The Impact of Nearshoring on North American Manufacturing: A Shift from Asia

In recent years, we have witnessed a significant shift in the global manufacturing and supply chain landscape. The phenomena known as "nearshoring" and "reshoring" have gained unprecedented momentum, redrawing the map of global production.

In this article, we will examine the growing trend of companies relocating their operations from Asia back to America, with a particular focus on the prospects for North America.

The Paradigm Shift in Global Supply Chains

The last decade has seen a radical transformation in how companies conceive and manage their supply chains. Factors such as geopolitical tensions, disruptions caused by the pandemic, and the increasing need for resilience have led many companies to reconsider their production and sourcing strategies.

As observed in the chart, since the end of 2022, there has been a notable increase in the political proximity of trade. This indicates that bilateral trade patterns have favored exchanges between countries with similar geopolitical stances, a phenomenon known as "friendshoring." This trend stabilized in the second half of 2023, but its impact remains significant in the reconfiguration of global supply chains.

Increased Optimism: The Driver of Reshoring in North America

According to the Kearney report on the 2024 Foreign Direct Investment Confidence Index, there is unprecedented optimism among investors regarding reshoring and nearshoring in North America. This optimism has become a crucial catalyst for the transformation of global supply chains and the manufacturing landscape in the region.

The most notable finding of the report is that 88% of investors plan to increase their Foreign Direct Investment (FDI) in the next three years. This percentage represents a significant increase of 6 percentage points compared to the previous year, indicating growing confidence in reshoring-related investment opportunities.

Breaking down this figure, we find that:

• 36% of investors anticipate a significant increase in their investments.
• 52% expect a moderate increase.
• Only 3% do not expect changes or foresee a decrease in their investments.

This high level of optimism directly translates into concrete actions, driving the "Made in America, for America" trend that Kearney describes as the foreseeable future of industrial manufacturing in the Western Hemisphere.

Signs of "Made in America, for America"

1. Reduction in dependence on Asia: The Kearney Reshoring Index (KRI) shows a significant decrease in U.S. imports from 14 low-cost Asian countries and regions (LCCRs). Imports fell from $1,021 billion in 2022 to $878 billion in 2023, a reduction of $143 billion.
2. Decline in Chinese Imports: Most of this reduction is due to a 20% drop (or $105 billion) in imports from China. This decline creates opportunities for local and regional manufacturing.
3. Rise of nearshoring in Mexico: Mexico has surpassed China as the largest exporter to the United States, with an increase in Mexican manufactured goods imports from $320 billion to $422 billion since before the COVID-19 pandemic. What is the winning recipe that is driving FDI in Mexico?
4. Increase in U.S. self-sufficiency: The U.S. Self-Sufficiency Index (SSI) increased by 5% between 2022 and 2023, reflecting a growing trend towards domestic production.

The Rise of Mexico as a Manufacturing Powerhouse

One of the most notable beneficiaries of this nearshoring trend has been Mexico. The country has experienced a substantial increase in its attractiveness for foreign direct investment (FDI) in the manufacturing sector.

This chart clearly shows how Mexico has seen the largest increase in imports to the United States as a result of nearshoring in recent years. In fact, in 2023, Mexico surpassed China as the main exporter of manufactured goods to the United States, a historic milestone that underscores the magnitude of this shift.

Driving Factors of Nearshoring in North America

Several factors have contributed to making North America, particularly Mexico, an attractive destination for nearshoring:

• Geographic proximity: The closeness to the United States significantly reduces transportation times and costs.
• Trade agreements: The USMCA (formerly NAFTA) provides a favorable framework for trade in the region.
• Skilled labor: Mexico offers an increasingly skilled workforce at competitive costs.
• Relative political stability: Compared to some regions in Asia, North America offers a more stable political environment.
• De-risking strategy: Both the United States and Europe are seeking to diversify their supply chains to reduce dependence on China.

Impact on the Mexican Economy

The nearshoring boom has had a significant impact on the Mexican economy. According to the International Monetary Fund, Mexico became the world's twelfth-largest economy in 2023. This rise is directly related to the increase in foreign investments in the manufacturing sector.

As can be seen in the chart, the manufacturing industry continues to be the main destination for FDI in Mexico. In 2023, this sector accounted for 50% of the total FDI in the country, a significant increase compared to previous years.

Future Prospects for Nearshoring in America

The future of nearshoring in America, particularly in Mexico, looks promising. Several indicators point to a continuation and even acceleration of this trend:

1. Investment announcements: In 2023, there were 363 FDI announcements in Mexico, amounting to $110 billion. Additionally, in the first half of 2024 alone, announcements worth $45 billion have already been recorded.
2. Sectoral diversification: Although manufacturing remains dominant, other sectors such as financial services and commerce are gaining ground in terms of FDI.
3. Origin of investments: While the United States remains the main investor, countries like Spain, Germany, the Netherlands, and Japan have significantly increased their share of FDI in Mexico.
4. Infrastructure development: Investments in infrastructure, especially in northern Mexico, are expected to further improve the country's logistical capabilities.
5. Global trends: The persistence of geopolitical tensions and the ongoing search for resilience in supply chains will continue to drive nearshoring.

Challenges and Considerations

Despite the positive outlook, there are challenges that must be addressed to maximize the potential of nearshoring in America:

• Infrastructure capacity: The rapid increase in production can put pressure on existing infrastructure.
• Talent competition: Accelerated growth can lead to a shortage of skilled labor in certain areas.
• Regulations and policies: Changes in government policies can affect the region's attractiveness for FDI.
• Global competition: Other countries and regions are also competing to attract nearshoring investments.
• Sustainability: Companies must consider how nearshoring affects their sustainability and corporate social responsibility goals.

The Role of Technology and Innovation

A critical factor in the future success of nearshoring in America will be the adoption of advanced technologies and innovative practices. Artificial intelligence (AI), in particular, is playing an increasingly important role in investment decision-making and operational optimization.

According to the Kearney Reshoring Index 2024 report, a significant percentage of investors already use AI significantly or moderately in their investment decision-making. This trend is likely to intensify in the coming years, with 63% of investors planning to make significant or moderate investments in the use of AI to guide investment decisions.

The integration of technologies such as AI, the Internet of Things (IoT), and advanced automation will be crucial to maintaining the region's competitiveness in the global manufacturing landscape.

North America is Well Positioned

The reshoring from Asia to America represents a fundamental shift in the dynamics of global manufacturing. North America, and Mexico in particular, are well-positioned to capitalize on this trend. However, long-term success will depend on the region's ability to address existing challenges, invest in infrastructure and technology, and maintain a favorable business environment.

Key Points:

• Nearshoring is reconfiguring global supply chains, with significant movement of production from Asia to America.
• Factors such as geographic proximity, trade agreements, and relative stability have made North America an attractive destination for nearshoring.
• The future prospects for nearshoring in America are promising, with a significant increase in investment announcements and diversification of sectors and investor countries.
• The adoption of advanced technologies, such as artificial intelligence, will be crucial to maintaining the region's competitiveness in the global manufacturing landscape.