To Move Profits North, Grow South of the Border

Aug. 26, 2009
Nearshoring offers a wealth of opportunities to reduce transportation costs.

Even as the global recession takes a toll on our economy, Mexico remains a critical opportunity market for American manufacturers.

Thanks in large part to our role as a manufacturing hub, Mexico is the United States' second-largest trading partner, after Canada. In fact, 85% of Mexico's exports are U.S.-bound, and the value of trade headed north of the border from Mexico to the U.S. totals around $134 billion.

For manufacturers, Mexico offers opportunities to manage costs and reduce supply chain risks. First and foremost, Mexico's close geographical proximity to the U.S. means that goods from Mexico can reach U.S. cities within days -- instead of up to a month from China or India. This can reduce inventory lead times and transportation costs significantly. Closer proximity also helps mitigate risks. With more regular site visits, it's easier for companies to monitor quality, prevent intellectual property theft and keep channels of communication open.

Tough economic conditions have also made the costs of manufacturing in Mexico more competitive. Currency fluctuations over the last year have made wages and other costs more favorable to U.S. businesses. Finally, Mexico is investing heavily in its infrastructure and workforce. For example, the government is in the midst of a five-year plan to improve and connect airports, roads and sea ports, and make other infrastructure improvements.

These factors are making "nearshoring," manufacturing closer to home, appealing to many manufacturers. In a recent AMR Research survey of manufacturing and retail executives, respondents said they plan to increase their nearshoring sourcing and manufacturing activities by a ratio of 5 to 1. The survey revealed that Mexico is the preferred nearshoring destination, with 84% of respondents choosing Mexico as a place for sourcing or manufacturing.

For manufacturers that may be considering starting or expanding their manufacturing in Mexico, there are important steps to take in order to pave the way for success. Here are a few tips to get you started.

Above All, Do Your Research

American companies have the tendency to think that because Mexico is so close, they don't have to prepare as diligently as they would if they were going to India or China. But even though Mexico is an immediate neighbor, and we share a free trade agreement, Mexico is a unique market with its own challenges and opportunities. U.S. companies should do their due diligence and take the time to know who they're doing business with before they grow full steam ahead.

Practice Smart Shipping

Nearshoring offers a wealth of opportunities to reduce transportation costs. Most goods are sent from Mexico to the U.S. by truck, a less expensive mode of transportation. Mexico-U.S. trucking routes are critical trade corridors; last year, the value of trade trucked between the U.S. and Mexico totaled $234 billion, according to the U.S. Bureau of Transportation Statistics.

To give manufacturers more cost-effective shipping options, UPS recently started a new ground service from Mexico to the United States.

It's important for manufacturers to be aware that customs procedures can be intricate. In 2005, Mexico customs began using an electronic risk assessment program, which is helping to modernize certain manual processes. However, this is still a work-in-progress and more needs to be done. Manufacturing companies that import to Mexico need to be particularly resourceful. They must work with a registered importer of record that can follow a litany of rules -- especially for imports from countries other than the United States. Working with a reliable shipper can streamline this process, giving businesses economical and efficient supply chains.

Culture Matters

As is the case with any international market, American companies must adjust their approach to doing business. In Mexico, it's critical for American companies to recognize that personal relationships are important. Mexicans like to socialize and get to know who they're working with. So take the opportunity to ask about them and their families -- time invested up front will pay off later on. It's also very important to speak some Spanish. While many Mexicans speak English, those who do may not be the right person to talk to in order to get the results you need, so an interpreter is essential.

Don't Be Dissuaded by the News

The amount of media attention Mexico has received lately is not indicative of the opportunities that are here. Doing business internationally requires a long-term approach, and U.S. manufacturers will flourish by making calculated investments for the future. What's more, helping to increase the flow of trade will help turn around the global recession -- benefitting all businesses on either side of the border in the long run.

Griselda Hernandez is UPS's country manager for Mexico. UPS has operated in Mexico for 20 years, and its network includes 70 operating centers, 520 vehicles and more than 2,000 employees.

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