Nearshoring Shift Brings Production Hurdles Closer to Home

Date: Tuesday, April 25, 2023
Source: Wall Street Journal

Even before the Covid-19 pandemic sparked a global shortage of shipping containers and a surge in ocean shipping costs in 2020, automotive-parts supplier Premium Guard Inc. was concerned about souring U.S.-China relations and had been working on bringing some production closer to home.

So when the New York-based company completed the purchase of its first factory in Mexico in late 2020, it proved to be a fortuitous solution to the Covid-19-related disruptions that allowed Premium Guard to keep some of its crucial parts moving even as lengthy backups in international shipping brought many supply chains to their knees.

But with new factories filling the landscape and more under construction in North America, some companies are discovering that shifting production from one part of the world to another has brought new sets of costs and logistics hurdles that highlight the complications of executing a nearshoring strategy.

When Premium Guard wanted to expand its factory in Mexico it had to import new equipment from Asia because manufacturers there offered better options and pricing than anywhere else, said Roel Dekkers, Premium Guard’s director of supply chain for Mexico. Premium Guard also had to develop a new network of suppliers that could make products and packaging to the right specifications and cost.

Even today, the factory struggles to compete with Chinese prices because the range of raw materials, from steel to paper pulp, available in Mexico is more limited and more expensive than in China.

Still, the challenges and the expense are worth it because Premium Guard now has a sourcing strategy that doesn’t rely on a single country thousands of miles away, Mr. Dekkers said.

“We needed to have a near-source option to complement our supply chains out of Asia,” he said. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”

More and more companies are looking to follow the auto supplier’s path as they seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.

Many companies have been looking for alternatives to China since the Trump administration in 2018 slapped the country with new tariffs on top of import duties for a range of goods. The search accelerated after the pandemic caused a sharp contraction in shipping demand, which then surged rapidly as restrictions were lifted, triggering port bottlenecks, product shortages and crumbling transportation budgets across the corporate world.

Much of the growth in production in the U.S. and nearby countries is coming in high-tech fields such as semiconductors, national priorities backed by billions of dollars in government incentives to support a Biden administration push to wean America off its reliance on China-focused supply chains.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S. It is close to American consumers, has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia.

Importers say that although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances that reduce the need to carry so much inventory and that offset the risk of production disruptions and lost sales because of freight delays.

Jake Ozmun, director of sourcing at Malouf Cos., a Logan, Utah-based furniture retailer, said his company can move imports from a factory in Mexico to Utah in a couple of weeks, about a third of the time it takes from a factory in Asia. The company now sources about 20% of its products from North America, mostly from Mexico.

But companies say Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable, executives say, and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers.

Chris Rogers, head of supply chain research at S&P Global Market Intelligence, said the risks that come with long supply chains must also be balanced against risks that may come with locating production in Mexico. Mr. Rogers said physical security is a concern in a country notorious for drug cartels and violent crime. And he said some companies might see a labor risk in Mexico because the U.S.-Mexico-Canada trade pact boosted unionization rights.

Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ Mr. Rogers said. 

China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation in the wake of its ascension to the World Trade Organization in 2001. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.

Mexico lacks many of the nearby supply-chain networks that support products ranging from iPhones to washing machines and sofas. Building up similar ecosystems in Mexico will take years.

Omar Troncoso, head of the Mexico City office at consulting firm Kearney Inc., said industrial parks built around furniture, electronics and home appliances are starting to spring up. Mr. Troncoso said about half of the investments are being driven by Chinese companies and their suppliers looking to set up facilities close to the U.S. border.

“I think it’s just a matter of time before we start seeing lots of different industries being built around the north of the country,” he said.

Freight and logistics companies are moving in to support the flow of goods across the U.S.-Mexico border and the growing stream of parts coming from suppliers in Asia.

Niels Larsen, North America president of air and sea operations for Denmark-based forwarder DSV A/S, said there aren’t enough direct flights between Asia and Latin America to satisfy demand. So DSV flies parts into California and Arizona and then trucks them to Mexico.

DSV has also doubled its warehouse capacity on the U.S. side of the border in two years, Mr. Larsen said. “Cross-border business is booming at a rate we haven’t really seen anywhere with the exception of when China took off,” he said.

Still, industry executives say the industrial real-estate market is lagging behind the growing nearshoring demand.

Mike Burkhart, vice president of North America surface transportation at freight broker C.H. Robinson Worldwide Inc., said competition for warehouse space in Texas border cities like Laredo and El Paso is fierce, even as leasing has slowed nationwide. “The larger the facility you need, the harder it is to get,” Mr. Burkhart said.

[Read from the original source.]