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How to Be Successful in Nearshoring Textile Manufacturing in Mexico

Mexico has been attracting foreign manufacturing investment for the fabrication of textiles for many years. It’s well known that the Maquila program was created to promote economic development and organization for Mexican and U.S. companies doing business at the border region. At first this was cotton cropping, and then years later the apparel industry became a key player in this program.

Presently, it’s estimated that there are over 400 textile companies established in Mexico using the advantages of temporary import programs created since 2006. These companies employ more than 131,000 people in their operations, representing 5 percent of the total employment generated by IMMEX-certified companies in the country. IMMEX refers to an import duty-deferral government program that provides benefits to authorized companies that engage in the manufacturing or maquila operation scheme in Mexico, including import-export.

So how best can textile manufacturing be nearshored? To effectively address that, some additional questions must be addressed.

What is the ultimate reason a company wants to move at least part of its manufacturing to Mexico to be near the U.S. market?
Does it reduce the supply chain length, or costs, or risks?
Will it impact production costs?
Can it address the company’s labor challenges?
Will there be a risk to intellectual property and designs?
Can it provide ease of management and better control over operations?

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The reason leadership must begin with this line of questioning is that answers will help guide the CEO and executive leadership to make better decisions about location (within Mexico), the level of investment, and any local partners and collaborators.

Overcoming the unique challenges

Companies will do well to make strategic choices based on both their stated goals and on opportunities and challenges arising from the realities on the ground. Labor difficulties are one notable example of such a challenge that requires thoughtful management.

Labor challenges have shown increased turnover rates in industrialized regions across the globe. Although Mexico has abundant labor, sometimes competition for similar positions with other industries might be an opposing force to consider, especially for those regions where the automotive industry is present.

How has this been addressed? In the Saltillo region, where 2 OEMs are located, bringing workers from nearby municipalities every morning for three shifts has been a common practice for seating cut-and-sew operations since 2016. That’s why manufacturing investment subsequently increased and turnover rates showed a marked decrease.

This environment has affected apparel manufacturing and new investments. Depending on their submarket, and business cost structure, this has forced companies to search for less saturated industrial markets in which to assemble. This means sacrificing skills, location and best practices to enter into new regions, such as Central Mexico or the South of the country. An example is the new Nike (Vertical Knits) plant announcement for Yucatan, Mexico.

While there are obvious similarities and advantages that come from proximity to the U.S., there are differences in customs, laws, local supply chains, and traditions. It’s best to identify local experts that are able and willing to invest time in understanding the business without offering standard, run-of-the-mill solutions that may not be ideal to support the company’s unique needs.

Local support for the initial setup

It’s likely that the CEO is not planning to move the company’s entire production to Mexico, at least not initially. This being the case, the leadership team must identify what components of the operation ought to move to Mexico first. The answers to the first set of questions mentioned above will inform the decision here.

As well, one initial decision will be to decide whether to find an existing supplier or set up a new one. In any case, vetting a local supplier’s operations is a necessity and may take some time to complete. Once this local support has been established, creating or deepening relationships with relevant local government agencies is the next step. Confirming any job creation metrics and identifying priority industries are key to availing the company of any officially approved incentives for new arrivals.

With the 1-to 2-year-long challenges of identifying local suppliers that can conform to the needed compliance, price, and quality standards, it is helpful to ask whether there are any more direct routes to obtaining local suppliers in the short-term. Contract manufacturers (CM) are one option to provide shorter term relief, but they also raise important questions that the leadership team must answer as to the amount of control that the company is willing to outsource. Procurement, manufacturing, design, and engineering are all relevant areas that outsourcing can address, but these also carry some risk to the nearshoring company.

Moving to Mexico provides real opportunities

There are certain other advantages to moving a company’s manufacturing to Mexico that may not be leadership’s primary driving force, but they are real and tangible. By outsourcing to Mexico, the CEO is essentially taking investments/commitments in the company’s own brick-and-mortar and labor, and converting it to something that offers more flexibility.

Labor availability is much better in Mexico. And direct labor costs are much lower—the hourly wage is about 20 percent as much—in Mexico as compared with the United States.

Logistical costs—and the attendant risks—of long supply chains from Asia are significantly reduced by moving operations into Mexico close to United States locations. With the recent pandemic and military conflicts abroad, nearshoring to Mexico serves to mitigate the risks of future black swan events. Rising tensions across the Taiwan Strait make the risk of a real disruption greater than zero. And shorter supply chains provide shorter lead times for innovation with apparel styles and the like.

While there are many potential obstacles to moving large textile operations from one region of the world to another, recent difficult events and the multiple benefits within Mexico provide real opportunities to safely grow one’s business in challenging times.

Jorge Gonzalez Henrichsen has spent two years as Co-CEO of The Nearshore Company, which has been helping U.S. companies lower operating costs and become more efficient for more than 30 years. He is responsible for sales, business development, and customer service. He brings a combination of both management and investment experience, as he was an investment banker for four years at Rothschild and UBS Investment Bank, in its Mexico City offices. Learn more at TheNearshoreCompany.com.