Made in Mexico

See the latest issue of Briefings at newsstands or read in our new format here.

By: Meghan Walsh

In 2018, when the trade war between the United States and China began, Raine Mahdi was operating a company that produced flexible packaging—think of the clear, pliable, easily customizable bags that granola is often sold in. While Mahdi was based in California, he sourced his products from a supplier across the Pacific Ocean. But as the the US and China launched a salvo of tariffs at one another, Mahdi got caught in the middle. His bottom line took a significant financial hit. “I realized I didn’t have any options outside of China,” Mahdi says.

He began looking for manufacturers in other countries, but there was no centralized platform that connected sellers and makers. Finally, one of Mahdi’s clients offered a solution: Mexico, where the client had once sourced packaging. “That got the cogs moving,” says Mahdi, who grew up in San Diego and had traveled across the border, less than an hour’s drive away, many times. Mexico was so close he’d be able to visit the factory and be back in a day.

Workers in a Mexican factory assemble computer servers.

The cogs kept turning. Ever the entrepreneur, Mahdi next began to ask why no marketplace like Alibaba existed for the Latin American market. In 2021, he sold his packaging business and launched Zipfox, a product-sourcing platform used by more than 2,000 verified Mexican factories. His ambition is to expand the firm throughout the Americas, then across the globe. “There’s never been any shortage of demand,” he says. “Finding the supply is the hard part.”

Anyone paying attention probably has noticed that whether it’s a car part or clothing or solar panels, there’s a new label in town: “Made in Mexico.” Post-pandemic, more companies have started moving production pipelines closer to key markets for greater stability—a trend known as “nearshoring.” It’s been occurring everywhere from Eastern Europe to Vietnam, but Mexico has been the biggest benefactor. Indeed, even Chinese companies are moving to Mexico to be closer to North American markets.

The nearshoring movement could lead to a significant restructuring of global supply chains. A remarkable nine in 10 executives say they’re exploring, or have already explored, moving operations closer to home, according to a survey by a global management consultancy. The Inter-American Development Bank, the largest developmental finance institution servicing Latin America and the Caribbean, announced in June that nearshoring is poised to add $78 billion in exports across Latin America by 2025, with Mexico reaping more than half of the increased value.

The big question is how long the shift will last. Despite substantial investments in Mexican manufacturing, experts point out that some companies may nearshore less once pandemic-era supply snafus and anxiety-provoking headlines recede into memory. “Out of sight, out of mind,” Mahdi says. “We tend to forget about potential risks when they’re not agitating us—but we haven’t reached the end of this story.”

(click image below to enlarge)

For four decades, China has been the world’s factory. But recently, its own success, along with a number of other factors, has led to a reapportionment of the global export pie. “We’re seeing early responders start to look at places outside of China—part of the larger trend of companies striving to become more globally competitive,” says Roselyn Hsueh, an associate professor of political science at Temple University and author of Micro-institutional Foundations of Capitalism: Sectoral Pathways to Globalization in China, India, and Russia. The clearest sign of this shift came in April, when year-over-year imports from China to the US fell to their lowest level since 2006.

Meanwhile, COVID-19 revealed the vulnerabilities of logistically complex overseas supply chains. Under ideal conditions, shipping a container from China to the Americas takes about a month. But during the pandemic, that time frame more than doubled. Supply chains can also be endangered by geopolitical tensions: for instance, last year the US banned imports from the Xinjiang region due to accusations that goods were being produced using forced labor.

This is not to say companies are cutting ties with China. That’s unlikely to happen anytime soon. Instead, many are adopting a “China plus one” model of sourcing. Experts say this process of building out regional supply networks and rethinking logistics operations is simply the next stage of globalization. “There is a huge playing field out there to consider that we have not,” Hsueh says. “Much of this talk about diversifying supply chains is about diversifying risk.”

“The main challenge is going to be talent. It’s going to take time to upskill and reskill.”

