Veronica Quintana
Director, CBIZ
US firms turn to nearshoring for labour
October 15, 2024
Nearshoring, particularly in Mexico, is becoming an increasingly popular answer for US firms who are struggling with a labour shortage. US companies are looking south of the border as they search for new ways to stay profitable. A big push to nearshore in Mexico comes from the labour market, but Veronica Quintana, Director at CBIZ, finds that strong cultural links between Mexico and America are also adding to the allure.
“We increasingly have more clients coming to us looking for advice on nearshoring,” she said. ‘Some still have family in Mexico and they want to invest in their hometowns. I have seen an uptick in US businesses wanting to invest in tequila and spirits. However, US firms across the board are finding it difficult to be profitable due to the rising costs of materials and labour. They have mentioned that perhaps it is best to invest in Mexico, where the labour market is cost-efficient and highly motivated.’
Labour shortages in the US and the push for nearshoring
There is a national labour shortage in the US. Many baby boomers are retiring, and others left the workforce during the pandemic. Offshoring can look different for each company, depending on the industry and their reasons for offshoring.
‘Companies are mostly looking to reduce or optimise costs, access specialised skills, staff augmentation, and effective scaling,’ said Quintana. ‘Offshore employees are often more flexible, which is important if business conditions change, and they need to downsize quickly and efficiently.’
Mexico’s skilled workforce and competitive advantage
Mexico has a skilled workforce with lower labour costs, and Quintana pointed out that this is especially true in the manufacturing industry.
‘The close proximity to the US also makes it easier to transport goods and materials quickly and at a cost savings,’ she said. ‘The United States-Mexico-Canada Agreement (USMCA) provides several benefits, such as reducing or eliminating tariffs, US firms turn to nearshoring for labour streamlines customs procedures, and provides market access to a large consumer base.
India as a growing offshore destination
India is another country that has seen an increase in offshoring. They also have a talented labour force, especially in the business field, and CBIZ has personal experience here that it can draw on to help clients.
‘We have had success offshoring some our income tax preparation to India,’ said Quintana. ‘We have worked with their team for several years now, trained them on our processes, software and procedures. They do good quality work, and that gives us the confidence and assurance that offshoring has been a success.’
Rising Appeal of Nearshoring
The pandemic and growing instability in the world’s geopolitics has also pushed nearshoring up the list of priorities for US companies. The disruption to supply chains during the pandemic made the thought of investing in manufacturing sites closer to customers much more attractive. More recently, Russia’s invasion of Ukraine and growing tensions between Washington and Beijing have made nearshoring even more of a priority.
The economic impact of nearshoring on Mexico
Over the past few years, nearshoring from the US has created a boom in Mexico. US imports from Mexico totalled US $455 billion in 2022, up nearly 19% from the previous year and up 64% from 2012, according to the United States Census Bureau. At the same time, the share of Mexico’s imports from China went from 1% in 1994 to 20% in 2022 according to a recent study by academics Laura Alfaro and Davin Chor.
New manufacturing plants could add an additional 3% to the country’s GDP over the next five years as well as over 1 million jobs, according to a recent study by Deloitte.
New manufacturing plants could add an additional 3% to the country’s GDP over the next five years as well as over 1 million jobs, according to a recent study by Deloitte. The Mexican government is cashing in by making the country’s tax laws more favourable to foreign companies. For instance, as of October 2023, international electric vehicle manufacturers could claim an 86% tax deduction on investments in the country.
Challenges for investors
US investors have been made nervous, however, by a bill of judiciary reforms that has been passed by the Mexican government, that makes Mexico the first country to allow judges to be elected rather than appointed.
Several big-name investors have come out against the reforms, including US investment banking giant Morgan Stanley. More recently, Julius Baer warned that rating agencies could change Mexico’s creditworthiness as soon as next year if the judicial reform is approved. But Mexico’s outgoing president Andrés Manuel López Obrador has hailed the approval of controversial reforms, saying they would be an “example to the world”.
Obrador who left office on October 1, 2024, accuses the current judicial system of serving the interests of the political and economic elite. ‘It’s very important to end corruption and impunity,’ he said.
Future prospects for US firms in Mexico
Investors will be watching the market closely, as energy and tax reforms would stall the nearshoring boom if they are not followed through. But US firms seem to be happy to be moving South, for now.
