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How Mexico Nearshoring, Logistics Tech Could Impact Supply Chain in 2023

As more U.S. businesses heavily consider moving their sourcing and manufacturing operations to local countries, Mexico is in a prime position to reap the benefits.

Under the spotlight for a recent visit from President Joe Biden and Canada’s Prime Minister Justin Trudeau, the country’s status as a nearshoring hub is gaining steam. Just two months ago, the Mexican Economy Minister’s office identified more than 400 companies that intend to relocate production from Asia to Mexico.

In a webinar held Thursday, Dan Gardner, co-founder and executive vice president of tech-enabled freight forwarding and customs brokerage Trade Xcelerators, said nearshoring in the market isn’t as easy as it appears on the surface, especially since China has a “30-year head start” on all things related to product design, engineering, production and shipping.

But Mexico’s current standing as the largest U.S. trade partner makes the country an enticing alternative to a country like China, where importers still feel the effects of punitive tariffs the Trump administration levied in 2018 and that Biden’s administration hasn’t reversed.

Importers should keep in mind that U.S.-Mexico-Canada Agreement (USMCA) revolves around the concept of “originating goods,” which means products can be imported duty free into the U.S.

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According to Article 4.2 of the USMCA, an originating good qualifies as a product wholly obtained or produced entirely in the territory of one or more of the parties. But that item can still include non-originating materials from countries outside the U.S., Mexico and Canada provided it satisfies all applicable requirements of the article’s Annex 4-B, which covers “product-specific rules of origin.”

In the case of textiles, all subsequent production processes used to make the finished product must be from a USMCA country, but fibers, yarns and fabrics can be sourced from anywhere, according to Annex 4-B. For cut-and-assemble merchandise, the fiber, yarn, and fabric and other inputs used to make the finished product can be sourced from anywhere. The cutting of the fabric and assembly of the product must take place in a USMCA country.

Gardner advised businesses not to make any assumptions about the products they procure from Mexico, whether it be their availability, quality, production capacity, price or raw material origin.

“The unit price will typically [be] a little bit higher, meaning the price of the product at the door of a factory, but the net impact, including transportation costs, reduced lead times, definitely qualification for USMCA—is very likely going to favor you,” Gardner said. “Make sure you know if your product or products qualify for USMCA in advance. Check the provenance of raw materials in advance as well.”

Gardner warned importers not to think of Mexico as a replacement for Chinese production.

“China can and does make just about anything. Do not assume that you can just bail out on China and get anything you want in Mexico,” Gardner said. “Diversity of product and production capacity is growing in Mexico, but purchasing products that can be procured in China far outweighs any country in the world.”

This advice should help executives weighing their options. A November 2021 survey from McKinsey & Company indicated that 71 percent of chief procurement officers (CPOs) plan to increase their nearshoring share by 2025, with 24 percent considering nearshoring in the same market where it currently operates.

Gardner also highlighted Mexico’s geographic considerations, noting the obvious that it shares a border with the U.S., as well as the fact that many factories are in close proximity to major highways and rail systems.

“As you think procurement, you think location of your vendors. Where they are is very much going to determine where goods can or will cross the border,” Gardner said. “Industrial clusters and workforce quality are geographic-centric, meaning you’ll find certain industries at least historically in certain areas of Mexico…The largest customs port in the Western Hemisphere—because you don’t have to be an ocean port to be considered a customs port—is right here in Nuevo Laredo.”

Cost-benefit analysis matters more than ever for logistics tech

While nearshoring garners more attention, another area that needs further development is logistics technology. Unfortunately, concerns of a recession, a slowdown in venture funding and layoffs at companies like Flexport and Project44 signal that these technologies are still far from reaching mass adoption.

Mitch Luciano, CEO of freight brokerage Trailer Bridge, said in a recent webinar that many companies are hesitant to update their logistics platforms, because they aren’t sure how much the investment will cost.

“If you start using the platform and integrate it into your system, it is very costly to switch. But then you have to make the evaluation—if we don’t switch, what’s it going to cost us in two or three years?” Luciano said. “I don’t know how many times I’ve see people try to get on a platform, whether it’s a transportation management system [TMS] or even a secondary platform tied to TMS and it initially costs $300,000. Next thing you know, I’ve got $2 million invested, and it’s still not working properly.”

The webinar also touched on another logistics struggle—an inability to monetize sustainability tools like carbon emissions calculators.

Alexander Nowroth, managing partner at logistics consultancy Lebenswerk Consulting, said that most CEOs say their customers find sustainability tools exciting, but don’t show any desire to pay extra for them. And in turn, these organizations often don’t understand how to foster engagement to adequately charge for the platform.

Nowroth suggested logistics companies offer a value-based pricing model for these solutions, which means no fixed fees and costs primarily based on the perceived solution impact through identified KPIs or objectives.

“If I import 2,000 containers from China and I have $10 million of budget for next year, why should I spend $13 million for the exact same activity? I have to understand why committing $3 million more to sustainability may yield material and non-material benefits which are far greater than $3 million,” Nowroth said. “If I feel as an economic buyer that my combined benefits are maybe $10 million or $15 million, I would not be reluctant to spend $3 million more for these 2,000 TEUs.”

The participants also pondered the future of automation in modern logistics operations, with the panelists agreeing that the technology is not at the point where it can complete every necessary task for humans—but is vital to augmenting an employee’s current logistics-related role.

“Specifically with automation, and you’ll find this with lots of forwarders and brokers, there’s a lot of mundane, redundant processes that still go on today,” said Erin O’Leary, chief information officer at customs brokerage and logistics services provider Janel Group. “Ones that we look from the tech perspective of ‘How can we eliminate those so that the employee can spend more time talking to the customer or resolving an issue with a container?’ as opposed to keying in all this data or whatever they’re processing at the time.”

O’Leary referred to document processing or the automatic creation of shipment records as tasks that Janel Group has successfully tested.

For Luciano at Trailer Bridge, automation has helped the most in onboarding new carriers and setting new contracts. While that is a process that is traditionally driven by the human element, where information is manually reviewed and sent back and forth between parties for confirmation, all of that has now been automated, helping drive costs down in the process.

“If you don’t drive some automation, as your competitors are, and drive costs down or neutral year-over-year for customers, you’re not going to gain the most out of your potential returns,” Luciano said.