SPEAKER INTERVIEW
Javier Zarazúa Ruiz, Managing Partner, JL Nearshoring Mexico, LLC
Dr. Zarazúa Ruiz, a prominent expert in Mexico's nearshoring, boasts 25 years of distinguished leadership in Manufacturing and Supply Chain operations within the Automotive, Heavy Machinery, Retail, and Remanufacturing industries. He will be speaking at Foam Expo North America and Adhesives & Bonding Expo on June 25 during the conference session “Racing to Mexico: the Business Pattern of Nearshoring”.
Why has nearshoring in Mexico become a major business pattern?
Nearshoring in Mexico started decades ago, specifically in 1965 with the Border Industrialization Program (BIP), which eliminated high tariffs, allowed foreign investment in Mexico, and provided cheap labor for foreign companies to assemble products. This program later expanded into the Mexico territory and in 1994 turned into an official Trade Agreement between the United States, Mexico, and Canada (NAFTA), which later turned into USMCA in 2020 as we know it today. There are major events that have contributed to the mass wave of companies coming to Mexico to buy products, create Joint Ventures, or establish their manufacturing: 25% tariffs on China products imposed by President Trump. The COVID-19 pandemic exposed the vulnerability of many Global Supply Chains. The two wars currently taking place Ukraine-Russia and Israel-Palestine and the geopolitical risk related to the United States-China trade war and the China-Taiwan issue.
What factors have led to the significant increase in this trend last year?
The COVID-19 pandemic exposed big issues in the Supply Chains around the world. Not having stock to sell, paying north of USD 25K for a 40’ container, and taking more than 60 days from port to port was not a pretty picture for many executives. There have been many surveys in recent years that tell us that the overwhelming majority of executives globally want to reduce their dependence on China, while more than half of the companies report already taking some kind of action. The recent wars are not making things easier, the cost of sea freight is on the rise again, the White House just denounced China for bad trade practices in a report to the WTO… and Trump just announced 60% tariffs on China if he is elected. Uncertainty is the biggest factor driving the Nearshoring behavior. If uncertainty can be reduced or eliminated by Nearshoring and on top cost can be reduced, agility can be gained, you can’t beat that.
What role do freight costs and political risks play in influencing companies to establish production in Mexico?
Cost in general is an important motivation for companies to Nearshoring, although often can’t be achieved when competing against China's manufacturing cost. Depending on the geographic location of the companies in Mexico and the United States, generally speaking, freight cost is positive or neutral. Political risk, on the other hand, is by far the variable with the biggest impact, as it drives uncertainty, nobody wants to re-live the COVID-19 Pandemic, not at a personal level, or a business level.
The country has witnessed steady and significant investment from businesses spanning various industries. What are the main manufacturing clusters?
Automotive is by far the biggest manufacturing industry in Mexico with 4.38% of the manufacturing being the oldest industrial export industry, established decades ago and continues being the engine driving Nearshoring. Other industries that keep thriving, although at a distant second place are Electronics (2.4% including appliances and computers), Medical devices (0.43% of GDP), Aerospace and defense (0.29%), Textile (0.2% of GDP), Furniture (02% of the GDP).
You have worked with several foam manufacturers who moved part of their production there. What do you think is the biggest advantage of being in the country for them?
Better cost (labor, tariffs, inventory, freight), access to the US market.
Lastly, what are the current biggest challenges that companies face when trying to start manufacturing operations in Mexico?
The biggest challenge newcomers face is the culture, especially for Asian companies. The second biggest challenge is industrial space (cost and availability), especially when power, gas, or water are needed in very large quantities. The third biggest challenge is the Supply Chains for their raw material (cost and availability).
