While the rise of nearshoring to Mexico has been steadily increasing over the past decade, the pandemic and several other recent global disruptions have kicked the trend into high gear.
About 88% of U.S.-based small and medium-sized businesses (SMBs) will reshuffle their supply chains to utilize suppliers in the U.S. or Mexico in 2023, according to a recent survey from Gartner-owned consultant Capterra.
“The switch to nearshoring is happening faster than was predicted in 2021,” the survey said. “Most industry professionals predicted this change would happen very slowly, over five or more years. But even the 2022 numbers we see in the data were stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.”
Capterra, a software consultancy and review site based in Arlington, Virginia, surveyed 300 supply chain SME professionals in the U.S. for the research titled “From Nearshoring to Cooperative Procurement.”
While 88% of SMBs plan to switch at least some of their suppliers to ones either in the U.S. or close by, 45% plan to switch all of them, the survey said.
Survey respondents said shorter supply chains, the United States-Mexico-Canada-Agreement trade pact, lower labor costs in Mexico and the North American transportation infrastructure as reasons for altering their manufacturing sources.
Ben Johnston, chief operating officer at Kapitus, said his firm expects nearshoring of manufacturing to Mexico, which has an established manufacturing base and low tariff trade agreements with the U.S., to become more frequent in the coming years.
New York-based Kapitus is a small business and industrial equipment financing company that provides funding for everything from construction firms to health care providers to small manufacturers in the U.S.
“There is already a significant manufacturing presence in Mexico, including many precision technology manufacturers,” Johnston told FreightWaves.
While automotive vehicle and parts manufacturing, consumer electronics and medical equipment have been a major part of U.S.-Mexico supply chains for decades, Johnston predicts increasingly more production of electrical components related to green technology.
“The Infrastructure [Investment and Jobs] Act of 2021 and the Inflation Reduction Act of 2022 provide large sums to spur investment in infrastructure and green technologies,” Johnston said. “Many of these incentives require manufacturing of subsidized products to occur in the U.S., or with approved trading partners, of which Mexico is included. In addition, new regulations prohibiting the manufacturing in China of certain items deemed critical to national defense will drive additional high-tech manufacturing toward the U.S., Mexico and other U.S. allies.”
The survey also stated that 65% of supply chain professionals are concerned about economic inflation going into 2023, followed by a lack of inventory (43%) and economic recession (42%).
“SMBs are hit harder than larger companies who have more resources available to them to absorb higher procurement and logistics costs and to reduce operating costs, such as labor,” the survey said.
Johnston said concerns about inflation have already begun to affect how SMB’s will source their supply chain this year.
“The trend toward the repatriation of manufacturing to the U.S. will continue in 2023 as long supply chains and geopolitical unrest drive businesses to seek more reliable alternatives,” Johnston said. “Continued cost reduction for U.S. manufacturers is critical as a strong dollar has hurt the competitiveness of U.S. manufacturing on the global stage and is slowing the overall repatriation trend. Inflation also remains an issue for U.S. manufacturers, but we are currently seeing a slowing of both consumer price index and producer price index and expect that trend to continue throughout the year, making inflation less of a long-term concern for manufacturers.”
Watch: Mexico’s truck production hits another high in January.
More articles by Noi Mahoney