Why Mexico Could Be The Big Winner In Pandemic Shift To Nearshoring

Major brands and retailers across the U.S. and Europe are looking to bring manufacturing closer to home amid the ongoing global supply chain crisis, with Mexico in pole position to gain from a pivot in strategy.

Fed up with astronomical container costs, having their goods stuck in L.A.’s ports, ships stuck sideways down the Suez Canal or endlessly disrupted by fresh Asian Covid lockdowns, manufacturing is shifting closer to consumer markets.

U.S. toymaker Mattel has become the latest company to switch tack after it announced mid-March that it had invested $50 million to expand its plant in Monterrey in the northern Mexican state of Nuevo Leon.

At 2.25 million sq ft and employing nearly 3,500 workers, it has become the company’s largest manufacturing site, overtaking other hubs in China, Vietnam and Malaysia. Mattel closed two of its factories in Asia in 2019 and more recently shuttered a plant in Canada and another in Mexico, ahead of expansion of its mega-factory.

Gabriel Galvan, Mattel’s Latin America managing director, told Reuters: “Being able to have product close to your consumer and not having to transport it from Asia, that’s going to be more profitable and more competitive when you take costs into account.”

Mattel – which plans to double investment at Monterrey over the next five years – is just the latest to adopt a strategy dubbed ‘nearshoring’, where manufacturing is established much closer to the end consumer market. In its case, the plant’s proximity to the company’s Dallas-Fort Worth distribution center, its second largest in the U.S., is the deciding factor.

Fashion Manufactures Close To Home

The global supply chain challenges have been with us for over two years now and few sectors have been left untouched, with clogged ports, sea containers stuck in all the wrong places and some specialist categories – such as cycling – crippled by a complex criss-crossing supply chain.

Pre-Christmas the situation got so bad at the port in Los Angeles that President Biden had to step in, bringing together retail and union leaders to agree a short-term fix to get more trucks in and goods out. Major retailers such as Costco and Walmart, meantime, chartered their own planes to ship goods.

It seems inevitable that retailers are going to have to rethink their supply chains and notably their reliance on certain territories or companies for manufacture. An extreme example almost completely derailed the global cycling industry, where the components from Japan’s Shimano account for an estimated 65% of the market for high-end gears and brakes, creating lead times of up to 400 days for components made by the Osaka-based company.

Those countries standing to benefit include Mexico, Turkey, North Africa and Central and Eastern Europe, serving the U.S. and Europe respectively.

Inditex Leads European Manufacture

While fast fashion giant Inditex already manufactures 53% of its apparel in European markets, others like Benetton are also bringing production closer to home, boosting manufacturing in Serbia, Croatia, Turkey, Tunisia and Egypt, with the aim of halving production in Asia from the end of this year, according to chief executive Massimo Renon. Hugo Boss CEO Daniel Grieder has also predicted more goods will be produced closer to where they are sold in future.

In the U.S,, Lululemon is relocating production where possible, increasing the use of air freight and prioritizing production of key seasonal items, while Gap is also investing in air freight as it deals with delayed inventory.

But that comes at a price. Shipping an ocean container load of goods by air is over eight times more expensive, though the cost of shipping has also skyrocketed. Until 2020, a 40-foot container along the world’s major trade routes never exceeded $2,000 according to The Economist research. It estimates shipping costs are now at up to five-times this, at a record high: $10,000.

As a result, longer term one of the residual impacts of the pandemic may be a much reduced distance between maker and user. Given the environmental and sustainability prerogative, fashion miles may well become another driver of a fundamental overhaul of global logistics.