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Emilio CadenaJun 10, 2024 10:48:48 AM4 min read

The Nearshoring Series: Current Trends in Business Relocation and Their Impact on Supply Chain

The Nearshoring Series: Current Trends in Business Relocation and Their Impact on Supply Chain
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The dynamics of the global market are undergoing significant changes regarding the relocation of productive assets. These changes suggest a trend towards the reassessment of supply chains and the pursuit of geographical proximity to key markets. In this discourse, we will delve into the primary trends and factors driving corporate relocation and how these decisions are reshaping the landscape of investment and business management. 

This blog is part of “The Nearshoring Series” summarizing some of the key conversations I have had with important stakeholders in recent months. 

 

 

The COVID-19 pandemic as a catalyst for change 

The pandemic has subjected global value chains to a trial by fire, revealing unexpected vulnerabilities and forcing companies to rethink their globalization strategy. This unprecedent situation highlighted the need to adapt to large-scale disruptions, emphasizing the importance of incorporating flexibility and resilience as fundamental components and pillars of business management. 

Faced with these challenges, numerous organizations have had to reassess their presence in certain regions. While specific markets, such as China, offer significant advantages in terms of costs and logistics, they also introduce considerable risks in terms of disruptions and dependence.  

This strategic realignment involves greater geographical diversification and a revaluation of proximity to consumer markets, as well as a more determined investment in digital technologies and flexible operational practices that enable agile responses to future crises. 

Current market conditions in China have led to a shift in sentiment among foreign business. A recent survey conducted by the American Chamber of Commerce in Shanghai (September 2023) indicated a decline in business optimism. Only 52% of respondents expressed a positive outlook for the next five years, marking the lowest level since the survey’s inception in 1999. 

 

The impact of geographical diversification and relocation in Mexico 

Geographical diversification is becoming a key strategy for companies seeking to optimize their operations and enhance their competitiveness globally. A clear example of this is the growing phenomenon of re-shoring and nearshoring towards Mexico. Western companies, in an effort to get closer to their markets and reduce costs, are relocating part of their operations to Mexican territory. This movement is driven not only by their pursuit of operational efficiencies and lower production costs but also by the desire to mitigate risks associated with dependence on distant markets, especially in the context of political and trade tensions, such as those existing between the United Stated and China. 

In addition to this, Mexico stands out for its rich human capital and growing specialization in technological sectors, attracting investments in innovative areas such as e-commerce. I refer to this new trend as “Tech-shoring”, where i seek to emphasize Mexico’s evolution towards a more diversified economy with greater capacity to attract foreign investments in high-value-added sectors. 

The factors behind this relocation are complex and go beyond immediate reactions to events like the recent pandemic. They include long-term strategic considerations on how to position oneself favorably in an uncertain and competitive global market. Mexico’s geographical proximity to the United States, combined with its network of trade agreements, makes it an attractive destination for companies seeking not only efficiency and reduced operating costs but also a solid base from which to address the challenges of the global economic future. 

More benefits and the reality of nearshoring here. 

Thus, the emergence of new investment sectors and the relocation of operations to Mexico illustrate a significant shift in the dynamics of global investment and production, where Mexico plays an increasingly important role as a strategic hub for international companies. 

 

Logistics and the strategic location of inventories 

Logistics and the strategic location of inventories play a fundamental role in the success of companies in the digital age, especially in a country as large and diverse as Mexico. The demand generated through mobile device purchases has underscored the importance of having inventories strategically positioned geographically to quickly meet consumer expectations. This not only entails efficient supply chain management but also a profound understanding of local consumption dynamics. 

Mexico’s Valley presents a compelling opportunity for e-commerce fulfillment. This strategic location boasts the concentration of nearly 80% of Mexico’s e-commerce potential within its borders. As the nation’s largest industrial zone with over 5.5 square miles of gross leasable space, it has witnessed a remarkable 50% increase in warehouse rental space in recent years. Furthermore, the Valley benefits from a highly concentrated population base, representing 20% of Mexico’s total, and sits at the heart of a major regional transportation network. These factors position the Valley for continued robust growth and solidify its position as a premier e-commerce fulfillment hub. 

Companies seeking to optimize their operational efficiency must consider not only the location of their inventories but also how their logistics strategies align with emerging consumption trends and changes in buyer behavior. Therefore, corporate relocation not only addresses the immediate needs arising from the pandemic but also reflects a long-term strategic adaptation to a more agile and diversified market. 

Success in the environment requires a holistic vision that integrates logistics with the global business strategy. Companies that achieve synergy between the location of their inventories and the preferences of their customers, leveraging market trends and adapting to new realities, will not only survive but thrive. 

The key lies in three important factors: 

  • The ability to anticipate changes. 
  • Knowing how to adapt quickly to adopt a strategic approach to inventory management.
  • Making the right logistics decisions, which will be crucial for long-term success. 

 

Blog post redacted from recent conversations about nearshoring in different media outlets, part of “The Nearshoring Series”.

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