To some degree, it’s not surprising that Mexico has become the location of choice for many companies looking to nearshore. It has its proximity to the US going for it, as well as an abundance of relatively cheap, young workers, and it’s a signatory to favorable North American trade agreements. The median age in the country is just 29 years old—10 years younger than that of China and the States. Transporting goods to American destinations from a maquila—a Mexican factory that serves non-Mexican clients—takes two weeks on average, with most products moved via land, which is cheaper than sea or air. And the new trade agreements mean that imports and exports among the US, Canada, and Mexico are, for the most part, duty-free.

A long list of companies have either announced plans for, or already broken ground on, new Mexican factories. That includes Milwaukee Tools, Ford, Boeing, and MGA Entertainment, the maker of Little Tikes. Tesla recently announced that it will build its largest factory yet in the northeastern state of Nuevo León. Nearby, GM will start assembling its line of electric cars next year. But it’s not just firms headquartered in the US that are moving into Mexico. British consumer-goods purveyor Unilever has announced that it will invest $400 million in the country over the next three years. Several European automakers, including BMW, Audi, Volkswagen, and Continental, are also investing in production plants, along with a growing number of Asian firms.

A rail yard in Salinas Victoria, Mexico.

In all, Mexico amassed more than $35 billion in foreign direct investment last year alone—a double-digit increase over the year prior. An economic analyst at Banco Base, a financial group that specializes in business banking, told reporters that investment is likely to top $40 billion this year. US imports of Mexican goods have swelled by more than one-quarter since the start of the pandemic. As of June, auto exports had surged more than 20 percent year-over-year, making Mexico the world’s seventh-largest passenger-vehicle-manufacturing country—and it exports 90 percent of those cars.

Whether Mexico is able to meet growing global demand, though, remains to be seen. Crime and political instability have deterred investment in the past. Plus, big questions have yet to be answered around infrastructure, labor, and security—and many experts are not confident that the current government has either the will or the ability to provide solutions. “There is a lot of activity and investment, but there is uncertainty, too,” says Mariana Herrerías, a senior client partner and coleader of Korn Ferry’s Industrial practice in Mexico.

The majority of manufacturing in China is contract based. Buyers place orders and an extensive network of factories equipped with state-of-the-art equipment and a skilled labor force handles the rest. While maquilas do exist in some industries, many companies find it necessary to make their own investments in real estate, equipment and training—even electricity, since some regions don’t have reliable access to utilities. But, says Eduardo Puig, a Korn Ferry senior client partner and coleader of the firm’s Industrial practice in Mexico, “The main challenge is going to be talent. It’s going to take time to upskill and reskill.” It’s a matter of training not only frontline workers, but also engineers, developers, and workers in other STEM-related fields.

“This is an opportunity to build something bigger and better for global development.”

For business owners like Mahdi, sourcing from Mexico may be the quickest and most cost-efficient solution to logistical concerns. But beyond bottom lines, nearshoring is prompting conversations between politicians and executives about global business practices and how they influence larger societal concerns, such as the gender income gap. From this perspective, nearshoring is about far more than tariffs: it’s a statement on values. Experts like Hsueh say that a large-scale supply-chain shakeup, if done with intention, could represent a significant opportunity to restructure trade agreements and global power dynamics. “As always,” Hsueh says, “the devil is in the details.”

Major labor reform is already underway in Mexico, with new laws recently passed on the workweek and healthcare. Leaders may also have a rare opportunity to rewrite rules on intellectual property, sustainability, and human rights. “This is an opportunity to build something bigger and better for global development,” Hsueh says.  

Right now, multinationals are leading the way forward. They are deciding not only where to set up shop, but also the terms under which they will do so. ​​A Bank of America report estimates US and European companies will spend more than $5 trillion over five years to shift manufacturing closer to their biggest markets. Small and mid-size firms will follow suit once the infrastructure is more securely in place.

“Nearshoring hasn’t fully caught on yet, but it will,” says Mahdi, whose business venture is an all-in bet on that prediction. Korn Ferry’s Puig shares the entrepreneur’s bullish outlook: “Mexico,” he says, “will be the next manufacturing hub.”