Mexico's logistics outlook, from close neighbors to strategic partners

In the context of economic globalization, the administration and proper management of logistics has become a solution for many organizations seeking to position themselves and maintain their global and competitive presence.

During the border closures as an initial effect of the pandemic, companies began to become aware of the high risks involved in having their manufacturing overseas and the catastrophic effect it has on the global supply chain.

The decision to manufacture abroad or in the same country is related to the facilities used for logistics. Their location is defined as a strategic decision that substantially determines the competitive advantage of a company, mainly in terms of cost and service. In general, four types of localization are recognized: 1) offshoring, 2) reshoring, 3) nearshoring and 4) ally shoring, anglicisms recognized within the technical language of logistics and the supply chain.

Offshoring and reshoring

Within localization logistics strategies, offshoring is defined as the process in which a company moves the manufacturing of goods and services abroad in order to reduce its manufacturing and labor costs. The COVID-19 pandemic caused a sudden shutdown of economic activities in Asia, which severely affected millions of companies that maintained commercial relations with this continent, highlighting the vulnerability of offshoring in the face of catastrophic scenarios. The contrast with the offshoring strategy is reshoring (See Figure 1).

Figure 1. Reshoring and Offshoring

Source: own elaboration

Reshoring is explained as the strategy by which companies return or bring back to their country of origin the production and manufacturing processes of goods and services. In particular, reshoring seeks to stimulate the domestic economy, although with the disadvantage that if the products being processed originate in other countries (such as agricultural crops) it is better to keep and process them at the origin so that they remain close to the source.

Offshoring and nearshoring

As an effect of the pandemic, a trend called "nearshoring" began to emerge at the beginning of the year 2021. As the months went by, this concept gained momentum and began to be linked to action plans and strategies used by companies to combat the problems of COVID-19. But what exactly is nearshoring?

Nearshoring is an English expression that literally translates as "offshoring". This concept is perhaps even more ambiguous than the term itself, making it difficult to translate accurately. In concrete terms, nearshoring is a strategy used by a company to move part of its production to locations closer to the end user or market where the products are sold. Nearshoring is the opposite of offshoring, i.e., looking for suppliers and manufacturers in other destinations (mainly in Asia) in order to reduce production costs, which is colloquially known as "Made in China". Figure 2 describes graphically the difference between nearshoring and offshoring.

Figure 2. Nearshoring and Offshoring

Source: own elaboration

Thus, nearshoring is a strategy whose objective is the outsourcing of services and production processes in nearby countries or within the same geographic region of the contracting company, with location being the main advantage, since in many cases long distances and time differences between countries and continents contribute negatively to supply chain operations.

Nearshoring and Ally shoring

Ally shoring is a concept that adds the political factor to the localization strategy, considering a perspective of business partners and allies that share values and a short and long term business vision.

Figure 3. Ally shoring

Source: own elaboration

Unlike nearshoring, the decision to ally shore is not only based on elements of production costs, labor or proximity, but also evaluates trade relations, the potential for developing human capital required by the allied companies in the different locations and the certainty that can be obtained from joint collaboration schemes between countries.

Opportunities for Mexico

Mexico's proximity to the world's largest economy positions it as a privileged and attractive location for nearshoring for the installation of manufacturing and supply centers from other distant locations. Given this scenario, the conditions for the installation of companies under the nearshoring strategy are highly favorable, as evidenced by the results obtained in the Logistics Performance Index (LPI). The LPI is an evaluation tool created by the World Bank based on a set of indicators to identify logistics performance and best practices compared among 139 countries.

In 2023, Mexico ranks third in the "International Logistics Opportunities" dimension, behind only India and China. In the international panorama, the country's global position, considering all the dimensions evaluated by the LPI, places it in 66th position with a score of 2.9, with Singapore, Finland, Denmark, Germany and Holland being the best evaluated with scores of 4.3, 4.2, 4.1, 4.1 and 4.1 respectively (See Figure 4).

Figure 4. LPI 2023

Source: own elaboration with data from LPI World Bank (2023).

Under this scenario, nearshoring has contributed to greater collaboration between Mexico and the United States. Companies that outsource services here often establish long-term relationships with their suppliers, as is the case in the automotive sector. Alliances between suppliers and manufacturers have also promoted an increase in the exchange of knowledge, human capital and technology between the two countries, which has enabled innovation and competitiveness in both markets. Factors such as the T-MEC, which facilitates international trade and fast and secure supply chains between the two countries, also favor the ally shoring strategy.

In conclusion, localization logistics strategies based on nearshoring and ally shoring have a high potential to have a significant impact, driving growth and diversification of the Mexican economy with benefits for society in general. However, outsourcing continues to be subject to criticism in some social sectors, making it necessary to address these concerns to ensure that outsourcing is used responsibly and ethically. Ultimately, localization strategies in the supply chain are complex processes so it is important to carefully evaluate their economic, social and political implications before making important decisions around this practice.