
Nearshoring refers to the practice of relocating business operations or outsourcing tasks to neighboring countries, often within the same time zone. This strategy offers companies cost-effective outsourcing solutions, time zone advantages, and cultural alignment, making business interactions smoother.
Why Latin America?
Several macroeconomic and geopolitical events have influenced this shift. The ongoing tensions between China and the US, the war with Ukraine, and supply chain disruptions during the COVID-19 pandemic have prompted businesses to reconsider their outsourcing destinations. While countries like China and India were once the go-to places, the spotlight is now on Latin American nations.
Mexico, with its proximity to the US, has become a favorite. The time zone alignment facilitates easier communication, and the bilingual workforce (English and Spanish) ensures seamless business operations. This cultural compatibility in outsourcing has given Mexico an edge over other countries.
| Country | Average Labor Cost | Time Zone Difference with the US | Key Industries | Language Proficiency |
|---|---|---|---|---|
| Mexico | Lower than the US, higher than Asia | Same to +2 hours | Manufacturing, IT, Automotive | Spanish (native), English (widely spoken in business) |
| China | Increasing but still lower than the US | +12 to +15 hours | Manufacturing, Electronics, Textiles | Mandarin (native), English (business sectors) |
| India | Lower than the US | +9.5 to +13.5 hours | IT, Software Development, Customer Support | Multiple languages, English (widely spoken in business) |
| Vietnam | Lower than the US and China | +12 hours | Manufacturing, Textiles, Electronics | Vietnamese (native), English (growing in business) |
Economic Impacts: Foreign Investiment In Latin America
The benefits of nearshoring to Latin America extend beyond individual businesses. The influx of foreign direct investment, especially in Mexico, has bolstered the region’s economy. Industrial real estate owners, particularly in Mexico’s northern borders, have seen significant gains. With industrial parks operating at full capacity, US giants like Tesla and Bombardier are setting up shop in Mexico, further strengthening its economic position.
Mexico: A Historical Perspective About Nearshoring
This trend isn’t entirely new. Mexico’s tryst with nearshoring began in the 1990s with the signing of the NAFTA treaty. Over the years, Mexican factories have evolved, becoming more efficient and cost-competitive, rivaling those in China and other global hubs. This competitive edge, combined with the benefits of nearshoring, suggests a bright future for Mexico and other Latin American countries in the outsourcing arena.
| Year/Decade | Key Events | Number of US Companies Established | Economic Impact |
|---|---|---|---|
| 1990s | Signing of the NAFTA treaty | Several hundred, primarily in manufacturing | Boost in trade between Mexico and the US, initiation of nearshoring trend |
| 2000s | Expansion of maquiladora (manufacturing) industry | Continued growth, especially in electronics and automotive sectors | Increased foreign direct investment, job creation in manufacturing hubs |
| 2010s | Rise of tech hubs in cities like Guadalajara; Mexico becoming a top car exporter | Growth in tech, automotive, aerospace, and other sectors | Strengthening of Mexico’s position as a global manufacturing and tech hub |
| 2020-2021 | Supply chain disruptions due to COVID-19; increased emphasis on nearshoring | Many companies reconsidering China-centric supply chains, looking towards Mexico | Increased interest in nearshoring due to pandemic-related challenges, further strengthening of Mexico’s economic position |
Outsourcing in LATAM: Beyond Nearshoring
While nearshoring is a significant trend, general outsourcing in Latin America also deserves attention. Companies are tapping into LATAM’s potential for various functions, from back-office tasks and manufacturing to technology development and customer support.
The cost savings are undeniable. Outsourcing functions like accounting or call centers to countries such as Colombia and Mexico allows businesses to capitalize on lower labor costs. Moreover, the geographical advantage of LATAM, with its time zone alignment with the US, ensures faster response times and reduced shipping costs.
This business strategy doesn’t just benefit the companies. The local communities in LATAM also prosper, with increased job opportunities and economic growth. Additionally, the collaboration between US and Latin American entrepreneurs is fostering innovation, with the region’s skilled professionals bringing fresh perspectives and expertise to the table.
The rise of nearshoring and outsourcing in Latin America, especially Mexico, is more than just a business trend. It’s a testament to the region’s potential and its ability to adapt and thrive in a changing global landscape. As businesses continue to recognize the advantages of working with Latin America, the region’s economies stand to benefit, creating a win-win situation for all involved.
If you want to know more about nearshoring in Latin America, you can head to the Emerging Market Today Podcast and listen to our latest episode below.
Main Photo: Mexico City By ribeiroandre.com - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=76367000
